Federal agents are probing JPMorgan Chase’s silver trading activity in order to determine if the bank used derivatives to artificially lower the price of the precious metal.
Part of a larger problem
It is estimated that JPMorgan holds up to 40% of the world’s silver short. If this is true it is certainly indicative of price manipulation as JPMorgan doesn’t possess 40% of the physical silver.
Derivatives played a large role in the market collapse that began in 2006 that was largely blamed on subprime loans. Because these mortgage backed securities, credit default swaps and other instruments weren’t on exchanges there would be a very wide difference between the bid and ask (or the spread), especially during market volatility.
This could lead to huge price swings in the instruments, making holders uncertain what the true value really was.
Light must be shed
When reflecting on this opaque market’s role in recent events it’s clear that something must be done. We need more transparency with derivatives.
They should be traded on open exchanges where they can be settled every trading day.
The reason silver (and to a large extent gold) have been shorted is to artificially depress the prices of precious metals vs. the prices of stocks and bonds, helping to hide the true effects of inflation.
In fact, using these derivatives to add liquidity to their balance sheet by shorting silver, it’s likely that JPMorgan would use that cash to invest in stocks and US Treasury bonds.
Wall Street sends $500 million to Washington every year, using lobbyists to shape the opinion of lawmakers. There is also a shameful revolving door between government and the private sector that often hinders regulators from employing their full might.
Consequences of manipulation
The DOJ and CFTC are looking at both civil and criminal charges as the investigation continues. They are examining trading tickets and other information. I expect the probe may expand to other assets, too.
It is possible that the firm will be fined, but I’d be very surprised if anyone goes to jail.