Even The Big Banks Now Admit It: "This Is How The Fed's 'Massive Manipulation' Broke The Market"

Tyler Durden's picture

Raise your hand if this sounds familiar: markets are calm, things are stable, stocks are levitating on virtually no volume... and suddenly there is a price 'air pocket' as one or more assets unexpectedly plunge in what has become a now daily "flash crash" du jour, traders panic, unable to frontrun orderly traffic HFTs immediately shut down, and all hell breaks loose.

We expect everyone to have gone through this "local tail" event scenario at least once and likely many times, one which we predicted would become the norm back in 2009, and one which has, as of 2015, become the norm.

Thank the Fed.

But don't take it from a "fringe, tinfoil hat, conspiracy theory" website which has been repeating this for so many years we have to dig deeper with every passing day to keep ourselves amused at this farce: here is Bank of America's head of global equity derivatives research, Benjamin Bowler, with a piece slamming the massively manipulated "market" that 7 years of global central bank intervention has created, and a simple schematic which demonstrates just how broken everything is, and why one should expect many, many more such "local tail" freakouts in the future.

From Bank of America

Central bank’s risk manipulation well explains local tails


A good way to explain why we have seen local tail risks arise so frequently since central banks began to heavily manipulate asset prices is with the following analogy, illustrated in Exhibit 1. Essentially central banks, by unfairly inflating asset prices have compressed risk like a spring to unfairly tight levels. Unfortunately, the market is aware the price of risk is not correct, but they can’t fight it, and everyone is forced to crowd into the same trade. By manipulating markets they have also reduced investors’ inherent conviction by rendering fundamentals less relevant.


This then creates a highly unstable (fragile) situation that breaks violently when a sufficient catalyst causes risk to rise – overly crowded positioning meets a market with little conviction.


Catalysts can range from a “valuation scare” similar to Oct-14 or Aug-15 to a prominent investor stating that assets (e.g. bunds) are not fairly priced and are the “short of the century”.


The unwinds from these crowded positions are violent, but almost equally violent in some cases are the reversals, which are driven from investors crowding back in when they realize central banks are still there providing protection.




From this vantage point, it becomes clear that the biggest visible risk to financial markets is a loss of confidence in this omnipotent CB put.

And a bonus post-script from BofA:

Central banks have had a tremendous impact on financial markets in the last seven years, which is never more apparent than when looking at the world through the volatility lens. As shown in Chart 12, cross-asset volatility reached all-time lows in the summer of 2014, falling even below the 2007 pre-GFC bubble lows, crushed under the weight of unprecedented monetary policy (or in the ECB case, the promise of policy). This is remarkable considering the size of the risk “bubble” created pre-GFC.



The result is that risk is not fairly priced based on fundamentals but rather is better explained by investors not wanting to stand in front of central banks as they embark on QE.

Our job here is done.

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Took Red Pill's picture

You've all got to see the movie "The Big Short"

JRobby's picture

I liked it. Seemed that many left the theater angry and or confused. Hopefully they start to think. Most people think a swap is a yard sale even with the provided explanations. They may now realize that it was their yard that got sold.

The level of criminality and stupidity was put across clearly.

NoDebt's picture

Nobody cares about manipulation as long as it's going in the right direction.


J J Pettigrew's picture

"Nobody cares about manipulation as long as it's going in the right direction."

You mean like Congress?

Yes We Can. But Lets Not.'s picture

Would it be accurate to characterize this situation as nationalization of equity markets?

sp0rkovite's picture

If the government ran the Fed instead of the other way around. The private bankers running the FED added about 900 billion USD to their balance sheet with just that measly quarter point hike.

Eyeroller's picture

Nobody cares about manipulation as long as their 401k is not affected adversely. If that ever happens, then Emperor Obola will have no clothes, which is why the PPT is hard at work spinning plates so the 'market' doesn't crash on his watch.

NoDebt's picture

That was going to be the second part of my post until I remembered I usually do better when I keep it short.  "Brevity is the soul of wit" or "Enough rope to hang myself".  One of those two applies to me, probably the latter.

armageddon addahere's picture

Everybody wants to invest in a crooked deal, as long as they think they are stealing for us. Then it turns out they were stealing from us. See Bernie Madoff, Martin Shkreli and a thousand others. Look at every hedge fund in the world and ask how people thought they were going to make the staggering returns they promised.

Nobody figures out until too late that there is no such thing as an honest thief. The Long Con is solidly based in human nature.

DavidC's picture

You're right, but when I've explained to people in terms of being no different to switching a mortgage from a floating rate to a fixed interest rate mortgage (or vice versa) depending on which way one thinks the rates may go, one can see the level of understanding suddenly go up markedly.

Some of the maths might be tricky but none of it, in empirical terms, is difficult. One of the greatest scams the banks have perpetrated is to make it SEEM really complex to the individual ("Ah yes, you see, WE understand even though YOU don't - but don't worry, we're here to HELP you").


Reginald Blome's picture

What I found noteworthy/scary was that the chatter upon exiting the film indicated to me that the viewers thought it was a "one and done" tale, like a movie about a one off disaster. Some clown was telling his wife that Dodd Frank fixed everything, so she needn't worry.


thunderchief's picture

I too am getting damm tired of this Fed inspired "Money for nothing and you're chicks for free" mentality..

Hold on! Where have I heard that before?


flyingpigg's picture

Hitting control+P:

That ain't working: maybe get a blister on your little finger, maybe get a blister on your tumb....

Look at them yoyo's, that's the way you do it: running the printing presses like a Central B.


DavidC's picture

Don't know, but it would make a great song lyric...


J J Pettigrew's picture

Being fully aware of the legalities of libel, the movie could have been tougher on Goldman Sachs (Paulsen and Blankfein), Fannie Mae (Frank Raines, Barney Frank and Chris Dodd) and the SEC (Chris Cox).

Great movie!!


armageddon addahere's picture

If the big banks are drawing attention to the bailout scam that is now 9 years old that is a sign the Fed pump and dump is coming to an end. They don't ring a bell at the top of the market but if they did you just heard the first ding.

Janet Shalom Bernanke's picture

So I guess it is true, I have a Fat Tail.

Just wait until I really show it to you.

new game's picture

high risk, high reward. stress the silent killer, no thanks...

williambanzai7's picture

Fuck Banco of Amerika!

Janet Shalom Bernanke's picture

One thing that Banco knows very well is fraud and manipulation. 

There are very few Wall Street scandles they haven't been an active participant in.  

"Higher Standards"  Bank of Amerika

THE SOLUTION IS DEBT FREE MONEY CREATION (not verified) Dec 28, 2015 9:31 AM

Test post

Tall Tom's picture



The solution is NOT Debt Free Money Creation.


A possible solution is privatized money backed by a real production of real VALUE.


Governments are unnecessary for this to manifest.


So it will not happen as we melt down into oblivion.

glenlloyd's picture

WTF dude? a test post? no one does test posts anymore

NoDebt's picture

You should also make a call to 911 just to be sure it works.


JRobby's picture

Oh? The big banks own the FED and visa versa

overmedicatedundersexed's picture

banks admit it,did they? well fuck ben & janet..you owe me ,pay up!

buzzsaw99's picture

says the tbtf recipient of a bailout with the overpriced stock

the maggot protests too much methinks...

aztrader's picture

And will an audit ever be available to prove that the Fed has been buying the markets just like the Swiss Central bank?   Everytime there was a sell off, someone came in a bought the market.  How can that be in a free market system?

surf0766's picture

All progressive marxists stick together

Bro of the Sorrowful Figure's picture

havent had free markets since the creature was born in 1913, but theyre still used as a scapegoat for all inequalities, perceived or actual, by economic illiterates.

yogibear's picture

Very nice Wall Street end of the quarter bonuses.

That's all the Fed is interested in. Enriching Wall Street. Taking money from main street.

kralizec's picture

That point of "poor trading liquidity" will be a real popcorn moment.

Ignorance is bliss's picture

I think you can add real state to the list of over inflated assets classes being supported and manipulated by the Fed.

J J Pettigrew's picture

All our problems are from the same area codes....212 and 202

44magnum's picture

How many __________ live in those area codes?

falak pema's picture

Bunga bunga on WS is now for bots; It makes sense, those bots never die with their boots on.

Those who die with their boots on are called humans.

So when is the last train to boot hill with the last human trader on it?

rejected's picture

" rendering fundamentals less relevant."

LESS relevant?? LMFAO.

withglee's picture

have compressed risk like a spring to unfairly tight levels.

What does it mean to "compress risk"? What is a "tight level" of risk?

Janet Shalom Bernanke's picture


High level of risk - having sex in a broom closet at the office with a co-worker who is much taller than you.

Tight spreads - an instrument that doesn't have much room over another instrument. 

Fat Tails - When a black swan shits on your lawn. 

Yes We Can. But Lets Not.'s picture

Seems like an indirect way of describing something ready to blow-up/collapse in an instant.

moman's picture

Basicly, the bond market is not allowed to operate by natural market forces because the Fed has their back, if they did, intrest rates would be much higher. When this unatural coiling snaps to find (true market forces), the effect will be violent as risk gets priced in.

Janet Shalom Bernanke's picture

"Broke Back Market"

Starring:  Your Federal Reserve!

We take care of main street, because someone has to.

jakesdad's picture

" unable to frontrun orderly traffic HFTs immediately shut down"


I'm not normally one to get into semantic fights but the phrase (/acronym) "hft" needs to be banned from the english language & replaced w/one that actually (/accurately) describes the actual business model:  "low-latency frontrunning" (or llf).  that's what they do - that's it!  there is no NET liquidity provided, only opportunistic poaching of transactions between buyers/sellers otherwise attempting to engage in legitimate price discovery!  (for those under 25 you may need to google that).  I know this sounds kinda "reverse-pc" (replace an accepted euphemism w/something more derrogatory) but (again) it's actually about accuracy - shorter fiber runs don't increase frequency, they reduce latency!  the "high frequency" part only describes the SCALE of the frontrunning (essentially volumne), the actualy MARGIN comes from the frontrunning! 

SpanishGoop's picture

The big banks admit it, "whe have to blame someone so.....the FED".

Self reflection are dirty words.



geekz_rule's picture

P < P + I



enough said. stupidity? Ignorance? NO. Design

1) Deregulate global "financial" markets

2) Deregulate Global Trade

3) Destroy sovereignty of nations and leave them bankrupt, impotent

4) Privatize Everything

government is merely a proxy for global banksters. teaching the honey boo boo inbreds to hate government sure was a boon for the Oligarchy!

our main problems are SCALE. things are not manageable on this scale, without overt corruption being predictable, natural.