Doubling Down To (DXY) Zero: Has The Fed, In Its Stealthy Synthetic Bet To Keep Long-Term Yields Low, Become The Next AIG?

Tyler Durden's picture

When looking back at the Great Financial Crisis of 2008, the primary catalyst the pushed the system over the edge and required central banks around the world to institute a global bailout of unprecedented scale was one simple thing: the layering upon layering upon layering of bets (using "other people's money" and courtesy of recently unleashed "financial innovation" in the form of virtually margin-free securities such as credit derivatives, demonstrated best by this chart) that interest rates would keep dropping, primarily in the form of exponentially tiered credit structures such as synthetic CDOs (all the way to the cubed degree) together with CDS sold on such layered synthetic derivatives. Of course, when the black swan event occurred and rates surged, this relentless leveraging of wrong-sided bets promptly resulted in the liquidation of any institution that was on the wrong side of such bets. Most notably AIG. In essence, AIG took the "logic" that since a rate blow up would likely result in the collapse of the US (and thus worldwide) funding structure, it would invoke the biggest central bank Put of all: either the Fed would rescue the world, or capitalism as we knew it would end.

As it turned out, AIG was right, and following the sacrifice of Lehman Brothers, every other institution on the wrong side of the levered "rate" trade was saved by the Fed. But at what price? Simply said, the Fed, in bailing out the world (a meme that has only now received popular acceptance following the release of formerly classified Fed documents, despite our claims precisely to that end from back in October 2009) has become the world's largest hedge fund and with a DV01 of over $1.5 billion by now, has taken on virtually unlimited interest rate risk (a topic discussed back in April 2010). As such controlling inflation expectations, or more specifically, Long-Term rates (the part on the curve that Quantitative Easing is powerless to control) is the most critical aspect of the viability of the monetary system. Stunningly, today we learn that to keep long rates low, the Fed may have resorted to nothing short of the same suicidal trade that destroyed AIG FP and brought the entire system to its knees. Namely, Ben Bernanke is now quite possibly the second coming of Joe Cassano, since in order to keep rates low, Bernanke is forced to a last resort action of selling billions upon billions of Treasury puts to "pin" rates low contrary to natural supply-demand mechanics. If so, the Fed is now basically AIG Financial Products, although instead of being synthetically long mortgages (and thus betting on a rate decline) and selling hundreds of billions in CDS to amplify its bet, Bernanke has done the same thing, only this time with Treasurys. Of course, Ben has the printing press on his side apologists will claim. Alas, that will have no impact whatsoever, if indeed the Fed has been reduced to finding ever fewer counterparties to a synthetic bet to keep long-term rates low, as very soon, with inflation ticking up, all hell may break loose in an identical replay of what happened to AIG once the Fed's put is called against it. Only this time there will be nobody to bail out the ultimate backstopper, resulting in the long overdue end of the current failed monetary system experiment.

Some may recall that over a year ago we made a curious discovery: by looking at the composition of securities held in the Fed's Maiden Lane I portfolio (than inherited from the collapse of Bear Stearns, which not even JP Morgan wanted) we uncovered that as part of the portfolio of toxic assets, which most recently was valued at $25.6 billion, the risk managed in charge of the book BlackRock had also put on a variety of synthetic hedges: "the FRBNY holds 5000 TYM0 puts, 3825 TYH0 puts, short 4000 FVH0,
short 7828 TYH0, short 2240 USH0, and is short a bunch of eurodollar
positions." The issue as we correctly specified, is that "while the Fed is pretending to care about interest rate concerns in an increasing rate environment and is hedging ML1, it has one billion DV01 risk for its house bailout package...
This is a stunning number: the second rates commence
creeping higher, you can kiss all that profit on TARP and what not not
only goodbye, but the losses on the SOMA books will likely destroy
America." We then concluded: "the Fed has decided to protect against a major hike in rates [in the Maiden Lane I portfolio]. Yet
that which is truly relevant, the Fed's nearly $2.4 trillion in holdings
of MBS, Agency and Treasuries is completely unhedged [the number is now $2.7 trillion and will be nearly $3 trillion by the time QE2 ends]. Good luck finding
the counterparty that would be willing to put on a $200 trillion gross notional interest rate swap with the Fed." In other words, we were wondering why is the Fed not actively hedging its multi-trillion SOMA portfolio (including MBS, Agencies and Treasuries) if it was willing to do so with the far smaller Maiden Lane I subsegment of its holdings. Naturally, it may well have been doing so as there is no place in the Fed's weekly report (H.4.1) update that lists explicit derivative positions (more on this in a second). Ironically, it seems that we had the entire situtation backwards: it appears that far from being worried about hedging its SOMA book synthetically, the Fed may well have be constantly doubling down on its risk exposure in the form of off-book derivative contracts in order to "pin" Long-Term rates (read the 10 Year) by constantly selling Puts on Long Dated Treasurys at opportune times when there is no incremental buying of the underlying security, yet when, as the CDO and upcoming ETF debacles have so well demonstrated, the price of the derivative actually impacts the price of the underlying!

The missing sequential link in (lack of) logic comes from a report by Market Skeptics' Eric deCarbonnel who has combed through the June 24-25, 2003 FOMC minutes to find what could well explain the ongoing paradoxical flatlining in long-term rates even despite the threat of an end in QE2, which implies the removal of a buyer of some 83.4% of net Treasury securities, as well as the ongoing inflation threat so well described by James Grant earlier. What deCarbonnel has found is that as per then Fed secretary and economist, Vince Reinhart, and SOMA manager Dino Kos, the Fed has explicit authority and has in the past, sold puts on securities in order to bring various parts of the curve in line with "market expectations." The fragment from Dino Kos' transcript which implies that the Fed is likely actively pursuing a derivative feedback loop to keep long-term yields low (and thus prices high), is the following. Below, Kos discussed the "alternative approaches that would involve changes to how the Desk operates" in order to achieve the "conduct of monetary policy at very low short-term interest rates."

To wit:

The alternative approaches that would involve changes to how the Desk operates are summarized in exhibit 4. The alternatives that could be adopted while changing only the composition of the balance sheet are listed in the top panel. These include (1) extending the average maturity of the outright holdings in the SOMA, (2) setting explicit ceilings on longer-term Treasury yields, and (3) using derivative instruments.

As deCarbonnel points out, 1 and 2 have already been either explicitly or implicitly utilized by the Fed in order to prevent the yield curve from exploding, due to the fundamental dichotomy of Fed operations: the Fed can keep short term rates at zero easily, it is the long-term ones that are a key threat to tipping the Fed's unhedged book over.

Which leaves only option 3: "using derivative instruments" to keep LT rates low.

And this is where it gets both interesting... and very disturbing.

Going back to Dino Kos' speech:

The Committee could sanction the use of various derivative instruments on conventional Desk operations as a way to influence longer-term yields, which is outlined in exhibit 8. Options of some form are a possibility, as are forward operations. For example, we could sell a sequence of options on term RPs, covering interlocking time segments that collectively extend as far into the future as desired. In this way, longer-term yields could be influenced and a visible signal of the Fed’s desired path of interest rates could be demonstrated. Forward operations in term RPs could be structured in a similar fashion.

And the stunner:

Alternatively, we could sell put options on longer-term Treasury securities at strike prices associated with desired longer-term yields. Of course, the operating objectives set for the sale of derivative instruments would determine their proper structure and should be carefully formulated first.

At this point the lightbulb should slowly be starting to glow:

The sale of any options, or forwards for that matter, would not affect the domestic portfolio immediately and, in the case of options, may never do so. Auctioning derivatives is something we already have experience doing. In the event that options were ever exercised, the impact on the portfolio would be profound, assuming that more than just a symbolic amount of contracts were sold. Simultaneously controlling the funds rate means that any reserve effect would need to be immediately sterilized. The volume of options sold might be limited because of this concern. Alternatively, options contracts might be configured to make a net cash payout if exercised, perhaps by structuring them as interest rate caplets or pairing them with offsetting trades with the Desk at then-current market prices. This would insulate the size and composition of the balance sheet, but the payouts would appear very visibly as losses on the income statement.

Summary: not only does the Fed admit that it has already sold off asset derivatives as a means of controlling short and/or long-term rates, but the Fed in essence is willing to do with rates derivatives what Warren Buffet did with equities in the form of his gargantuan index put sales, and Joe Cassano has done with CDS sales on his CDO holdings.

Here the Fed, as any rational investor seeking to manipulate the price of an underlying instrument, although with the benefit of having a printer, expresses the logical concern: what happens if options are excercised, or in other words, what might happen if the "pin" bogey on the underlying is crossed and the Fed suddenly finds itself in a losing "In The Money" position:

Of course, a successful program would be one in which any options sold would never be exercised. Achieving this result, just as with interest rate ceilings, would depend on how well the characteristics of the options—the strike price and the expiration dates—corresponded to market expectations for future rates.

Ironically this is precisely what Jos Cassano thought... Until of course Goldman changed the rules in the middle of the game, hiked collateral requirements and forced a toxic feedback loop whereby AIG had to undergo a liquidation waterfall putting it deeper and deeper underwater, until ultimately it was so far undercapitalized it had to be bailed out by taxpayers.

Kos logically realized that it is far easier to manipulate short-term rates than long-term and as such advocated initially merely dabbling in repurchase options, which only impact ultra-short term rates: i.e., those critical to bank functioning whereby banks can borrow cheap and lend rich.

In this regard, options on RPs with the Desk have a strong advantage over, say, options on Treasury yields because the policy rate over which the Committee has direct influence could be more directly linked to shorter term RPs than to longer-term Treasury yields. For these same reasons, options on Desk RPs could be structured to correspond directly with a policy commitment on the path of future short-term rates, and they could be effective through one of several channels.

We get even warmer:

First, even a relatively small program would undoubtedly add symbolic weight. Second, they would represent a monetary cost to the Federal Reserve of deviating from the implied path of future short-term rates, which might be seen as further binding the Committee to that path. For this effect, the more options sold the better. Third, a large volume of options sold could reduce risk premiums embedded in longer-term rates, independent of the level of credibility about any policy commitment. Here too, the more sold the more effective. As with interest rate ceilings, the question could be asked how effective the sale of options, either on Desk RPs or Treasury securities, would by itself be in reducing longer-term yields.

Kos' verdict: the Fed would need to sell a huge amount of Treasury puts to regain credibility that it would continue to sell even more puts should the situation require it: i.e., be the seller of only resort, and calm a Treasury liquidation wave by the market.

[The] ultimate success would hinge on the quantity of options sold—that is, how big a bet the Federal Reserve were willing to make. The more options sold, the greater the chance they would have the desired effect on longer-term rates even if not associated with any policy commitment, either by raising the costs to the Fed associated with options being exercised, or by lowering risk premiums on longer-term rates.

To be sure, Kos appreciated the downside risk associated with going all in on a losing bet, and then leveraging some more:

[O]f course the risks to the portfolio, to reserve levels, and of capital losses would rise in equal measure. And an exit strategy for options may not be as straightforward as it seems, even apart from the possibility of their being exercised. Of course, the Desk could stop auctioning new options at any time. But a decision to stop selling more options or not to issue new contracts with later expiration dates as time passes likely would be interpreted in the market as a statement about future policy intentions. The resulting rush to unwind market positions would likely be very disruptive and send yields sharply higher.

And that is the kicker. In essence the Fed may well be undergoing a program whereby via one of its Primary Dealers, most likely JP Morgan due to the banks key position as one of only two clearers of the repo system, it is selling Treasury puts, which would have an impact of pushing Treasury prices higher, and thus yields lower, contrary to all expectations in order to pin rates to specific levels. And as Kos admitted, the more long-term yields would run up, the more puts the Fed would be forced sell.

Since derivatives have little to no initial (or maintenance) margin requirements, especially not with a counterparty such as the Fed which can just print money any time there is a margin call, the Fed would be able to virtually print an endless amount of Treasury puts to keep underlying, and very much delta hedged, position, read THE YIELD ON THE 10 YEAR precisely where it wants it! The Fed says as much in Exhibit 8 to the June 24-25, 2003 minutes:

And before skeptics say the Fed would never do this in reality, Vince Reinhart admits that the Fed did very much that just over a decade earlier:

The System has also been willing to put its balance sheet at risk to encourage appropriate expectations about interest rates or to calm fears about funds availability. As plotted at the top right, the Desk sold options on RPs for the weeks around the century date change that totaled nearly $0.5 trillion of notional value. Given that the Desk already operates in all segments of the Treasury market, we wouldn’t have to move up a learning curve if instructed to increase purchases of longer-dated issues.

With lack of data availability one can only speculate how much options, most likely in the form of swaptions, the Fed would need to sell currently to keep 10 Year yields low, although if past is any indication, if the SOMA desk sold nearly $250 billion in repo puts back in 2000 when the Fed's balance sheet was a fraction of what it is now, it is safe to assume that a comparable amount currently would have to be in the trillions, if not tens or hundreds, considering the far lower notional impact on a security with material duration compared to one to impacted (and impacting) by merely ultra-short term rates.

As for the Fed's justification to impact the market in such a covert and off-balance sheet manner some might say, it provides the following justification:

The Federal Reserve has always appreciated the importance of correctly aligning market expectations about the economy.

Of course when the Fed sees the economy as the market, such as now, it is critical that the Fed do all in its power to prevent an efficient price discovery process from occurring.

For those for whom this is still unclear, basically what the Fed may well have done (and has admitted to doing in the past) is what the market does each and every day, when ETF buying results in a long/short gamma trade that pulls or pushes component securities higher or lower. There is a reason why the SPY and the ES are the two most liquid securities in the market: control these, and what happens to the underlying stocks is irrelevant. In very much the same way, the Fed which still continues to load up on Treasury securities (albeit far less so as the longer-end of the curve), is now most likely pursuing a goal of keep the curve as flat as possible and not losing the long end.

As a reminder, during QE Lite/QE 2, the Fed has practically forsaken the 30 Y sector of the curve, or the part the most reliant on long-term inflation expectations. Why would the Fed do this in the cash market unless it had some other way to definitively impact demand via synthetic instruments?

A synthetic off-book short put position also explains the confusion of those such as Bill Gross: when the Fed supposedly exits the monetization game, regardless for how short, rates would traditionally be expected to rise. Yes... but only if the Fed was not concurrently selling massive amounts of volatility. And while the actual buying and selling would remain hidden from public view, the aftermath would be visible in downstream market effects. Indeed, this is precisely the case. As can be seen on the below chart which maps the yield on the 30 Year during various QE regimes, and the level of the MOVE Treasury volatility index, during times when the 30 Year appears poised to break out higher in anticipation of a QE end, yet merely trades rangebound, the level of MOVE plummets.

Obviously, plunging vol ends up having an offsetting impect on prices. Were the vol not to drop so materially, the upward drift in Long-Term yields would be very pronounced, and result in the 30 Year breaking out north of 5%, after which the Fed would likely lose all control of the curve. The question then becomes: who is selling all this vol ahead of such a risky event as the end of a Quantitative Easing episode. Our bet: none other than the current Manager of the System Open Market Account: Brian Sack.

This however leaves open the question of just where on the Fed's books would Sack et al keep a record of how much the Fed has in Treasury yield exposure?

Enter Exhibit A: Federa Resere "Other Assets", which as we have been disclosing for quite some time is now a not too negligible, and very much record, $125 billion!  That's right, the Fed has $125 billion in other assets, whose definition is so broad they could well be anything and everything, and which we have a sinking suspicion could well include among them the "net" exposure the Fed currently is booking on its swaption book.

Naturally, the specific booking of these "assets" would depend on the format under which the Fed has contrived to make its synthetic but on higher Long-Term prices: whether these are outright puts, or, as was disclosed previouly when looking at Maiden Lane I, in the form of curve swaptions (and thus payers or receivers).

Recall that as per the latest breakdown of Maiden Lane I assets, the actively managed book includes, among other things, $675 million in net notional swaption exposure (gross could be anything), as well as ($3.3) billion in Interest Rate Swaps. Is this the same open market tactic that the Fed is applying to the broader Treasury curve? If so, keep a very close eye on abnormal activity in the swaption market, especially that originating from JP Morgan.

Which leaves open one question: with the Fed selling Treasury Puts, who is buying them? Well, the answer could be anyone. While nobody in their right mind would every transact directly with a Fed selling insurance on its own books, many Primary Dealers, and foreign institutions are certainly eager to hedge their surging Treasury exposure, courtesy of the trillions in new issuance each and every year. In this scenario, JPMorgan, the Fed's proxy, would all day, every day, especially on key inflection date such as ahead of the termination of a quantitative easing period, flood the market with an overabundance of Long-Term volatility (i.e. selling puts), which as shown above, would push the MOVE index lower, and result in a strengthening of 10 Year rates.

Yet what observent readers will realize is that those buying protection from the Fed would be analogous to those who would have been buying protection from AIG on its CDO books. However, unlike back then, when entities like Goldman were sure to be bailed out on their collateral exposure to Joe Cassano, this time around if the Fed does lose control of the long end, and the Fed ends up experiencing first tens, then hundreds of billions of P&L losses should rates jump by 1%, 2%, 3% or more, then all bets would be off, and everyone left holding Treasury protection, i.e., the bet opposite to that of the Fed, would end up with with a big, fat nothing as the monetary regime finally fails, fiat is dethroned, and alternative monetary systems are implemented.

If indeed the Fed is the primary driving force behind the long-end's continued resilience, one should first inquire whether or not this is an action that the Fed is misrepresenting as performing - after all in its description of activities performed under US Foreign Exchange intervention, the Fed clearly states "The Fed historically has not engaged in forward or other derivative transactions" - is this blanket statement true only for Fed's FX intervention regime or for everything, because as Reinhart has confirmed, if so, the Fed is engaging in activity that is not previously disclosed as performing. Second, if the bulk of Treasury put buyers were to realize that their ultimate counterparty, under the guise of various Primary Dealers, and especially JP Morgan, is indeed the Federal Reserve, they will promptly abandon the Treasury Derivative market, forcing the Fed to lose this key lever of reverse market influence, resulting in chaos when it comes to controlling the long-end, and leaving the Fed with a curve that is at or near zero on the short end and surging in the 10 Year and over spot, which would result in complete loss of control by the Fed regarding inflationary expectations, the collapse of the dollar (yes, even more than to date), and an explosion in commodity prices as the nation finally careens over to its Weimarian endspiel. Lastly, a key question to demand of Bernanke, if it is confirmed that the Fed is shaping the yield curve using derivatives, would be just how great the Fed's blended risk is currently over and above the DV01 on merely its underlying physical instruments, and just how the Fed will hedge not only its massive ~$3 trillion paper exposure, but possibly its multi-trillion synthetic exposure should inflation surge, and the Fed's SOMA desk finally lose control of the long end.

While there are many questions embedded in the assumptions presented above, we are confident at least some unconflicted reporter will inquire Ben Bernanke on April 27 whether any of the above is in fact true.Which if confirmed, will be the biggest admission of market manipulation by the Federal Reserve in history.

Those who wish to follow deCarbnnel's thoughts on the matter can do so below...

And for those curious to see just how the Fed predicted this very course of action as long as 8 year ago, we urge you to read the following exhibit from the Fed June 2003 minutes in its entirety - link

What is most ironic, is that Mr Reinhart was kind enough to leave us with the Fed's next steps for when the SOMA manager finally loses control of the curve. From Exhibit 8 to the June 2003 minutes (presented below in their entirety):


h/t Dnarby




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Yen Cross's picture

Well I'm by no means a bond expert. I track 10's closely, because I trade USD/JPY frequently. Last I looked they were off 6 basis points. I watch bid cover on all auctions. I watch direct and indirect bidding. I watch flows.

Dejean Splicer's picture

Wow, fascinating. So often I find myself thinking; "I wonder what Yen Cross is watching today?". Now I know. Thank you so much for this valuable input.

Yen Cross's picture

NoNo  The pleasure is all mine! Enjoy your OPUS!

CrazyCooter's picture

Cheeky Bastard was first on that old post ... I miss the opinions of some of the early ZHers ... (the fact that he "firsted" isn't lost on me - Cheeky Bastard posted really great stuff - I read Tainter because of him and bought several copies for friends/family).



P.S. And now, i will read the article.

Yen Cross's picture

Enjoy your meat and potatoes day (RONNIE)

Dejean Splicer's picture

"I miss the opinions of some of the early ZHers"

Yes, I guess this 'input cost' was too high for Tyler to maintain.

I sometimes see B9K9 around but not often enough.

Yen Cross's picture

Evolution Ronnie! Junk me all you want ronnie. I will never junk you. Or anyone else on this site. What is your outlook on Cable today your time? (Barely)

Squid-puppets a-go-go's picture

I will make it my solemn quest to say something so damn moronic that you will feel compelled to junk me.

..hey, is that Glee I hear coming on the telly?

Yen Cross's picture

Hey you Squid. My post is 12 hours old. Living on a post! I'm tired and on a Jet. You little tool.

Michael's picture

Only 1 junk SPA, wow. Try this yall.

I just thank God the complete and total economic collapse of the USA and the world will spare no one. If a nuclear war is what the kleptocrats want, a nuclear war is what we will give them. I say bring it on. We will go down the same road as every other great civilization that preceded ours. The Bush/Obama Nazi police state is firmly in place for the end game, a clear sign of falls that always proceed like this one in the last days.

I love witnessing the end of civilizations and I would not have changed a thing on how we got here. It was my not so clear intention to push economic systems to the extreme of their breaking point for maximum effect, while on the surface advocating for a sound monetary system. I understand how a sound monetary system should operate, but challenging the controllers to the extreme, well, made them do exactly as I had intended.  Doing it was like the TV airheads strategy, saying one thing while thinking another pushing for global government. It's a mind trick they play on us, I just did it back to them in reverse accelerating the process.  Our system cannot be fixed without inflicting maximum pain for everyone involved, and I helped make sure of that so everybody will get exactly what they deserve, that means all of us. No one here gets out alive, and that means no one! Thinking about political systems at this point is a futile exercise. Perhaps a few years ago when we had a chance to elect Dr Ron Paul, but now it's too late.  All you proles got to learn to live with what's coming to you.

The only way to avoid complete and total destruction is to put a bullet in every Kleptocrats and controllers heads, and do it soon if you want to save any shred of what you have as a civilization.

Michael's picture


Chicago thug politics at work. The comments in this science blog section are priceless. Broaden your horizons and take a few minutes to read them. Too funny.

Face Palm: EPA Bureaucrat Tap Dances During Testimony

Here's the Youtube video they are discussing;

EPA Admits Jobs Don't Matter


CrazyCooter's picture

Most folks wouldn't understand the moniker. I think SheepDog-One has the same play.

I would venture a guess this would probably nail it down.





By LTC (RET) Dave Grossman, RANGER, Ph.D., author of "On Killing."

One Vietnam veteran, an old retired colonel, once said this to me:

"Most of the people in our society are sheep. They are kind, gentle, productive creatures who can only hurt one another by accident." This is true.

Remember, the murder rate is six per 100,000 per year, and the aggravated assault rate is four per 1,000 per year. What this means is that the vast majority of Americans are not inclined to hurt one another.

Some estimates say that two million Americans are victims of violent crimes every year, a tragic, staggering number, perhaps an all-time record rate of violent crime. But there are almost 300 million Americans, which means that the odds of being a victim of violent crime is considerably less than one in a hundred on any given year. Furthermore, since many violent crimes are committed by repeat offenders, the actual number of violent citizens is considerably less than two million.

Thus there is a paradox, and we must grasp both ends of the situation:

We may well be in the most violent times in history, but violence is still remarkably rare. This is because most citizens are kind, decent people who are not capable of hurting each other, except by accident or under extreme provocation. They are sheep.

I mean nothing negative by calling them sheep. To me it is like the pretty, blue robin's egg. Inside it is soft and gooey but someday it will grow into something wonderful. But the egg cannot survive without its hard blue shell. Police officers, soldiers, and other warriors are like that shell, and someday the civilization they protect will grow into something wonderful.

For now, though, they need warriors to protect them from the predators.

"Then there are the wolves," the old war veteran said, "and the wolves feed on the sheep without mercy." Do you believe there are wolves out there who will feed on the flock without mercy? You better believe it. There are evil men in this world and they are capable of evil deeds. The moment you forget that or pretend it is not so, you become a sheep. There is no safety in denial.

"Then there are sheepdogs," he went on, "and I'm a sheepdog. I live to protect the flock and confront the wolf."

If you have no capacity for violence then you are a healthy productive citizen, a sheep. If you have a capacity for violence and no empathy for your fellow citizens, then you have defined an aggressive sociopath, a wolf. But what if you have a capacity for violence, and a deep love for your fellow citizens?

What do you have then? A sheepdog, a warrior, someone who is walking the hero's path. Someone who can walk into the heart of darkness, into the universal human phobia, and walk out unscathed.

Let me expand on this old soldier's excellent model of the sheep, wolves, and sheepdogs. We know that the sheep live in denial, that is what makes them sheep. They do not want to believe that there is evil in the world. They can accept the fact that fires can happen, which is why they want fire extinguishers, fire sprinklers, fire alarms and fire exits throughout their kids' schools.

But many of them are outraged at the idea of putting an armed police officer in their kid's school. Our children are thousands of times more likely to be killed or seriously injured by school violence than fire, but the sheep's only response to the possibility of violence is denial. The idea of someone coming to kill or harm their child is just too hard, and so they chose the path of denial.

The sheep generally do not like the sheepdog. He looks a lot like the wolf. He has fangs and the capacity for violence. The difference, though, is that the sheepdog must not, can not and will not ever harm the sheep. Any sheep dog who intentionally harms the lowliest little lamb will be punished and removed. The world cannot work any other way, at least not in a representative democracy or a republic such as ours.

Still, the sheepdog disturbs the sheep. He is a constant reminder that there are wolves in the land. They would prefer that he didn't tell them where to go, or give them traffic tickets, or stand at the ready in our airports in camouflage fatigues holding an M-16. The sheep would much rather have the sheepdog cash in his fangs, spray paint himself white, and go, "Baa."

Until the wolf shows up. Then the entire flock tries desperately to hide behind one lonely sheepdog.

The students, the victims, at Columbine High School were big, tough high school students, and under ordinary circumstances they would not have had the time of day for a police officer. They were not bad kids; they just had nothing to say to a cop. When the school was under attack, however, and SWAT teams were clearing the rooms and hallways, the officers had to physically peel those clinging, sobbing kids off of them. This is how the little lambs feel about their sheepdog when the wolf is at the door.

Look at what happened after September 11, 2001 when the wolf pounded hard on the door. Remember how America, more than ever before, felt differently about their law enforcement officers and military personnel?

Remember how many times you heard the word hero?

Understand that there is nothing morally superior about being a sheepdog; it is just what you choose to be. Also understand that a sheepdog is a funny critter: He is always sniffing around out on the perimeter, checking the breeze, barking at things that go bump in the night, and yearning for a righteous battle. That is, the young sheepdogs yearn for a righteous battle. The old sheepdogs are a little older and wiser, but they move to the sound of the guns when needed right along with the young ones.

Here is how the sheep and the sheepdog think differently. The sheep pretend the wolf will never come, but the sheepdog lives for that day. After the attacks on September 11, 2001, most of the sheep, that is, most citizens in America said, "Thank God I wasn't on one of those planes." The sheepdogs, the warriors, said, "Dear God, I wish I could have been on one of those planes. Maybe I could have made a difference." When you are truly transformed into a warrior and have truly invested yourself into warriorhood, you want to be there. You want to be able to make a difference.

There is nothing morally superior about the sheepdog, the warrior, but he does have one real advantage. Only one. And that is that he is able to survive and thrive in an environment that destroys 98 percent of the population.

There was research conducted a few years ago with individuals convicted of violent crimes. These cons were in prison for serious, predatory crimes of violence: assaults, murders and killing law enforcement officers. The vast majority said that they specifically targeted victims by body language: slumped walk, passive behavior and lack of awareness. They chose their victims like big cats do in Africa, when they select one out of the herd that is least able to protect itself.

Some people may be destined to be sheep and others might be genetically primed to be wolves or sheepdogs. But I believe that most people can choose which one they want to be, and I'm proud to say that more and more Americans are choosing to become sheepdogs.

Seven months after the attack on September 11, 2001, Todd Beamer was honored in his hometown of Cranbury, New Jersey. Todd, as you recall, was the man on Flight 93 over Pennsylvania who called on his cell phone to alert an operator from United Airlines about the hijacking. When he learned of the other three passenger planes that had been used as weapons, Todd dropped his phone and uttered the words, "Let's roll," which authorities believe was a signal to the other passengers to confront the terrorist hijackers. In one hour, a transformation occurred among the passengers - athletes, business people and parents. -- from sheep to sheepdogs and together they fought the wolves, ultimately saving an unknown number of lives on the ground.

Here is the point I like to emphasize, especially to the thousands of police officers and soldiers I speak to each year. In nature the sheep, real sheep, are born as sheep. Sheepdogs are born that way, and so are wolves. They didn't have a choice. But you are not a critter. As a human being, you can be whatever you want to be. It is a conscious, moral decision.

If you want to be a sheep, then you can be a sheep and that is okay, but you must understand the price you pay. When the wolf comes, you and your loved ones are going to die if there is not a sheepdog there to protect you.

If you want to be a wolf, you can be one, but the sheepdogs are going to hunt you down and you will never have rest, safety, trust or love. But if you want to be a sheepdog and walk the warrior's path, then you must make a conscious and moral decision every day to dedicate, equip and prepare yourself to thrive in that toxic, corrosive moment when the wolf comes knocking at the door.

For example, many officers carry their weapons in church.? They are well concealed in ankle holsters, shoulder holsters or inside-the-belt holsters tucked into the small of their backs.? Anytime you go to some form of religious service, there is a very good chance that a police officer in your congregation is carrying. You will never know if there is such an individual in your place of worship, until the wolf appears to massacre you and your loved ones.

I was training a group of police officers in Texas, and during the break, one officer asked his friend if he carried his weapon in church. The other cop replied, "I will never be caught without my gun in church." I asked why he felt so strongly about this, and he told me about a cop he knew who was at a church massacre in Ft. Worth, Texas in 1999. In that incident, a mentally deranged individual came into the church and opened fire, gunning down fourteen people. He said that officer believed he could have saved every life that day if he had been carrying his gun. His own son was shot, and all he could do was throw himself on the boy's body and wait to die.
That cop looked me in the eye and said, "Do you have any idea how hard it would be to live with yourself after that?"

Some individuals would be horrified if they knew this police officer was carrying a weapon in church. They might call him paranoid and would probably scorn him. Yet these same individuals would be enraged and would call for "heads to roll" if they found out that the airbags in their cars were defective, or that the fire extinguisher and fire sprinklers in their kids' school did not work. They can accept the fact that fires and traffic accidents can happen and that there must be safeguards against them.

Their only response to the wolf, though, is denial, and all too often their response to the sheepdog is scorn and disdain. But the sheepdog quietly asks himself, "Do you have and idea how hard it would be to live with yourself if your loved ones attacked and killed, and you had to stand there helplessly because you were unprepared for that day?"

It is denial that turns people into sheep. Sheep are psychologically destroyed by combat because their only defense is denial, which is counterproductive and destructive, resulting in fear, helplessness and horror when the wolf shows up.

Denial kills you twice. It kills you once, at your moment of truth when you are not physically prepared: you didn't bring your gun, you didn't train. Your only defense was wishful thinking. Hope is not a strategy.

Denial kills you a second time because even if you do physically survive, you are psychologically shattered by your fear helplessness and horror at your moment of truth.

Gavin de Becker puts it like this in Fear Less, his superb post-9/11 book, which should be required reading for anyone trying to come to terms with our current world situation: "...denial can be seductive, but it has an insidious side effect. For all the peace of mind deniers think they get by saying it isn't so, the fall they take when faced with new violence is all the more unsettling."

Denial is a save-now-pay-later scheme, a contract written entirely in small print, for in the long run, the denying person knows the truth on some level.

And so the warrior must strive to confront denial in all aspects of his life, and prepare himself for the day when evil comes.

If you are warrior who is legally authorized to carry a weapon and you step outside without that weapon, then you become a sheep, pretending that the bad man will not come today. No one can be "on" 24/7, for a lifetime.

Everyone needs down time. But if you are authorized to carry a weapon, and you walk outside without it, just take a deep breath, and say this to yourself...


This business of being a sheep or a sheep dog is not a yes-no dichotomy. It is not an all-or-nothing, either-or choice. It is a matter of degrees, a continuum. On one end is an abject, head-in-the-sand-sheep and on the other end is the ultimate warrior. Few people exist completely on one end or the other.

Most of us live somewhere in between. Since 9-11 almost everyone in America took a step up that continuum, away from denial. The sheep took a few steps toward accepting and appreciating their warriors, and the warriors started taking their job more seriously. The degree to which you move up that continuum, away from sheephood and denial, is the degree to which you and your loved ones will survive, physically and psychologically at your moment of truth.

Yen Cross's picture

I respect life. Take your 8 paragraphs of BS and (Dumb them Down) Discuss finance you tool!

Dejean Splicer's picture

Lolz, maybe he could tell us what he watches?

jeff montanye's picture

i stopped reading when he said the sheepdogs never hurt the sheep.  probably true to an impressive statistic for sheepdogs (wonderful creatures) but hardly true for people: police and military.  among the latter are many truly heroic men and women.  but there are also others that should not be there and are wolves in sheepdog's clothing.  or something.

DeadFred's picture

WTF!  Tyler puts out what may be the most important post I've read on this site and the commentary is hijacked to talk about the protectors of society.  Get back on topic.

TruthInSunshine's picture

Tyler, I've never asked before and probably never will again, but this article is the best yet published on ZeroHedge (and quite possibly, anywhere else), so could we delete the bullshit rambling, War-And-Peace challenging expose on things not related to ANYTHING in this  MOST EXCELLENT article by cooter?



by CrazyCooter
on Sat, 04/16/2011 - 20:02


Most folks wouldn't understand the moniker. I think SheepDog-One has the same play.

I would venture a guess this would probably nail it down.





By LTC (RET) Dave Grossman, RAN

Yen Cross's picture

Dead Fred. Do the Math! Oh Barney Rubble is on that one!

Hephasteus's picture

Yep total hijack.

Let me explain my NOBLE BULLSHIT QUALITIES and I can wear them like a little kookie mask.

For that. I am revealing Jesus's secret of the loaves and the fishes and how to do the miracle of multiplying them.

First you befriend a fisherman and get him to follow you everywhere.

Then you befriend a hooker with a thing for bakers.

The rest is easy to figure out.

Oh and speaking of sheep dogs.

bonddude's picture


with the small exception of the copious misspellings and errors, which make it hard to teach the less initiated.

sun tzu's picture

He is right, you are wrong:

are wolves in sheepdog's clothing. 

WaterWings's picture

I respect life.

And unicorns and rainbows.

Yen Cross's picture

The consummate tool. Today it's a hacksaw.

D.M.'s picture

Dumb down? Rly? You mean condense it into a paragraph or two of highly concentrated stupidity? How about he just do ZH a favor and delete it, cuz junking alone is not satisfying!

Yen Cross's picture

You just gave me a thought.

Crab Cake's picture

Well my friend I guess you'll have to color me a dog of a different coat. A feral dog in sheeps clothing perhaps. I see plenty of sheep dogs who are in reality wolves, and this makes me wander a lonely path. If neither the sheep, or their dogs, or the wolves know I'm there; then I have succeeded. Cross my pack, and I care not your species, shield, flag, or kind; there will be blood. Stay clear of me and mine and you'll see is a sheep.

trav7777's picture

fuck 911 and fuck the police too...a group of C students who rate only below incarcerated felons in terms of sociopathy.

Don't dislocate your shoulder patting yourselves on the back for how heroic you all are

disabledvet's picture

"this moment of hope and healing brought to you by trav7777.  remember, until you have 7777 you only trav7777."

D.M.'s picture

Thanks for posting this pure non-sense from the prospective of a "sheepdog". The reality is that we arn't dealing with traditional wolves, we are dealing with wolves who dress up as sheep, live among the sheep, control and set the rules for the sheepdogs, and instead of simply living like leeches, they have lost control and are dead set in killing as many sheep as necessary to obtain complete control of every soul on earth. This group of wolves are the same ones who started the Federal Reserve, eliminated the gold standard, create tension across the globe by involving the US in countless military operations across the globe, killed JFK, organized 9-11, and have completely ruined the financial and industrial sectors of the United States.

CrazyCooter's picture

So, asshat, put a label on Tyler ... Sheep ... Wolf ... or Sheep Dog ... in so far as my previous authors commentary allows.

It amazes me that folks can be so myopic. Oscar Wilde would disapprove.

Let me help you with the bits...

If you have no capacity for violence then you are a healthy productive citizen, a sheep. If you have a capacity for violence and no empathy for your fellow citizens, then you have defined an aggressive sociopath, a wolf. But what if you have a capacity for violence, and a deep love for your fellow citizens?

Or, this bit:

There is nothing morally superior about the sheepdog, the warrior, but he does have one real advantage. Only one. And that is that he is able to survive and thrive in an environment that destroys 98 percent of the population.

Grandiose, no?

If you want to be a wolf, you can be one, but the sheepdogs are going to hunt you down and you will never have rest, safety, trust or love. But if you want to be a sheepdog and walk the warrior's path, then you must make a conscious and moral decision every day to dedicate, equip and prepare yourself to thrive in that toxic, corrosive moment when the wolf comes knocking at the door.

In the end, the perps will hang.



D.M.'s picture

A label can't be put on Tyler, at least not by a person like myself who doesn't even know if Tyler is one person, which is next to impossible, he/they plays the role of a journalist. So are journalist's sheepdogs? Why are there only 3 options? Why can't there be something in the middle of sheepdog and sheep (which is what I consider myself to be, "awake" but only interested in protecting/helping my countrymen that surf sites such as these, or at least willing to learn more about the crimes the wolves are committing and how to prepare. NOT the American sheep who are too busy watching dancing with the idiots, who finds the issues discussed on ZH "boring" and will most likely call me crazy)? I don't know what your world perpective is besides your long, ridiculous post, which doesn't represent you well in my perspective of the world. The perps are running the show and they are leading us to world war 3, one world government, or outright collapse. The reality is that HUMANITY is the loser in this. Our numbers have swelled to 7 billion, and in the process we have completely trashed the planet and made ourselves completely dependant on resources that are getting harder and harder to extract and coming from more unstable and dangerous places that hate America(which they have every right to). There is a huge die-off in the horizon, and the wolves, sheepdogs, sheep, and everything in between are all in danger.

Squid-puppets a-go-go's picture

option 4: lapdog (crony)

option 5: dawg (financial observer who also happens to like rap)

Bartanist's picture

I agree. In this world the wolves own the sheepdogs (even assuming the whole analogy is valid) and so the wolves have now created an environment where the brain dead sheep dogs are chasing after shadow wolves, letting the real wolves run free and feasting on the sheep.

There IS terror, but it is the not some shadowy Islamic wolf group that is creating the terror. It is the wolves who own the stupid, blindly obedient sheepdogs and the sheepdogs who have lost all respect for the sheep they are supposed to protect.

The sheepdogs now willingly serve their wolf masters. The only thing the sheepdogs are capable and willing to protect the sheep from is the occassional solitary jackel who is intruding on their territory. The sheepdogs run drugs. The sheepdogs torture and terrorize the sheep. The sheepdogs kill the sheep for sport. The sheepdogs create false flag events to control the sheep. The sheepdogs protect the wolves from the sheep. The sheepdogs steal from the sheep ...

... and then the poor misunderstood sheepdogs claim that the sheep, who are perfectly aware of wolves, are in denial, when in fact it is the sheepdog who is in denial that they do the wolves' bidding. 

High Plains Drifter's picture

ok, i will go with this explanation. we sure don't want to hurt any feelings.....but see, so many think that all of these things are just happening by coincidence and that if we only get ron paul elected to the presidency we will be saved. what was it the old patriarch of the rothschild klan said one time, back in the late 1700's i believe, i don't care who is king, as long as i control the money or something like that.  its a cancer. until it is cut out of the body, it will continue to grow and fester. that is the way it is. it has always been this way down through recorded history. but now , as in so many times in the past, fools say yes to the money from this beast and laugh as their fellow brothers die for nothing. there is a very small percentage of people who really know what is going on and are willing to do something about it. right now, they are peaceful. one day, not so much. we have had our revolution in 1775. now we must have a counter revolution. it is not a way. it is the only way. the hive, is full of bees now working and the infiltration is complete in almost all systems of life. one by one, these bees must be destroyed and the connecting tunnels and/or tennacles removed and destroyed. its a dark day coming soon and there is much work to be done. i was on my way home from the store a while ago and i thought i heard the radio playing. i guess i had turned it down but not off. so i turned it up. i heard people singing the old gospel song, amazing grace, how sweet the sound, that saved a wretch like me, i once was lost and now i am found, was blind but now i see.........i enjoyed the singing for a minute. then the criminal traitor john hagee's booming voice came on the radio telling the sheep to pray........i turned it  off in disgust.......DM, there is much work that needs to be done........

D.M.'s picture

Stay strong, for those that survive are surely those that prepared. The people that survive the crash will hopefully carry the torch for humanity, and bring about a 21st century renaissance, where love, rationality, and living in harmony with the earth prevail!

Yen Cross's picture

I respect and read your post's! But then again, you have BALLS!

45north's picture

Denial is a save-now-pay-later scheme, a contract written entirely in small print, for in the long run, the denying person knows the truth on some level.

"a contract written entirely in small print"  - nice turn of phrase

God bless the sheepdogs!

Yen Cross's picture

Thesis in Psycology? You are the retard feeding kids blue pills.  You are an ignoramus  Bafoon!

i-dog's picture

"The difference, though, is that the sheepdog must not, can not and will not ever harm the sheep. Any sheep dog who intentionally harms the lowliest little lamb will be punished and removed. "

Here is where this self-serving little fairy tale falls down. In the current system -- where the sheepdogs are given their orders by the wolves -- there is never a sanction for harming the sheep. Indeed, any sheepdog who fails to obey a "lawful order" by the wolf to harm the sheep will be punished then thrown in with the sheep!!

I had a long chat with a self-described "sheepdog" just 2 nights ago about this very topic. He had served with the UN force in Rwanda, for example, and watched the Hutus slaughtering Tutsis. His justification for doing nothing there was that the UN's orders were "not to get involved". I then asked him if he would engage in live fire against his own countrymen if ordered, and he again fell back on "if I was ordered to, I would have no hesitation".

No morality or empathy, just blind obedience. (Yet he is an extremely moral and empathetic person as an individual civilian).

The state's sheepdogs are just as much in denial as the sheep.

Dave's picture

+1 on that last sentence.

disabledvet's picture

Bernanke IS the wolf in SheepDog's clothing i tell you!  He's the "pyro fireman"---listen to me.  LISTEN TO ME!

High Plains Drifter's picture

Seven months after the attack on September 11, 2001, Todd Beamer was honored in his hometown of Cranbury, New Jersey. Todd, as you recall, was the man on Flight 93 over Pennsylvania who called on his cell phone to alert an operator from United Airlines about the hijacking. When he learned of the other three passenger planes that had been used as weapons, Todd dropped his phone and uttered the words, "Let's roll," which authorities believe was a signal to the other passengers to confront the terrorist hijackers. In one hour, a transformation occurred among the passengers - athletes, business people and parents. -- from sheep to sheepdogs and together they fought the wolves, ultimately saving an unknown number of lives on the ground....

since you brought it up.....the todd beamer episode never happened. it was all made up. let's roll? give me a break already......

now back to your regularly scheduled programming......

goldsaver's picture

the todd beamer episode never happened. it was all made up. let's roll? give me a break already......


Really? Wow, next you are going to tell me that the recordings and the cell conversations with his wife were done on the same sound stage were they did the moon landings.

TruthInSunshine's picture

I really wish commentators would stick to the relevant facts of this article instead of all this other bullshit.

Even by conventional standards, it appears that there's almost a distraction campaign by long windedness going on.


Ima anal sphincter's picture

Damn.... I guess that plane was special. It must of been the only aircraft with cellphone air to ground technology. 5 years ahead of everyone else. "Let's Roll" my ass, just one more lie from 911.