Hedge Fund Euro Probe Should Look for Media Manipulation

 |  Includes: AGG, DIA, ERO, SPY, UDN, UUP
by: Daryl Montgomery
According to the Wall Street Journal, the Justice Department has launched an investigation into whether hedge funds colluded to drive down the value of the euro. Not stated in their coverage was the fact that the collusion in question may have gone well beyond just trading activities, however. Manipulation of media news flow concerning not just the euro and the U.S. dollar, but also the condition of U.S. government finances, were almost certainly a part of the bigger picture.

The euro lost 10% of its value from early December to its recent low because of the Greek debt crisis, even though Greece represents only 2% of the eurozone economy. The euro's drop has been accompanied by a rise in the U.S. dollar - money coming out of the euro has to go someplace, after all. Any reasonable analysis, however, indicates that U.S. finances are as bad as Greece's, which in turn are the worst in the eurozone. Selling the euro to buy the U.S. dollar just doesn't make sense on a fundamental basis. Mainstream media coverage buried that message however and this was particularly noted in financial circles in Europe. Was supportive mainstream media coverage that helped the hedge funds make money just a convenient coincidence?

As usual, the only place the investing public was assured on getting an unbiased slant on this issue was from the independent blogosphere (readers take note, not all blogs are operated independently of Wall Street). Some of these blog posts were strongly attacked by commenters who went to great lengths to talk up the strength of U.S. finances. If these attacks were coming from the hedge funds themselves, it wouldn't have been unprecedented. It is well documented that before Fannie Mae (FNM) was nationalized it had a large slush fund used to depower and silence its political critics using misinformation tactics. Other major corporations have also investigated and smeared their critics as well, with GM's handling of Ralph Nader being one of the most prominent examples.

According to reports, the Justice Department is investigating the euro trading activities of Soros Fund Management, Greenlight Capital, Paulson & Co., and SAC Capital Advisors in its probe. George Soros is of course well known for making a fortune by causing a major devaluation of the British pound in 1992. A centerpiece of the investigation seems to be a dinner supposedly attended by representatives of all of these funds on February 8th where the euro and Greek debt were discussed. It is highly unlikely this was the beginning. If collusion did indeed exist, it was probably already underway by last November. Dedicated readers of financial news should remember that two internationally famous and globally well-connected uber-bears on the U.S. dollar suddenly became bullish at that time. Did they have access to information that the public didn't? The Justice Department should certainly try to find out.

The euro started trading down in early December. To conduct a thorough investigation, the Justice Department needs to look at trading records and emails (both subpoenaed in the probe) from well before that time. It also needs to look at any an all contacts with public relations firms and consultants, media outlets and employee activities that might have been used to influence both traditional and online media. The trading records are only part of the puzzle; efforts made at public relations support will fill in the rest of the picture.

It was only a short time after the news of the hedge fund euro manipulation investigation was released before articles began appearing online about how the Justice Department will never be able to prove anything and even if they do it will not be warranted. We indeed have a very good recent example of the inability of the authorities to prove even the largest and most obvious Wall Street crimes. Bernie Madoff's $50 billion multi-decade Ponzi scheme was investigated by the SEC many times. They couldn't find anything. A whistle blower provided them all the details of how the scheme worked. The SEC still couldn't find anything. Mainstream media outlets were also informed about Madoff's activities. With the exception of Barron's, they sat on the information. The scam was revealed by Madoff himself only after it collapsed. If investors think that the powers that be make even the most minimal efforts to protect their interests, they should reconsider that thought. Perhaps the Justice Department will surprise us this time. We can always hope.

Disclosure: None