Does Bitcoin Need a Central Market Maker?

The digital currency, Bitcoin, needs world-class marketing making. That’s what RT’s popular TV host, Max Keiser, told millions of viewers around the world yesterday. After we watched Mt.Gox suffer a DDOS attack these last few weeks that led to Bitcoins dropping over $100 in value–the idea of trying to weed out crazy volatility swings through an added layer of market making might not be a bad idea. Keiser even breaks news on his show that Cantor Fitzgerald, a broker dealer, is secretly working on this.

You see Cantor bought a virtual market maker tech platform from Keiser many many years ago when he owned the Hollywood Stock Exchange with Michael Burns of Lionsgate. The U.S.-based brokerage firm could use Max’s virtual specialist technology to create a trading market in about anything. Right now it looks like they’re trying to figure out how to make money off the platform trading Bitcoins.

I am not going to bother asking Cantor to confirm if they are going to jump into the new-new world of Bitcoins because when I interviewed them in 2007 at Trader Monthly Magazine for a story on the Hollywood Stock Exchange they told me Max’s technology had been lost when their New York office was blown up in the 9/11 bombings. I found out later this was a lie. Cantor had the root technology Max had created and then added a few bells and whistle to it so they could back out of paying him and claim it was their own tech platform. It was typical back-stabbing dirty-deal making on Wall Street that Max eventually just gave up trying to collect on.

I don’t think the boys at Cantor are the right group to touch anything having to do with Bitcoin. But I like Keiser’s idea of finding one group or firm to help buyers and sellers of the digital currency find true price discovery the moment they want to make a transaction. Right now with more than one Bitcoin exchange we end up with these incredible spreads. I’ve written at Bitcoin Magazine last month about hedgies getting excited to make large block buys of Bitcoins through Coinlab’s new exchange. So we know the institutional money has arrived. Problem is these hedgies are setting up limit trades on buy or sell orders to buy at say anytime Bitcoin goes below $100. Since Bitcoin’s price depends on the number of buyers and sellers coming to a market at one time this creates an opportunity to screw up the price. Or to put it a nicer way you rarely ever buy or sell a Bitcoin at true market price. That’s why Max thinks we need a specialist, like they still have on the floor of the NYSE, to step in and buy when there is a mismatch of Bitcoin buyers and sellers.

Keiser told millions of his viewers “The exchange piece of the Bitcoin formula is its weakest link right now.”

Still even without a market maker in place, we are seeing record jumps in new people signing up to trade Bitcoins at Mt.Gox – the exchange blamed for forcing the price of $BTC to nose dive. Stacy Herbert told the Keiser Report yesterday in March Mt.Gox had 60,000 new clients. As of this week they are taking in 20,000 new clients a DAY! Stacy also gave us some damn funny history on Mt.Gox which stands for – Magic the Gathering Online Exchange. The exchange is based out of Japan and actually started out trading ‘Magic the Gathering Cards’ for cash. If you need a laugh I highly recommend watching Stacy explain this on the show.

People who write about finance, like me, are often prone to pigeon-hole a new asset into a type of group. There is a huge debate now on if Bitcoin is a commodity or a currency. My friend Josh Brown, at The Reformed Broker, laughs at anyone who calls Bitcoin a currency.

I started reporting on Bitcoins last year for Bitcoin Magazine because I was fascinated with any non-government controlled product that could possibly take away transaction fee revenue from our Too Big To Jail banks. Marc Hochstein, editor at American Banker, was also early in getting his team to write on the effect of how the Bitcoin Market could hinder bank revenue and change the way we transfer money. I don’t think either Marc or I have wanted to classify if Bitcoin is a commodity or a currency and Max points out on his show it doesn’t have to be. It’s simply a new asset class. One he says asset managers in London are now coming to him to learn how they should invest in it. Think about that–sophisticated money men in London need a TV journalist to help invest because he’s been the only TV jurno to learn and report on the Bitcoin market for over two years now.

Still if your going to trade Bitcoins, or hold them for a long-term investment, you have to understand why even the feds are now calling Bitcoins MONEY. Max got one of Bitcoin’s top entrepreneurs, Tony Gallippi of Bitpay, in an exclusive TV interview to explain Bitcoin’s intrinsic value. Tony ask us to think about it this way. What gives any type of money value? It’s utility – what can you buy with it and how many people/places can you make that transaction with. I’m not going rewrite Max’s great interview with Tony here so watch the show. It’s worth it.

Why Does JP Morgan Want This Fraud Suit Sealed?

How Can They Do This?

JP Morgan is being sued by Ambac for allegedly selling the insurance company hundreds of millions of mortgage back securities while knowingly packing them full of loans they knew were bad. The loans stem from MBS created by Bear Stearns that JP Morgan took control of after they bought the failed bank in 2008. While this might sound like an ailing mortgage insurer trying to pass off blame for buying a financial product that didn’t work out, if we could look inside the lawsuit we’d likely see otherwise.

The problem is the bank, who’s known to have close ties to Obama’s administration, has somehow convinced a judge in the Southern District of New York to seal the complaint. Combing through the legal documents filed before the seal was ordered, we get a glimpse of what has JP Morgan so worried – although because the lawsuit is sealed we still don’t get to see how Ambac can claim these violations of securities laws were started.

Ambac accuses JP Morgan (NYSE:JPM) and the Proposed Individual Defendants of:
(i) “accounting fraud”
(ii) implementing a “bad faith” strategy to reject without justification insurers’ and investors’ demands for the repurchase of breaching loans
(iii) “arbitrarily” denying demands by investors and insurers to repurchase loans
(iv) “manipulating” its accounting reserves
(v) “obscene compensation” and “reckless pursuit of fees”
(vi) “encourag[ing]” the acquisition of defective loans

Talk about accusing them with the kitchen sink of bank fraud. Now here is what I find a weak excuse for why the investors in a publicly traded company (or anyone else who’s interested) shouldn’t be allowed to see this complaint. JP Morgan’s argument is because Abmac was able to get sworn testimony, about how they broke the law, from people working inside the mortgage security packaging division; that this information should be considered a trade secret. On top of that, JP Morgan argues that because ex-employees of these alleged financial criminals are testifying exactly who at the bank told them to skirt the law, this information must be suppressed because it might damage top JPM executives’ reputations.

Sound fishy? This week I went on financial TV journalist Max Keiser’s show to tell his international audience just what JP Morgan was up to. It drew hundreds of comments packed with fans of The Keiser Report screaming this shows just how connected JP Morgan is to a Federal government known to play favorites with American’s bulge banks.

Yet what’s going on behind the scenes is even more alarming. Abmac was able to add testimony to its complaint after I broke news at TheAtlantic.com about Bear Stearns falsifying some of the mortgage details they supplied the raters. You know — to get a better rating so firms like Ambac would buy and insure their mortgage securities. One of the ex-Bear employees quoted in my story, Matt Van Leeuwen, then offered to tell Ambac’s lawyers even more about the misconduct and fraud he witnessed. These Ambac lawyers were also able to see unpublished taped interviews in Nick Verbitsky’s upcoming documentary film ‘The Confidence Game’, which added more clues to who and how Bear Stearns was building RMBS with loans they knew were already in default. But eight days before Van Leeuwen was schedualed to appear in depositions he’d been lawyer’ed up by JP Morgan; claiming because he received a severance when he left the bank they had to represent him. Then according to Van Leeuwen’s deposition transcript, he testified that he’d embellished what he told the documentary film maker in a hour long interview and that some of the information he gave me for my The Atlantic story was taken out of context or only offered on background.

Wow talk about a bait and switch. Of course Verbitsky and I had interviewed other co-workers of Van Leeuwen who corroborated most of his original testimony. So to see him try and swear under oath that he made it up was not only shocking but a clear sign of how influential JP Morgan can be when someone wants to whistleblow. As for Van Leeuwen, he’s suddenly found the funds to attend Law School at the University of Texas; the Ambac lawyers are looking into possible payoffs to get him to change his testimony. They’ve also been granted a court order to get copies of emails from Van Leeuwen and the journalist he gave interviews with in an attempt to prove he lied under oath about not being a willing participant in our stories.

Luckily Van Leeuwen isn’t their only star witness; they have near half a dozen more insiders willing to speak out. Since my story at The Atlantic came out, the Financial Crisis Inquiry Commission got Verbitsky to show them his unpublished taped insider interviews, including – Van Leeuwen’s, and there is a chance they will subpoena Van Leeuwen to testify.

Ambac lawyers now wait for the good graces of a New York federal judge to let them submit their evidence in an amended complaint. A decision is expected by the end of the year. Although the American public, along with investors in JP Morgan, might be kept in the dark about who did what and how they did it, if a media company doesn’t pay to sue and unseal the case.

The Case is: AMBAC v EMC Mortgage Et Al New York Fed – USDC Southern District of New York – 110508 091754 – 08 CV

EMC was a wholly-owned sub mortgage company of Bear Stearns and is now owned and controlled by JP Morgan.