By: pelicanbrief114 06 Jun 2008, 07:20 PM EDT Msg. 729793 of 729839 Jump to msg. # The Next Shoe
A mere infant just years ago ($1.5 T) has now morphed into a " $62 T Beast"!!
Polluted/Toxic Financial Instruments continue to litter cyberspace without a Home (Buyer/Bids).
What did YOU DO Mr. Magoo??
CREDIT DEFAULT SWAPS THE NEXT CRISIS Sub Prime is Just 'Vorspeise' by F. William Engdahl
"While attention has been focussed on the relatively tiny US „sub-prime“ home mortgage default crisis as the center of the current financial and credit crisis impacting the Anglo-Saxon banking world, a far larger problem is now coming into focus. Sub-prime or high-risk Collateralized Mortgage Obligations, CMOs as they are called, are only the tip of a colossal iceberg of dodgy credits which are beginning to go sour. The next crisis is already beginning in the $62 TRILLION market for Credit Default Swaps. You never heard of them? It’s time to take a look, then.
The next phase of the unravelling crisis in the US-centered “revolution in finance” is emerging in the market for arcane instruments known as Credit Default Swaps or CDS. Wall Street bankers always have to have a short name for these things.
As I pointed out in detail in my earlier exclusive series, the Financial Tsunami, Parts I-V, the Credit Default Swap was invented a few years ago by a young Cambridge University mathematics graduate, Blythe Masters, hired by J.P. Morgan Chase Bank in New York. The then-fresh university graduate convinced her bosses at Morgan Chase to develop a revolutionary new risk product, the CDS as it soon became known.
A Credit Default Swap is a credit derivative or agreement between two counterparties, in which one makes periodic payments to the other and gets promise of a payoff if a third party defaults. The first party gets credit protection, a kind of insurance, and is called the "buyer." The second party gives credit protection and is called the "seller". The third party, the one that might go bankrupt or default, is known as the "reference entity." CDS’s became staggeringly popular as credit risks exploded during the last seven years in the United States. Banks argued that with CDS they could spread risk around the globe.
Credit default swaps resemble an insurance policy, as they can be used by debt owners to hedge, or insure against a default on a debt. However, because there is no requirement to actually hold any asset or suffer a loss, credit default swaps can also be used for speculative purposes.
Warren Buffett once described derivatives bought speculatively as "financial weapons of mass destruction." In his Berkshire Hathaway annual report to shareholders he said "Unless derivatives contracts are collateralized or guaranteed, their ultimate value depends on the creditworthiness of the counterparties. In the meantime, though, before a contract is settled, the counterparties record profits and losses -often huge in amount- in their current earnings statements without so much as a penny changing hands. The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen)." A typical CDO is for five years term.
Like many exotic financial products which are extremely complex and profitable in times of easy credit, when markets reverse, as has been the case since August 2007, in addition to spreading risk, credit derivatives, in this case, also amplify risk considerably.
Now the other shoe is about to drop in the $62 trillion CDS market due to rising junk bond defaults by US corporations as the recession deepens. That market has long been a disaster in the making. An estimated $1,2 trillion could be at risk of the nominal $62 trillion in CDOs outstanding, making it far larger than the sub-prime market.
A chain reaction of failures in the CDS market could trigger the next global financial crisis. The market is entirely unregulated, and there are no public records showing whether sellers have the assets to pay out if a bond defaults. This so-called counterparty risk is a ticking time bomb. The US Federal Reserve under the ultra-permissive chairman, Alan Greenspan and the US Government’s financial regulators allowed the CDS market to develop entirely without any supervision. Greenspan repeatedly testified to skeptical Congressmen that banks are better risk regulators than government bureaucrats.
The Fed bailout of Bear Stearns on March 17 was motivated, in part, by a desire to keep the unknown risks of that bank’s Credit Default Swaps from setting off a global chain reaction that might have brought the financial system down. The Fed's fear was that because they didn't adequately monitor counterparty risk in credit-default swaps, they had no idea what might happen. Thank Alan Greenspan for that.
Those counterparties include JPMorgan Chase, the largest seller and buyer of CDSs.
The Fed only has supervision to regulated bank CDS exposures, but not that of investment banks or hedge funds, both of which are significant CDS issuers. Hedge funds, for instance, are estimated to have written 31% in CDS protection.
The credit-default-swap market has been mainly untested until now. The default rate in January 2002, when the swap market was valued at $1.5 trillion, was 10.7 percent, according to Moody's Investors Service. But Fitch Ratings reported in July 2007 that 40 percent of CDS protection sold worldwide was on companies or securities that are rated below investment grade, up from 8 percent in 2002.
A surge in corporate defaults will now leave swap buyers trying to collect hundreds of billions of dollars from their counterparties. This will to complicate the financial crisis, triggering numerous disputes and lawsuits, as buyers battle sellers over the technical definition of default - - this requires proving which bond or loan holders weren't paid -- and the amount of payments due. Some fear that could in turn freeze up the financial system.
Experts inside the CDS market believe now that the crisis will likely start with hedge funds that will be unable to pay banks for contracts tied to at least $150 billion in defaults. Banks will try to pre-empt this default disaster by demanding hedge funds put up more collateral for potential losses. That will not work as many of the funds won't have the cash to meet the banks' demands for more collateral.
Sellers of protection aren't required by law to set aside reserves in the CDS market. While banks ask protection sellers to put up some money when making the trade, there are no industry standards. It would be the equivalent of a licensed insurance company selling insurance protection against hurricane damage with no reserves against potential claims.
Basle BIS worried
The Basle Bank for International Settlements, the supervisory organization of the world’s major central banks is alarmed at the dangers. The Joint Forum of the Basel Committee on Banking Supervision, an international group of banking, insurance and securities regulators, wrote in April that the trillions of dollars in swaps traded by hedge funds pose a threat to financial markets around the world.
``It is difficult to develop a clear picture of which institutions are the ultimate holders of some of the credit risk transferred,'' the report said. ``It can be difficult even to quantify the amount of risk that has been transferred.''
Counterparty risk can become complicated in a hurry. In a typical CDS deal, a hedge fund will sell protection to a bank, which will then resell the same protection to another bank, and such dealing will continue, sometimes in a circle. That has created a huge concentration of risk. As one leading derivatives trader expressed the process, “The risk keeps spinning around and around in this daisy chain like a vortex. There are only six to 10 dealers who sit in the middle of all this. I don't think the regulators have the information that they need to work that out.''
Traders, and even the banks that serve as dealers, don't always know exactly what is covered by a credit-default-swap contract. There are numerous types of CDSs, some far more complex than others. More than half of all CDSs cover indexes of companies and debt securities, such as asset-backed securities, the Basel committee says. The rest include coverage of a single company's debt or collateralized debt obligations...
Banks usually send hedge funds, insurance companies and other institutional investors e-mails throughout the day with bid and offer prices, as there is no regulated exchange to pricess the market or to insure against loss. To find the price of a swap on Ford Motor Co. debt, for example, even sophisticated investors might have to search through all of their daily e-mails.
Banks want secrecy
Banks have a vested interest in keeping the swaps market opaque, because as dealers, the banks have a high volume of transactions, giving them an edge over other buyers and sellers. Since customers don't necessarily know where the market is, you can charge them much wider profit margins.
Banks try to balance the protection they've sold with credit-default swaps they purchase from others, either on the same companies or indexes. They can also create synthetic CDOs, which are packages of credit-default swaps the banks sell to investors to get themselves protection.
The idea for the banks is to make a profit on each trade and avoid taking on the swap's risk. As one CDO dealer puts it, “Dealers are just like bookies. Bookies don't want to bet on games. Bookies just want to balance their books. That's why they're called bookies.”
Now as the economy contracts and bankruptcies spread across the United States and beyond, there's a high probability that many who bought swap protection will wind up in court trying to get their payouts. If things are collapsing left and right, people will use any trick they can.
Last year, the Chicago Mercantile Exchange set up a federally regulated, exchange-based market to trade CDSs. So far, it hasn't worked. It's been boycotted by banks, which prefer to continue their trading privately."
Keep the Ears and Eyes "Pinned" in the coming months as the Brushfires continue to spread/span the Globe, most notably, Mid-East/Asia, where ticking financial landmines litter the landscape.
Water Balloons, Jawboning won't/don't suffice in order to contain or flame the blazes.
We remain mired in the 4th Inning of the 'Great Derivative Unwind"!!
Are there any "Live" arms remaining in the "Bullpen"?
Will we witness the "7th Inning Stretch" without Global financial chaos/meltdown?? Or, will "The Game" be called due to Rain?
Strap in and Buckle-up and make certain to bring a Poncho/Umbrella!!
By: pelicanbrief114 23 Jun 2008, 09:51 PM EDT Msg. 734936 of 736718 Jump to msg. # EXPOSURE Is a
******************************************************************** Naked Shorting And Pool Operations On The Short Side
Author: Jim Sinclair
The following is a missive that is being emailed to a total of 60,000 by request readers.
I respectfully request that you cut, paste and send this to every junior mineral company and every mineral investor you know.
Let’s send this to 250,000 investors and 1000 mineral companies TODAY!
I trust you are all enraged and will be active in your support.
Today is proof that these people are running scared. Their target today is a message that their time has come to an end. Add to that the arrest of the Bear Stearns Hedge Fund managers for not correctly marking down their holdings and informing their investors. These events have to put these people that are committing bullying, illegal and unethical activities in the crosshairs of investors, management and the law.
Soon there will be no place to hide, no place to run and the name Anonymous has done them no good at all. The name Anonymous may well be their eventual undoing as illegal activities using such a means confirms their devious undertakings.
The major underestimation by these hedge fund operators is the nature of the old-line junior mineral management. When you push them hard they will push back harder and make it personal. They should study the history of past PDACs and how old timers can act when attacked.
Where I am concerned, today they made this personal.
There is a great deal of information available to the management of any company listed on an exchange.
The first step in determining what is happening in the short term is broker identification. Every transaction shows a broker on it with one curious twist on the TSX which allows trades to be noted as broker “Anonymous.”
That is not the stumbling block itself because you can see all the daily trades almost as they happen and the total volume of buys and sells on each trade for broker Anonymous, therein determining if this legal camouflage has been a seller on balance for that day.
This information can be obtained from www.tsx.com for companies on the Toronto Stock Exchange. Other exchanges have similar setups. It will have to be obtained by your company on www.tsx.com as info/short interest data is password protected.
When you are on the TSX homepage, click on “Market Activity” and select “Current Market.” There will be a 15-minute delay on information but you can see the broker’s activity and name including that famous broker, Anonymous.
This type of information can be obtained for all exchanges and the NASDAQ. Looking historically will be more informative as you can be assured that as the heat is turned up, procedures will change.
Knowing the broker who represents the greatest on balance selling daily or from period to period is quite easy as they will not use Anonymous often enough to camouflage that they are or have been the largest seller.
The next three documents companies need to obtain are:
The Participation List that shows all street name securities held and by whom. This document should be reviewed, as all documents should, from period to period. The non-objecting shareholders list will show the changes in the positions of those investors. This is again reviewed from period to period. Even the major shareholders who object to their name being listed are available for the company from the same source to the shock of the hedge funds. These two items are key to knowing exactly what is occurring in your particular share. The brokers who bought and sold list shows both percentage purchases and percentage sales. By the comparison of all the above you are able to determine if the selling is long selling, legal short selling or unreported short selling.
It is an exercise that is common to forensic accounting, probably better done for many companies by their auditor rather than by non-accountant management such as geologists.
The next step is to retain a reputable Internet investigator as it is all out there in one form or another.
Anonymous is a nice cover name probably used by the naked short seller, but after the trade and into the statistics it loses its effective cover capacity.
We will keep that proprietary for the time being.
We live in an information world, complex of course, but not to those that specialize.
As this practice continues, your dedication to stopping the rape of shareholders must increase.
Complaining to exchanges, regulators and hiring attorneys at this point is a useless effort. Bringing the culprits out into the light is the most effective first step. Making their identity known is the goal.
The effort is to out those who are both pool raiding and those naked short selling your issue. One is conspiracy and the other is simply a crime. Identification is the first step. They will be identified and then they will be dealt with. We will come at them at every angle from rewards for information to cyber investigators and forensic accounting. Click here to read more about our efforts.
The incoming company interest in this is simply overwhelming. I would venture to say that the companies now interested in ousting these criminals represents at least 200,000 investors.
They can hide as all cowards do, but out they will come as many in the mineral industry have now dedicated their existence to this effort.
Remember, the threats you face you can overcome. The threats you run away from for any reason win.
To the management of the juniors: Never run, no matter what the message they try to communicate to you via your market is. Stockholders will support you because aggressive, dedicated and well-financed action is the only way to remove this vermin permanently. The more they speak via your market, the more you act. This is the only strategy that will protect shareholders from their reprehensible and illegal activities permanently.
The formation of the “Chamber of Mines – Junior Producers, Exploration and Development” is proceeding at a rapid pace. As of today we are approaching 50 companies that have expressed interest in becoming founding members.
The formation of a non-profit limited liability entity has begun. Charters and bylaws to govern the group are being formulated as you read this.
This campaign is moving on a fast track as there is a need now to speak with one voice.
Any companies interested in joining the Chamber of Mines to help us fight these financial thieves can contact Editor Dan at firstname.lastname@example.org.
More information about the Chamber can be read in the article posted below titled “Naked Shorting And Pool Operations On The Short Side.”
"Ratchet (financial definition): An anti-dilutive provision where an investor is granted additional shares of stock without charge if the company later sells the shares at a lower price.
Screw (Sprott definition): A highly dilutive provision where an existing investor is granted, without his approval or knowledge, an increasingly smaller share of the company at an increasingly lower exit price (usually the result of a ratchet bestowed on other investors).
Is it a ratchet or a screw? We’ll let our readers be the judge. But whatever you call it, and punning aside, the evidence grows daily of a disturbing trend in place that is leaving existing shareholders nailed. As the troubled financial sector continues to post massive loss after massive loss, and inundate the markets with equity offering after equity offering after equity offering, it would appear that transparency has taken a back seat to the banking industry’s desperate need to raise capital from whomever would buy it and at whatever terms would cinch the deal – even if it involves selling their souls to the devil. Unbeknownst to the shareholders of these financial institutions, they are having the wool pulled over their eyes by being subjected to the possibility of bottomless dilution with less than forthright disclosure. As we’ve long written, we believe the banking system is effectively bankrupt. They are dead men walking. The fact that they are unable to raise capital the oldfashioned way (selling common shares at market prices) is proof positive of our thesis.Instead, they have to compel investors to buy their sorry shares through either way-below market rights issues (an abhorrent abuse of capitalism that invariably results in a freefall) or by baiting new investors with no-brainer can’t-lose ratchet provisions. Either way, existing shareholders are taking it on the chin. But the banks don’t care. Neither do the regulators nor the Treasury nor the Fed. Capital must be raised come what may! It’s gotten so bad that the very viability of the financial system seems to hinge on whether or not the next equity offering can be pulled off without a hitch. It’s a misallocation of capital of tremendous proportions, for the sector that is currently in the greatest need of capital is also the sector least worthy to receive it.
The horrendous performance of financial stocks of late speaks for itself – perhaps the markets aren’t so easily fooled. But those investors tempted to bargain hunt best beware.Due to lack of transparency running amok, investing in the financial sector is chalk full of minefields. One example that immediately comes to mind is an article in the Wall Street Journal last week titled “Banks Find New Ways to Ease Pain of Bad Loans” . Have the banks done something value-added here? Have they actually found ways to mitigate their losses by improving their recoveries of bad loans? Not at all. The article is about how some banks, even big ones like Wells Fargo, are using accounting gimmicks to make it seem like things are getting better. For example, “improving” the write-off rate of nonperforming home equity loans by changing the past-due time period (after which they are deemed to be in default) from 120 days to 180 days. Or offloading troubled loans onto subsidiaries, thereby erasing them from their own books and improving their regulatory capital level, even though the bank is still fully accountable and liable for the losses that are eventually incurred from these bad loans. It’s a wonderful magic trick – now you see them…/now you don’t! Would that all bad loans can be made to disappear so easily. Unfortunately for the banking industry, accounting trickery does not reality make. They are merely gaming the system to make things look better than they really are, in the hopes that unwary investors will be lulled into believing that things are improving when they are not. Another recent example that got our goat is courtesy of Lehman Brothers. On the day of closing their $6 billion equity offering, they announce a management shake-up whereby the CFO and the President and COO are replaced.We would question why such a material decision, which seems unlikely to have happened overnight, wasn’t mentioned before the offering. Could it be that the spirit of full disclosure, lest it hinder the equity offering, must fall by the wayside?
But the most egregious example of lack of transparency (a.k.a. turning the screws on existing shareholders) is the “full ratchet” provision that has recently come to our attention and, doubtless, is currently making the rounds of many of the recent equity offerings in order to sweeten the deal for reticent investors who have sizeable cash to invest. It would appear that in order for the equity raise to succeed, lead investors are being given preferential treatment at the expense of existing shareholders who are being subjected to the potential for limitless dilution should financial stocks continue to go down in value. Such provisions are appalling, but what is even more appalling is that the existence of these not inconsequential provisions is only coming out of the woodwork in the footnotes of subsequent 10-Q’s. It’s an abomination of supposedly free and transparent Western financial markets.
But first, here’s a skill-testing question for our readers: Even though hundreds of billions of dollars of capital have been raised by the financial sector over the past several months,which of the investors in a financial institution have made money since their initial investment? Answer: Zero. We can’t think of one. They are all underwater. When Abu Dhabi first invested $7.5 billion in Citigroup last November, Citi’s stock was $35.Subsequently, when Citi did their $14.5 billion raise in January, the stock was trading at $30.Today Citigroup’s stock is under $20... and it keeps falling. Merrill Lynch did a combined raise of $12.8 billion in December and January at $48. Now the stock is under $35… and also falling. Warburg Pinkus made their now infamous $1 billion investment in MBIA at $31 per share. MBIA has fallen over 80% since and is now trading at under $5 per share.Those who participated in Ambac’s $1.5 billion rights issue in March are down a similar amount, 80%, as the stock now hovers under $2. Bank of America made their initial investment in Countrywide Financial last August at $18 per share (rather surprising to us, given that Countrywide looked to be going bankrupt if BofA didn’t come to the rescue). Bank of America subsequently made a takeover offer in January. Today Countrywide shares can be got for under $5 per share. TPG invested in Washington Mutual to the tune of $7 billion at $8.75 per share, a substantial discount at the time to WaMu’s stock price of $13. Today WaMu’s stock is $6. Last month AIG raised $20 billion when their stock was trading at $37 per share. Today AIG stock is just above $30 per share. Even those who participated in Lehman Brothers’ $6 billion equity offering last week at $28 per share are already underwater, with LEH currently trading below $24 (year-to-date Lehman’s stock is down over 60%). Smaller banks have faired no better. The shares of Colonial BancGroup, East West Bankcorp, Huntington Bancshares, and UCBH Holdings have all fallen by over 40% since their initial equity offerings. The list goes on. It’s never ending carnage. Ironically, thanks to full ratchet provisions, this promises to lead to further dilution and even weaker stock performance going forward.
We always wondered who in their right mind would invest in a financial institution that is scrambling for capital just when the news is clearly going from bad to worse. As we already mentioned, we believe the banking system is bankrupt. Thanks to overleverage, if all their assets were to be marked down to what the market would be willing to pay for them, we believe they would have no capital. Save for government Treasuries, there isn’t an asset class on bank balance sheets that hasn’t fallen precipitously in value. What capital the banking system does have is from recent raises, but this will likely disappear when future massive writedowns are announced. Who would be fool enough to invest in banking shares?
The list is growing shorter. But there were at least some smart investors who noted the downward trend and successfully negotiated for downside protection. We know of at least two cases (though there are doubtless others); namely, Merrill Lynch’s $12.8 billion investment from Temasek (the Singapore sovereign wealth fund) and Washington Mutual’s $7 billion raise from TPG (a private equity firm). Quite unbeknownst to the general public at the time, downside protection was built into these equity raises to protect these investors. They are called “look back” provisions or “full ratchet” compensation. We believe it is more accurate to call them “death spiral” securities. They work as follows. The investors in the equity raise would have their investment “protected” by a provision which states that should the bank afterwards raise money at a lower price than what they paid, these investors would be compensated retroactively by having their initial investment priced at this lower price, thereby being issued new shares for free. It doesn’t take a mathematician to see how these provisions can result in massive dilution should the bank subsequently raise even a paltry amount of capital. A new offering will trigger a lower price because of the dilution it would cause, which would trigger even more dilution because of the lower price, which would then trigger an even lower price because of the even higher dilution, etc. This is why we call such securities a death spiral. They hurt the price of any and all future equity offerings and open the door for potentially limitless dilution of existing shareholders if and when the bank goes to the markets for more capital at ever-lower prices.
However, unless the bank goes bankrupt, these investors can’t lose. And we already know to what lengths the Fed will go to prevent a banking bankruptcy. It’s heads I win, tails I win.They can even short the stock in the expectation that it will go down and still not lose. At the next financing, which is sure to come, they will be made whole... even making money on the short! It’s a perverse situation. Even if they don’t short (or aren’t allowed to short) they still can’t lose. It’s like being given a free put option written by existing shareholders. They get all the upside and existing shareholders (insult to injury) pay them on the downside! It’s the worst way to raise equity. We wouldn’t even call it equity. It comes at a tremendous cost to the already beaten up shareholders of these financial institutions. How did this happen? Because these are “private” transactions, and thus no prospectus was required at the time of the offering. The banks disclosed only what they wanted to disclose. It is only after the fact,in the footnotes of subsequent 10-Q’s, that shareholders (if they dig deep enough) will realize that they got nailed/ratcheted/screwed. How many other financings were done on this basis? Only time will tell.
In the meantime, it is little wonder that banking indices are in freefall and the demand for new bank equity is becoming increasingly muted. Investors are finally beginning to say: no mas! When regulators have to get involved in order to push financings through (for instance, Bradford and Bingley in the UK), it is a signal for ordinary investors to steer clear of the financial sector. It’s a misallocation of capital… good money chasing bad… that can ultimately only be resolved by a massive central bank bailout. You don’t want to be a shareholder when this happens… and in the interim be subjected to an unacceptable lack of transparency. Financial shares, if they weren’t already, are now toxic. They will become only more so with each equity offering."
"For the last couple weeks, my attention has been given to the amusement and desperation behind propaganda, bluffs, and the utter desperation of the USFederal Reserve in the orchestrated rumors of a new position wherein they would soon or eventually raise the official interest rate in order to combat the horrendous price inflation brought about by the falling crippled USDollar. What utter nonsense! To hear that the investment community actually accepted and embraced this notion was laughable on its face, and served as continued evidence that the loose collection of investors, speculators, and observers simply cannot wake up reality despite the events that began last August 2007 when the mortgage debacle ripped the banking system wide open with gaping wounds. The USFed needs to arrest the falling USDollar, no doubt. But it cannot. The USFed needs to stem the price inflation, no doubt. But it cannot. This parasite central banker organization has its own track record of inflation boom & bust, complete with profound destruction. The USFed does not control the shallow and ineffective USGovt policies on ethanol, trade sanctions, geopolitical isolation, crackdown on oil speculators, and delay for actual mortgage bailout programs. The USGovt collectively is responsible for the chronic budget deficits and huge USTreasury Bond sales every year. The USMilitary is the largest single non-govt user of gasoline, diesel, and jet fuel in the world, yet nobody seems to point a finger at endless war as another reason why the crude oil price is high.
The US Federal Reserve oversees the sequences of credit explosions, fails in its rational regulation, orders hidden subsidies to Wall Street banks, justifies the colossal inflation permitted, and under-writes the last bubble bust with more liquidity. It fails to comprehend that the sequence has gutted the national economy. The ongoing drama must be watched closely. The USFed on Wednesday was laid bare in its legless weakness and incapacity. They revealed they are in a corner, trapped, stuck in an unresolvable dilemma. Its propaganda was stripped. Its bluffs were called and they blinked. Its desperation is vividly and tragically clear. Enough on these guys, these charlatans, these improperly revered destructive parasites on the body economic!
STARK MARKET RESPONSE TO THE USFED
The effect on four key markets was pronounced and loud since Wednesday, when the USFed sheepishly blinked in profound weakness. Its bluff is over now. The euro currency jumped up sharply in a reversal, now at 157.30 or so. The 2-year USTreasury Bill yield fell down sharply in a reversal, now at 2.70% or so. The gold & silver prices jumped up sharply in reversals, now at 913 and 17.3 or so. Anyone who cannot see in basic terms what happened in response is not awake, plainly put! On June 25, everything changed and reality entered the room again!
The stage is set for the next two to four months for a broader banking system deterioration, most likely the bankrupt collapse of a few big banks, and a good chance of lost control of portions of the credit derivative complex. A big broad powerful liquidation sequence is coming soon for the biggest of bloated money center and investment banks. They have tried in vain to sell most of their overpriced mortgage bonds and related financial securities. They cannot find truly stupid parties anymore to buy them. Past rescues are all showing big losses for participants. The bonds lack true price discovery. In many cases no market exists for them, such as with the Collateralized Debt Obligations that leverage mortgage bond in reckless fashion. In an increasing number of cases, many of the mortgage securities cannot be properly associated with ‘perfected titles’ to the actual properties. The big banks might soon choose to dump the bonds on the market in a race to be first, BEFORE class actions are taken by the public to block the foreclosure process. They can and are blocking their own foreclosure, dispossession, and eviction, as they properly and legally demand for the banks or financial agencies to produce perfected property title. In many cases, the banks cannot. In its haste during the Go-Go years of 2003 through 2006, the Wall Street bond dealers, purveyors of fraud, conmen to the pension funds and insurance firms, did not bother to file the documents and connect the asset backed bonds with the properties that backed up the securities. They were concerned about fast bond sales and ripe fees earned. Now they are vulnerable to class action and civil disobedience, which will possibly accelerate disorder and chaos. Enough on these guys, these untouchable conmen felons, these destructive parasites on the body economic!
The official Federal Open Market Committee statement said, “Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased.” Their statement actually stated that the USEconomy was continuing to grow, although slowly. One must wonder what statistics they are reading. Perhaps these clueless guys believe the $165 billion in handouts to US households will sustain the economy. In my view such handouts are very similar to Third World Nations delivering handouts of rice and beans to the impoverished citizens. The next ugly resemblance will be dead cars used as lawn ornaments.
Four specific reactions occurred after the USFed took no action, did not raise the official FedFunds rate, mentioned ongoing housing weakness, and basically tipped its hand that it cannot conceivably raise rates as long as the housing market, financial markets, and USEconomy remain so weak. They actually cited weakness, but understated the actual weakness. The economic stagflation underway is powerful, and like nothing seen in seven decades. Even Greenspan expects a recession to last for a much longer time in a break from past patterns. Let’s proceed with four key markets, as reality entered the room. The next phase is almost ready. The spring deception is now completed, a closed chapter. The next bank bond gigantic losses are soon to come. The next selloff retest of the USDollar critical support is coming soon. The next gold & silver runup toward the critical resistance levels of 1030 and 21.50 is coming next. Prepare for fireworks running from July 4th all the way into the autumn in steady fashion, with some assured climaxes in two to four months.
THE EURO JUMPS IN REVERSAL
Even the EuroCB is guilty of phony messages disseminated. It was bluster! They perhaps should raise their official interest rate, but they will not. They too must contend with rising price inflation, but they too are stymied by housing declines, economic slowdowns, and banking crises also. In the past few weeks, they have been displaying a position of bravado, as the Germans defiantly claim they might hike their official interest rate soon, further straining the USDollar, as they work to manage and protect the economy across the European Union. If they really cared about inflation, they would halt the 12% annual euro money growth. It is all talk, gamesmanship, in a grand struggle to wrest banking leadership from the reckless corrupt Americans who continue out of control. On Wednesday in Europe, the EuroCB head Jean Claude Trichet was on the defensive. He found himself dismissing the notion that the ECB would install three separate rate hikes before December. He tried to make the case that the ECB would perhaps order just one rate hike. They will not hike at all. They will be forced to deal with a growing conflict within the European Monetary Union, covered in the Hat Trick Letter in recent monthly reports. The southern nations are crippled by housing declines, mortgage disasters, and associated economic harsh slowdowns. They need lower interest rates, but the Germans who run the EuroCB refuse to budge. A potential breakdown of the EMU and euro looms.
The euro currency had been weakened in the last few weeks by accepted beliefs in the propaganda, that the USFed would next cut its official short-term interest rate. That would have narrowed the differential between the 4.0% official Euro Central Bank rate and the 2.0% official USFed rate. As stated in my article last week, neither central bank will be hiking interest rates in the foreseeable future, not with economic weakness, housing vulnerability, and bank crisis continuing to wreak havoc. The euro had been down to slightly flat on Wednesday in trading. When the news broke on the USFed statement to do nothing, and to paint the picture of helplessness on defense of the USDollar as engrained policy, the euro jumped up. It is now 150 basis points higher. The Goldman Sachs statement pushed the euro higher still, highlighting the US bank weakness. The contrived USDollar bounce is officially done, cooked, stick a fork in it. A more complete analysis will appear in the July Hat Trick Letter in a couple weeks. For now, just view the tremendous single day movement in the euro. The opposite occurred in the USDollar DX index, weighted by over 50% in the euro.
THE SHORT-TERM USTREASURYS JUMP
In the last few weeks, the 2-year USTreasury Bill yield has climbed rather suddenly. The bond traders accepted the notion of an eventual USFed rate tightening, in response to painful price inflation. They overlooked the weakness in housing, economic slowdown, and worsening bank balance sheets, all of which render impossible any official rate cut. Sure, the Germans and Americans are at odds and in conflict. Each has talked tough on price inflation, stealing from each other the mantle of leadership. But despite the rhetoric and bravado, the facts remain. The two economies of Europe and the Untied States cannot possibly tolerate a rate tightening episode. To order higher rates would push both economies over the edge into a downward spiral. To accept the notion of rate hikes is an exercise in embarrassing naivete at best, and reckless stupidity at worst. In the ensuing minutes following the USFed public announcement, the short end of the USTreasurys rallied. The USTBill yields are showing more clearly the economic slowdown and ongoing endless recession. The gap between the 2-year TBill yield and the FedFunds 2.0% target has been reduced. They realized the jig was up. The USFed blinked as the gold longs and dollar shorts called their bluff successfully. Below is the bond principal chart in minute ticks. The 2-year TBill yield had been flirting above the 3.0% level. After the announcement, it fell sharply toward 2.8% and stands at 2.7% now. The short-term USTreasurys are screaming recession again. Consistent with such loud cries is the associated painful notion that the USFed will almost certainly LOWER the official FedFunds rate reluctantly. Give them a few months. With the next official rate cuts, all USFed leadership, all USFed credibility, and all USDollar integrity will be thrown out the window.
GOLD JUMPS IN REVERSAL
The gold price has been doing repeated tests of the critical support. At least three or four such successful tests have been completed. The uptrend in the gold price remains clearly evident, very firm in its support, as it prepares for the next summer and autumn fireworks. The silly notion of a USDollar rebound led by USFed vigilance to price inflation is now cast aside like last month’s Sunday newspaper. Recycle both the newspaper and the failed propaganda that has become like a rancid sugarcoating upon the financial markets, endlessly repeated deceptions heaped upon the public. The housing weakness will spur continued inflationary responses to deal with it. Any mortgage rescue platform program will be extraordinarily packed with inflation medicine. Gold will respond. The USEconomic weakness will spur continued inflationary responses to deal with it. Any further USFed stimulus and rescue packages will be extraordinarily packed with inflation medicine. Gold will respond. The bank crisis and upcoming bank failures will spur The USEconomic weakness will spur continued inflationary responses to deal with it. Panic will soon enter the financial markets and banking world. Gold will respond. Not a single bank run by depositors has occurred, at least not yet. There will be many. The reversal on Wednesday, continuing into Thursday, was plain as day. For believers in real money, and advocates of sound money, the gold response was reassuring and soothing, not to mention promising.
Some credibility had been accepted within the FedFunds futures market in the last few weeks, that a rate hike or series of rate hikes would come before the end of the year. This is patently nonsense. The financial markets in the Untied States have swallowed the notion of bank system recovery, mortgage market stability, and immunity of the USEconomy from the housing decline. All three notions are absurd on their face, with much worse distress and losses to come in the near future. The USTreasury Bonds on the short end are finally reflecting the USEconomic recession that is growing worse by the month. The news on housing was terrible this week, as the Case Shiller housing price index over 20 cities fell 2.0% in April, registering a hefty 15.3% decline in the last full year. Also, the consumer confidence index by the Conference Board fell hard to 50.4 in June from 58.0 in May. The June reading is the lowest in its history. The next bank failure will put the final nail in the Rate Hike Coffin, dispelling any doubt. The inevitability of a General Motors bankruptcy has begun to take root. Perhaps Ford Motors will go bust also. Car sales, SUV sales, and truck sales are down badly. The entire car industry supply chain is suffering. Claims of growth in the USEconomy by USFed Chairman Bernanke defy reality.
GOLDMAN SACHS PAINTS THE PICTURE
Some clear indications are coming to light. The Wall Street firms are both banding together and at odds with each other. First a preface. The Bear Stearns kill job engineered by JPMorgan has numerous stories behind the public face story told. Some of my views have been shared. Here is more. Bear Stearns did not participate in the LongTerm Capital Mgmt emergency bailout rescue in 1998. They were punished ten years later. Furthermore, when the USFed opened the Bear Stearns books in March, they found a giant position that was short the USDollar. They found a giant position that was betting on a higher gold price. So Bear Stearns was killed, with the liquidation of their gold position responsible for a huge gold price drop, aided by the cover of their US$ position. See the mid-March gold price and US$ action. The Wall Street firms took notice of the message. If they bet against the US$ and bet in favor of gold, they would not have any further access to the USFed discount window or lending facilities. So now the Wall Street firms might be helping each other to stand up. If one fails, they all might fail and go bust. That is why the Lehman Brothers story and the Merrill Lynch story are so important. They are being propped up. Enter Citigroup. My guess is that a huge amount of mortgage bonds are to be sold soon by Citigroup, and maybe another big bank, in the initial stage of a bond liquidation scheme and exercise. Citigroup is busted, and will portray their bankruptcy as a restructuring procedure, complete with liquidation. We will have to wait to see what remains.
Goldman Sachs on Thursday downgraded Citigroup with a short stock recommendation. Why would they do that? They put Citi on their ‘Americas Conviction Sell’ list, which just has to evoke laughter for its name. They expect another gigantic bond loss to be admitted by Citi, more cash to be raised as they sell capital and undermine stock equity value, and even more dividend cuts. Up to May, the total amount of cash they raised by selling off capital to foreign entities was a robust $42 billion, thus undermining US control of the biggest US bank. One can only speculate. Perhaps GSax finally has a big short position in place against Citi, and wants the public to climb aboard the selling parade. Perhaps GSax has inside word of the big Citigroup bond liquidation fire sale upcoming. People need to remember that GSax is not a charitable organization. They make money by legitimate trades, but also by lying, cheating, and sometimes stealing, all legally. Just to prove that GSax remains a corrupt information source, they downgraded the entire brokerage sector from ‘Attractive’ to ‘Neutral’ in laughable style. The US brokerage industry is fast approaching extinction. Check their bond and stock issuance lately. Their ugly position matches the US banks, which on average are insolvent. Sanford Bernstein analyst Brad Hintz forecasted a $3.5 billion Q2 writedown for Merrill Lynch, matched by Bank of America analyst Michael Hecht. The Goldman Sachs analyst Richard Ramsden said just a week ago that the US banks must produce $65 billion more capital to cope with the destruction to their balance sheets before the peak of the crisis sometime in 2009. So have we seen the worst yet? No way! Once again, they are not raising capital. They are raising cash. They are selling capital in the form of stock equity and long-term debt. As they do so, control of the banks goes into foreign hands more so.
Yet another excellent quote came from Art Cashin of UBS, from the New York Stock Exchange floor. Two weeks ago he responded to the crude oil mania when he said, “Goldilocks is thinking about a career change. She is considering a new job renting out and operating a drill rig.” Today he said simply, “The Fed cuts before it raises,” which surprised the anchors on the financial advertisement public address system known as CNBC. Even Ron Insana, yesterday afternoon said, “The Fed offered nothing for everyone.” The smart guys out there have figured out the helpless and desperate situation that the USFed finds itself. It cannot raise rates, since that would harm the stock market, further cripple the mortgage and housing markets, and worsen the rapidly advancing USEconomic recession. Sure, it needs to raise rates in order to defend the USDollar, but the US$ is not defensible. It has been totally ruined by three decades of mismanagement, corruption, pork projects, sacred war budgets, socialist programs like Medicare, and reckless creation of bubbles in serial fashion.
Yet another shadowy story came to light (for those who know how to flash the spotlight), certainly not mentioned by the intrepid lapdog US financial press networks. Lehman Brothers and the London Stock Exchange announced plans to set up a pan-European trading platform steeped in darkness (click here). The joint venture is called Baikal, named after the world’s deepest fresh water lake in western Siberia within Russia. It is known as the ‘Blue Eye of Siberia’ in exotic terms. It is famous for holding a volume of water larger than all the North American Great Lakes combined. At 1637 meters (5371 feet), Lake Baikal is the deepest lake in the world, and the largest freshwater lake in the world by volume, holding approximately 20% of the total surface fresh water on earth. How appropriate! The new Dark Pool Trading Platform will offer access to securities across 14 European countries, featuring computer driven trading schemes. The claim is to address complexity of order execution, but the real intention is to minimize market impact and avoid the scrutiny of public disclosure. Wall Street and London firms, as in investment banks, large money center banks, and hedge funds, are anxious to dump huge positions without attention. Those who claim the US and London financial markets have transparency are dead wrong! Those who claim they have price discovery that seeks equilibrium are dead wrong!
A bizarre story was just told to me by a friend from Philadelphia. On a daily basis, his wife travels the New Jersey Transit Train line as many commuters do, from Philly to New York City. In the last month alone, three suicides have taken place, almost never heard of before. Some men without hope jumped in front of the train. Each time the usual 2-hour trip by train suffered delays, including today. The delay added 2-1/2 hours, making the commute over four hours. The entire NJ Transit line was interrupted, which included the Amtrak Metroliner and Keystone Service. People trying to avoid cars, gasoline, and its nightmare face a different nightmare. Contrast this story to a recent analysis that points to how many US citizens earning under $25k in annual income will be forced to stop driving altogether. In typical overextended US style, over 30% of them have more than one car. The perceived right of Americans to drive will slowly endure a transition toward the privilege to drive. Japan has made its investment in electric cars and hybrids for well over ten years. The Untied States made its investment in Sport Utility Vehicles piglets, Hummer true hogs, and light trucks. The US has not made any meaningful investment in commuter railways, and especially not high speed railways like Japan, London, and Europe. The US is horrendously mismanaged and corrupt. The 60% share of new vehicle sales that were from SUV and light trucks will be cut in half in the next year. Shocks to the US landscape will be ongoing, regular, and severe. Expect shocks to become routine.
The strange new world is emerging, with more onerous extensions of the Fascist Business Model. My view is that the financial markets will declare the shock filled status as normal very soon. Panic will slowly seep into the environment. This late summer or early autumn, some really nasty bank failures are assured. GOLD WILL REACT VERY STRONGLY, AS WILL SILVER. The next USDollar decline is coming soon, right on schedule for those who ignore the propaganda, nonsense, and blatant deception promulgated by Wall Street. Has anyone noticed that the Dow Jones Industrial index has fallen below critical long-term support, but the S&P500 index is near critical long-term support levels??? Each is falling badly. This occurs while gold rises!!! The criminal prosecution has begun finally. They started with the small fries at Bear Stearns. Look for these little guys to roll over, to turn state’s evidence, and to attempt to bring down some executives for criminal fraud felonies. The process is very early here. Bad publicity like CFO or CEO indictments akin to WorldCom, Enron, and Tyco lies in the future. Gold will respond."
THE FINANCIAL TSUNAMI The Next Big Wave is Breaking F. William Engdahl
The announcement by US Treasury Secretary Henry Paulson together with Federal Reserve chief Bernanke, that the US Government will bailout the two largest guarantors of housing mortgage debt—the Fannie Mae and Freddie Mac—far from calming financial markets, has confirmed what we have said repeatedly in this space: The Financial Tsunami which began in August 2007 in the relatively small “sub-prime” high risk US mortgage securitization market, far from being over, is only gathering momentum. As with the Tsunami which devastated Asia in wave after terrifying wave in December 2004, the financial Tsunami we are witnessing is a low-amplitude, long-wave phenomenon of trillions of dollars of financial securities being unwound, defaulted on, dumped on the market. But the scale of the latest wave to hit, the collapse of confidence in the two Government-Sponsored Entities, Freddie Mac and Fannie Mae, is a harbinger of worse to come in what will be the most devastating financial and economic catastrophe in United States history. The impact will be felt globally.
The Royal Bank of Scotland, one of the largest financial institutions in the EU has warned its clients “A very nasty period is soon to be upon us—be prepared.” They expect the S&P-500 index of US stocks, one of the broadest stock indices in Wall Street used by hedge funds, banks, pension funds could lose almost 23% by September as in their term, “all the chickens come home to roost” from the excesses of the US-led securitization revolution that took hold after the dot.com bubble burst and Greenspan lowered US interest rates to levels not sustained since the 1930’s Great Depression.
This all will be seen in history as the disastrous Alan Greenspan “Revolution in Finance,”—the experiment in Asset Backed Securitization, a mad attempt to bundle risk in loans, “securitize” them in new bonds, insure them via specialized insurers called “monoline” insurers (they only insured financial risks in bonds), rate them thereby via Moody’s and S&P as AAA, highest grade. All that was done so that pension funds and banks around the world would assume they were high quality debt paying even higher interest than safe US Government bonds.
Fed in Panic Mode
While he is getting praise in the financial media for his “innovative” and quick reactions to the un-raveling crisis, Fed chairman Ben Bernanke in reality is in a panic mode with little short of hyperinflationary tools at hand to deal with the crisis. Yet, his room to act is increasingly bound by the soaring asset price inflation in food and oil which is pushing consumer price inflation to new highs even by the doctored “core inflation” model of the Fed.
If Bernanke continues to act to provide unlimited liquidity to prevent a banking system collapse, he risks destroying the US corporate and Treasury bond market and with it the dollar. If Bernanke acts to save the heart of the US capital market—its bond market—by raising interest rates, its only anti-inflation weapon, it will only trigger the next even more devastating round in Tsunami shock waves.
The real significance of the Fannie Mae bailout
The US government passed the law creating Fannie Mae in 1938 during the Great Depression as part of President Franklin D. Roosevelt's New Deal. It was intended to be a private entity but “government sponsored” that would enable Americans to finance buying of homes, as part of an economic recovery attempt. Freddie Mac was formed by Congress in 1970, to help revive the home loan market. Congress started the companies to promote home buying and their charters give the Treasury the authority to extend a $2.25 billion credit line.
The problems in the privately-owned Government “Sponsored” Entities or GSEs as they are technically known, is that Congress tried to fudge on whether they were subject to US Government guarantee in event of a financial crisis as the present. Before now, it always appeared a manageable problem.
The United States economy is in the early phase of its worst housing price collapse since the 1930’s. No end is in sight. Fannie Mae and Freddie Mac, as private stock companies, have gone to excesses in leveraging their risk, most as many private banks did. The financial market bought the bonds of Fannie Mae and Freddie Mac because they bet that the two were “Too Big To Fail,” i.e. that in a crisis the Government, that is the US taxpayer, would be forced to step in and bail them out.
The two, Fannie Mae and Freddie Mac, either own or guarantee about half of the $12 trillion in outstanding US home mortgage loans, or about $6 trillion. To put that number into perspective, the entire 27 member states of the European Union in 2006 had an annual GDP of slightly more than $12 trillion, so $6 trillion would be half the GDP of the combined European Union economies, and almost three times the GDP of the Federal Republic of Germany.
In addition to their home mortgage loans, Fannie Mae has another $831 in outstanding corporate bonds and Freddie Mac has $644 billion in corporate bonds.
Freddie Mac owes $5.2 billion more than its assets today are worth meaning under current US “fair value” accounting rules, it is insolvent. Fair value of Fannie Mae assets has dropped 66% to $12 billion and may as well go negative next quarter. As the home prices continue to fall across America, and corporate bankruptcies spread, the size of the negative values of the two will explode.
On July 14, symbolically the anniversary of Bastille Day, US Treasury Secretary Paulson, former chairman of the powerful Wall Street investment bank Goldman Sachs, stood on the steps of the US Treasury building in Washington, a clear attempt to add psychological gravitas, and announced that the Bush Administration would submit a bill proposal to Congress to make taxpayer guarantee of Freddie Mac and Fannie Mae explicit. In effect, in the present crisis it will mean nationalization of the $6 trillion agencies.
The bailout by Paulson was accompanied by a statement by Bernanke that the Fed stood ready to pump unlimited liquidity into the two companies.
The Federal Reserve is rapidly becoming the world’s largest financial garbage dump as for months it has agreed to accept banks’ Asset Backed Securities including sub-prime real estate bonds as collateral in return for US Treasury bond purchases. Now it agrees to add potentially $6 trillion in GSE real estate debt to that.
However, the disaster in the two private companies was obvious as far back as 2003 when grave accounting abuses in the two companies were made public. In 2003 then President of the St. Louis Federal Reserve, William Poole publicly called for the US Government to cut its implied guarantee of Freddie Mac and Fannie Mae claiming then that the two lacked capital to weather severe financial crisis. Poole, whose warnings were dismissed by then Fed Chairman Greenspan, called repeatedly in 2006 and again in 2007 for Congress to repeal their charters and avoid the predictable taxpayer cost of a huge bailout.
As financial investors warn the Paulson bailout is not a bailout of the US economy but a direct bailout of his Wall Street financial cronies. What until recently had been the largest bank in terms of loans outstanding, Citigroup in New York, has been forced to raise billions in capital from Sovereign Wealth Funds in Saudi Arabia and elsewhere to remain in business. In its May announcement, Citigroup’s new Chairman Vikram Pandit announced plans to reduce the bank’s $2.2 billion balance sheet of liabilities. However, he never mentioned an added $1.1 trillion in Citigroup “off balance sheet” liabilities which include some of the highest risk deals in the US real estate and securitization era it so strongly backed. The Financial Accounting Standards Board in Connecticut, the official body defining bank accounting rules is demanding tighter disclosure standards. Analysts fear Citigroup could face devastating new losses as a result with value of liabilities exceeding the bank’s $90 billion market value. In December 2006 prior to the onset of the Tsunami crisis, Citigroup had a market value of more than $270 billion.
By: pelicanbrief114 17 Jul 2008, 05:17 PM EDT Msg. 743004 of 745082 Jump to msg. # That Time of
The Year again.
It's " Show & Tell " time at the "Romper Room" aka Broad and Wall, whereby the Q2 writedowns persist in egregious style/magnitude.
Keep those Ears and Eyes "Pinned" to the East (Asia/Mid a la Petro Dollar) where the mountainous landscape remains littered with Toxic Financial Garbage (Paper) that has yet to reveal its ugly head and "Trip" the landmines sometime between the Fall and Winter months.
We remain mired in the Bottom of the 4th Inning (Rain Delay?) of the "Great Global Derivative Unwind".
1. Paulson appears on Face The Nation and says "Our banking system is a safe and a sound one." If the banking system was safe and sound, everyone would know it (or at least think it). There would be no need to say it.
2. Paulson says the list of troubled banks "is a very manageable situation". The reality is there are 90 banks on the list of problem banks. Indymac was not one of them until a month before it collapsed. How many other banks will magically appear on the list a month before they collapse?
3. In a Northern Rock moment, depositors at Indymac pull out their cash. Police had to be called in to ensure order.
4. Washington Mutual (WM), another troubled bank, refused to honor Indymac cashier's checks. The irony is it makes no sense for customers to pull insured deposits out of Indymac after it went into receivership. The second irony is the last place one would want to put those funds would be Washington Mutual. Eventually Washington Mutual decided it would take those checks but with an 8 week hold. Will Washington Mutual even be around 8 weeks from now?
5. Paulson asked for "Congressional authority to buy unlimited stakes in and lend to Fannie Mae (FNM) and Freddie Mac (FRE)" just days after he said "Financial Institutions Must Be Allowed To Fail". Obviously Paulson is reporting from the 5th dimension. In some alternate universe, his statements just might make sense.
6. Former Fed Governor William Poole says "Fannie Mae, Freddie Losses Makes Them Insolvent".
7. Paulson says Fannie Mae and Freddie Mac are "essential" because they represent the only "functioning" part of the home loan market. The firms own or guarantee about half of the $12 trillion in U.S. mortgages. Is it possible to have a sound banking system when the only "functioning" part of the mortgage market is insolvent?
8. Bernanke testified before Congress on monetary policy but did not comment on either money supply or interest rates. The word "money" did not appear at all in his testimony. The only time "interest rate" appeared in his testimony was in relation to consumer credit card rates. How can you have any reasonable economic policy when the Fed chairman is scared half to death to discuss interest rates and money supply?
9. The SEC issued a protective order to protect those most responsible for naked short selling. As long as the investment banks and brokers were making money engaging in naked shorting of stocks, there was no problem. However, when the bears began using the tactic against the big financials, it became time to selectively enforce the existing regulation.
10. The Fed takes emergency actions twice during options expirations week in regards to the discount window and rate cuts.
11. The SEC takes emergency action during options expirations week regarding short sales.
12. The Fed has implemented an alphabet soup of pawn shop lending facilities whereby the Fed accepts garbage as collateral in exchange for treasuries. Those new Fed lending facilities are called the Term Auction Facility (TAF), the Term Security Lending Facility (TSLF), and the Primary Dealer Credit Facility (PDCF).
13. Citigroup (C), Lehman (LEH), Morgan Stanley(MS), Goldman Sachs (GS) and Merrill Lynch (MER) all have a huge percentage of level 3 assets. Level 3 assets are commonly known as "marked to fantasy" assets. In other words, the value of those assets is significantly if not ridiculously overvalued in comparison to what those assets would fetch on the open market. It is debatable if any of the above firms survive in their present form. Some may not survive in any form.
14. Bernanke openly solicits private equity firms to invest in banks. Is this even close to a remotely normal action for Fed chairman to take?
15. Bear Stearns was taken over by JPMorgan (JPM) days after insuring investors it had plenty of capital. Fears are high that Lehman will suffer the same fate. Worse yet, the Fed had to guarantee the shotgun marriage between Bear Stearns and JP Morgan by providing as much as $30 billion in capital. JPMorgan is responsible for only the first 1/2 billion. Taxpayers are on the hook for all the rest. Was this a legal action for the Fed to take? Does the Fed care?
16. Citigroup needed a cash injection from Abu Dhabi and a second one elsewhere. Then after announcing it would not need more capital is raising still more. The latest news is Citigroup will sell $500 billion in assets. To who? At what price?
17. Merrill Lynch raised $6.6 billion in capital from Kuwait Mizuho, announced it did not need to raise more capital, then raised more capital a few week later.
18. Morgan Stanley sold a 9.9% equity stake to China International Corp. CEO John Mack compensated by not taking his bonus. How generous. Morgan Stanley fell from $72 to $37. Did CEO John Mack deserve a paycheck at all?
19. Bank of America (BAC) agreed to take over Countywide Financial (CFC) and twice announced Countrywide will add profits to B of A. Inquiring minds were asking "How the hell can Countrywide add to Bank of America earnings?" Here's how. Bank of America just announced it will not guarantee $38.1 billion in Countrywide debt. Questions over "Fraudulent Conveyance" are now surfacing.
20. Washington Mutual agreed to a death spiral cash infusion of $7 billion accepting an offer at $8.75 when the stock was over $13 at the time. Washington Mutual has since fallen in waterfall fashion from $40 and is now trading near $5.00 after a huge rally.
21. Shares of Ambac (ABK) fell from $90 to $2.50. Shares of MBIA (MBI) fell from $70 to $5. Sadly, the top three rating agencies kept their rating on the pair at AAA nearly all the way down. No one can believe anything the government sponsored rating agencies say.
22. In a panic set of moves, the Fed slashed interest rates from 5.25% to 2%. This was the fastest, steepest drop on record. Ironically, the Fed chairman spoke of inflation concerns the entire drop down. Bernanke clearly cannot tell the truth. He does not have to. Actions speak louder than words.
23. FDIC Chairman Sheila Bair said the FDIC is looking for ways to shore up its depleted deposit fund, including charging higher premiums on riskier brokered deposits.
24. There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that.
25. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.
What cannot be paid back will be defaulted on. If you did not know it before, you do now. The entire US banking system is insolvent.
The Con In Central Bankers' Confidence Darryl Schoon
Rising gold prices are a cold sore on the lip of central bankers. In the world of paper money, it’s a clear sign something’s not right
Central bankers are the keepers of the keys to the kingdom. The kingdom, however, is on the edge of bankruptcy and in danger as never before. Comparisons are now being made to the Great Depression of the 1930s. The comparisons, however, are just that.
In some ways, the situation is similar. In many ways, it is not. In a very fundamental way, the conditions are much worse. The systemic strains on the global financial system are today much more profound than even during the Great Depression.
The Great Depression of the 1930s was unique in the history of capital markets built on debt-based money, sic capitalism. Until the creation of the Federal Reserve System, the US economy had been a savings-based, not debt-based, economy. The difference between the two, although rarely understood, is profound
The price paid for credit-based expansion is debt. Increasing the debt-based money supply increases the amount of debt; and, over the naturally limited life of a debt-based economy, the constantly increasing and compounding levels of debt will grow until the economy collapses.
Compounding debt, the wellspring of bankers’ profits, will eventually destroy the economy on which it lives. The time it takes to do so is dependent on the strength and productivity of the underlying economy.
No economy, however, no matter how strong initially, can out run the constantly compounding debt of credit-based money—not even the United States.
THE GREAT DEPRESSION, VERSION 1.0
In 1913, the Federal Reserve System began feeding debt-based money into the previously savings-based US economy; and in just ten years, the newly available cheap credit poured into the stock market and drove shares prices to historic highs. In 1929, the stock market collapsed and the Great Depression began in 1933, only thirty years after the Federal Reserve Act was approved.
It was the vast amounts of cheap credit from the Federal Reserve that fueled the meteoric rise of the stock market bubble in the 1920s, a bubble so large its collapse plunged the US and the world into the first Great Depression in the 1930s; and, now, today, the same is again about to happen.
The amount of debt that will soon come crashing down will make the Great Depression seem exactly as it is, a prelude to something much larger and much more dangerous—a possible hyperinflationary deflationary collapse that will soon dwarf the merely deflationary collapse of the 1930s.
This time around, the Federal Reserve and its government enablers, sic co-conspirators, have created far more leveraged debt than existed during the historic 1920s stock market bubble. The housing bubble of 2002-2006, created in the wake of the 2000 dot.com bubble (remember that?) is the biggest bubble in history and again we will relearn the lesson that the more that goes up, the more will come down.
THE GREAT DEPRESSION, VERSION 2.0
Modern economics is a shell game, a 300 year old confidence game designed to hide the fact that bankers’ credit replaced real money, credit created out of thin air by private bankers and public government that leaves compounding debt, and ultimately economic destruction, in its wake.
Recently, because of the increasing collusion between bankers and government, the line between private banking and public government is gone. They are now one and the same—only the union hasn’t been publicly announced because of anticipated opposition to the now consummated marriage.
Central bankers are modern day confidence men who have so embedded themselves into the fabric of everyday commerce that people are convinced they need credit in order to survive; like Elvis Presley in his final days believed he needed prescription pills to live.
Just as Dr. “Nick”, Elvis Presley’s pill doctor, is responsible for killing Elvis with his over-prescription of drugs, Dr. Bernanke, the current US credit provider, and his predecessor Dr. Greenspan will be remembered for their fatal over-prescribing of central bank credit to the US and world economy. Too much of a good thing is and has always been in the end, a bad thing.
THE ILLUSORY SAFETY OF DENIAL
Americans often tell themselves that safeguards are in place that will prevent another Great Depression; and, as we are now on the edge of another such collapse, it would do us well to take another look at those “safeguards” to see how safe we actually are—or aren’t.
The daisy chain of debt defaults set in motion by the collapse of the 1920s bubble caused 15,000 banks to fail between 1929 and 1933. So in 1933, the US government responded by passing the Glass-Steagall Act to prevent another such collapse.
Unfortunately, the Glass-Steagall Act was designed to deal not with the cause (debt-based Federal Reserve bank notes fueling excessive speculation) but with the results (bank failures and loss of savings). Nonetheless, the Glass-Steagall Act of 1933 is the reassurance Americans believe will insure that “it won’t happen again”.
Glass-Steagall prohibited investment banks from again acting as commercial banks. No longer could investment banks (which make speculative bets) own commercial banks (which accept savings deposits from customers) and thereby risk the savings of depositors.
On November 12, 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act of 1933. One of the effects of the repeal was to allow commercial and investment banks to consolidate. Some economists have criticized the repeal of the Glass-Steagall Act as contributing to the 2007 subprime mortgage financial crisis.
…One reason banks are losing money is the repeal nine years ago of the 1933 Glass-Steagall Act, which separated commercial and investment banking after excessive risk- taking contributed to the Great Depression
...The repeal enabled commercial lenders such as Citigroup, the largest U.S. bank by assets, to underwrite and trade instruments such as mortgage-backed securities and collateralized debt obligations and establish so-called structured investment vehicles, or SIVs, that bought those securities.
…Citigroup played a major part in the repeal. Then called Citicorp, the company merged with Travelers Insurance company the year before utilizing loopholes in Glass-Steagall the allowed for temporary exemptions.
…the "finance, insurance and real estate industries together are regularly the largest campaign contributors and biggest spenders on lobbying of all business sectors [in 1999]. They laid out more than $200 million for lobbying in 1998, according to the Center for Responsive Politics..." These industries succeeded in their two decades long effort to repeal the act.
In 1999, investment banks, insurance companies, and real estate companies together gave $200 million to US politicians in order to repeal the act specifically designed to prevent another Great Depression; and, now the idea that investment bankers such as US Treasury Secretary Henry Paulson fresh from Goldman Sachs will save America’s economy is absurd—for Paulson and his cohorts are not in Washington DC to save America, they are there to profit and save themselves.
The $200 million lobbying effort by investment bankers, real estate and insurance companies to repeal Glass-Steagall prevailed but their task is not yet over. Investment bankers via the privately owned Federal Reserve System are now about to complete their control over the entire US financial system.
The following is excerpted from Silver, Gold, & The Last American Hero, JFK. Written March 2008, it was true then, it is true today and unfortunately will be true tomorrow.http://www.drschoon.com/articles%5CSilverGoldAndTheLastAmericanHeroJFK.pdf.
FED ASKS FOR OVERSIGHT OF ALL FINANCIAL MARKETS oversight n 1: synonym, overlooking, as in government oversight
Plan Would Expand Fed's Power To Intervene In Financial Crisis March 29, 2008
WASHINGTON (CNN) -- The Federal Reserve would have the power to regulate virtually the entire financial industry under a Treasury Department proposal to be announced Monday.
The proposal is part of a sweeping overhaul of the government's regulatory structure that Treasury Secretary Henry Paulson will propose in a speech Monday, said Treasury Department spokeswoman Michele Davis.
"I am not suggesting that more regulation is the answer, or even that more effective regulation can prevent the periods of financial market stress that seem to occur every five to 10 years," Paulson will say, according to a text of the speech obtained by The Associated Press.
According to Brookly McLaughlin, another department spokeswoman, Paulson will propose these changes:
• Give the Federal Reserve authority to look at the financial status of any institution that could affect market stability; • Merge the Securities and Exchange Commission with the Commodity Futures Trading Commission; • Give stock exchanges more room for self-regulation; • Consolidate bank supervision into one regulator. One of the most dramatic changes would extend the powers of the Federal Reserve -- designed to regulate the commercial banking industry -- to oversight of virtually the entire financial industry. THE FOX IS IN THE HENHOUSE After the recent collapse of Bear Stearns, the Fed announced that US funds will now be made available to international investment banks. Previous to this announcement, any loaning of US funds to investment banks was prohibited. On March 28th, the first day the funds were available, the Fed loaned the banks $75 billion dollars. These investment banks, called primary-dealers, are the inner circle of the Fed’s funding mechanism. That these primary-dealers are in need of US support is an indication of the rapidly disintegrating state of their balance sheets—and the lengths the Fed will go to protect their fellow bankers in the private sector with public money …The bailout of the richest investment banks in the world by US taxpayers is tantamount to a kidnap victim being forced to defray their kidnappers’ expenses. Someday, however, these bail-outs by the Fed will come to an end, but that end will not be pretty—for the end of central banking will be both unprecedented and brutal. Central banks and investment banks are two sides of the same coin; and, now that the coin has been debased and recast with subprime securities and other suspect forms of debt; investment banks and their enablers, the central banks, are as vulnerable as those they once exploited. Their increased vulnerability will soon be triggered by any number of events, e.g. bank insolvencies, collapsing currencies, slowing economies, money-market failures, counter-party derivative defaults etc., each one powerful enough to bring down a faltering house of cards built on a foundation of rapidly shifting sand. You need not remember the above predictions. You will remember them soon enough when they occur. Private bankers have controlled the US economy since 1913. Their success has led to our present problems. Their failures will lead to our future problems.
But the bankers’ work is not yet complete, there are still a few coins on the floor they inadvertently missed and their greed will cause them to bend over to pick them up. Perhaps then they will be vulnerable to the people’s will—which brings us to another subject, the peoples’ will.
THE LAST BUBBLE
Sometimes the patrons of strip bars—influenced by alcohol and their own delusions—believe the dancers truly desire them. While at the time it is a pleasant thought (for the patrons), it is not true and does not last, at least not long after the last bill has been stuffed into the stripper’s G-string.
Self-delusion, however, is not confined to strip clubs although it regularly rises and is paid for there. Self-delusion is far more common than commonly thought as the more widespread the delusion, the less the delusion is apparent to the deluded.
America is unique in many ways but in some ways it is representative of other nations and other people. After all, its national character was forged by the many different nationalities that comprise it; and, in that way, it is both unique and reflective of humanity as a whole.
It appears to Americans as well as to others that through democracy, the peoples’ will determines the nation’s destiny. However, this is no more true than the delusion that strippers lust for whom they dance.
Delusions, whether private as in the confines of a strip club or collective in the case of nations, are just that, delusions. The repeal of the Glass-Steagall Act by the Gramm-Leach-Bliley Act in 1999 is a case in point. Since 1933, Glass-Steagall has given Americans some measure of protection. Since 1999, however, such feelings of protection have been delusional.
The Gramm-Leach-Bliley Act which repealed Glass-Steagall (note: Gramm, Leach, and Bliley were all Republicans) was passed along party lines in the Senate (Republicans for, Democrats against); but it was passed in the House of Representatives with both Republican and Democrat support, and was signed into law by a Democrat, President Bill Clinton.
FREE ELECTIONS MEAN NOTHING WHEN POLITICIANS ARE FREELY BOUGHT AND SOLD
The passage of the Gramm-Leach-Bliley Act was either an example of the “hands-across the aisle” sentiment that sometimes causes both parties to join in supporting a common cause; or, it was an example of the far more common “greased-palms of politicians selling out the public good for private gain” syndrome lubricated by $200 million in lobbyists money.
Glass-Steagall was designed to protect America from another Great Depression, a time where one in four had been out of work, where 60 % of banks had failed, and where bread lines were as common as family misery. But in 1999 Glass-Steagall was repealed by those elected to represent the peoples’ will.
The subversion of democracy did not happen overnight or by chance. It was built into the process itself. Alexis deToqueville in his seminal work, Democracy In America written in the 1830s, believed that America’s version of democracy suffered from a fatal flaw, a flaw that derived from the American character itself.
DeToqueville observed that Americans had two conflicting desires: (1) The desire to be free, and (2) the desire to be led. It is America’s second desire that has now led to the undoing of the first.
Irrespective of America’s truly revolutionary Declaration of Independence and extraordinary Constitution, America today has become a debased mockery of the founding fathers’ original dream and the manifestation of DeToqueville’s dire predictions; and, this November, Americans will again go to the polls to choose “their masters”.
This is what DeToqueville said of the process:
It is in vain to summon a people, who have been rendered so dependent on the central power to choose from time to time the representatives of that power; this rare and brief exercise of their free choice, however important it may be, will not prevent them from gradually losing the faculties of thinking, feeling, and acting for themselves, and thus gradually falling below the level of humanity.
In 2008, America is now the world’s number one jailor. Its prisons hold 25 % of the world’s entire prison population and a 2002 Department of Justice ruling allowed Americans to torture prisoners as long as the torturer “in good faith” did not believe permanent harm would result (torture being defined by the US Department of “Justice” as only those "extreme acts" that cause pain similar in intensity to that caused by death or organ failure). www.chicagotribune.com/news/politics/sns-ap-cia-interrogations,0,7435986.story.
This is stark evidence of the devolution of the “rule of law” that has occurred in the United States of America in recent years. Perhaps America has not yet fallen below the level of humanity as DeToqueville predicted. As some might and will argue, it all depends on who sets the bar.
Just recently, in June 2008 the US Congress passed a bill submitted by President Bush that allows the US government to spy on Americans and to indemnify those that already have done so, i.e.AT&T and Verizon. Both presidential candidates, John McCain and Barack Obama voted for the bill.
IF YOU ASPIRE TO THE SEAT OF POWER YOU MUST FIRST DROP YOUR DRAWERS
I am not saying Americans or others should not vote in elections; but, if they do, they should be cognizant of what they expect will be accomplished. Most Americans still hope their votes once every two or four years will correct the direction this once great nation has taken. They will not.
Those candidates who actually challenge the corrupt system which now masquerades as a representative democracy have been marginalized. Ron Paul on the right and Dennis Kucinich on the left represent the best of the two opposing political polarities.
Ron Paul’s bills to abolish the Federal Reserve System and Dennis Kucinich’s bills to impeach President Bush and Vice-President Cheney for crimes against the nation should be heard and subjected to meaningful debate. Neither will occur. Real democracy has now been silenced in our now unreal world.
HOPE IS ON THE HORIZON
Delusions die hard. But like the patrons in strip clubs, only when the money is gone, does reality return and so in 2008, America may now be on the verge of a reawakening. With gas above $4 a gallon, its credit cards tapped, home foreclosures rising and its telephones increasingly called by bill collectors from India, Americans, like the patrons in the strip club, are realizing their wallets are now empty—the money’s now gone, America’s last bubble may be about to pop.
THE LAST FORUMS FOR LIBERTY
I want to extend my deep thanks and gratitude to the sites that publish these writings and the writings of others, writings that draw attention to the crisis that now threatens the US and indeed the world. It is no coincidence that the gold and silver focused websites have become the last forums for liberty.
The loss of our freedoms has been accomplished by the collusion of two powerful forces, private bankers and public government. Both those forces, however, are counterfeit. Bankers no more represent real money than governments today represent those they govern; and the power of both derives from the false money that has fueled the ambitions of each.
When bankers and government first colluded in England in 1694, they replaced gold and silver with government counterfeit coupons and the world has not been the same since. It is little wonder that over the years, bankers have become more and more wealthy, governments have become more and more powerful, and we, the citizenry, have become more and more impoverished and indebted to bankers and enslaved to government.
It was on the internet, on gold and silver focused websites where I first encountered the writings of others who knew well before I of the dangers unseen by those who could not then see. Because of them and because of the websites that posted their writings, I have gained some understanding and insight into the critical issues that now confront us.
Professor Antal E. Fekete, see www.professorfekete.com, was one of those writers. When I first read his articles, I didn’t understand the value of a gold standard which the professor adamantly espoused.
I didn’t understand that the true value of a gold standard—apart from valuing gold and silver as real money—lay in its natural bounds on the powers of government, bounds against which governments attempt to override.
Mao Zedong once proclaimed that political power comes out of the barrel of a gun. While that may be true, it is only partially true; for here in the West, since 1694, political power has increasingly come from the issuance of debt-based fiat money from central banks, money that can corrupt all who benefit from its false issuance e.g. politicians, academics, regulators, corporate officers, the military, etc.
Buckminster Fuller was fond of calling our planet, Spaceship Earth. It’s a good name but it might do us well to note that, of late, our Spaceship Earth has become a bit wobbly. The icecap on the North Pole has now melted, geophysical calamities are on the rise, gold and silver have been replaced by pieces of paper, and those who purport to speak in defense of justice, liberty and democracy are lying through their teeth.
Welcome to 2008. 2009 comes next. 2010 comes after that.
By: pelicanbrief114 31 Jul 2008, 11:43 AM EDT Msg. 747065 of 748952 Jump to msg. # The Signs Were
Always there (5yrs ago) when the powers that be ( AND we ALL know whom You are) "Closed the Doors/Books" and Locked'em tight in order to attempt to "CONceal" the Outrageous/Egregious behaviour [SIC]TO THE TUNE OF $ 11 BN or is that Trillion?
Smok'em IF you got'em, eh Boyzzzzzzz??
Unfortunately, the "Big Mac and Mae" Happy Meal were/are minus the "Fries".
Treasury Secretary Henry Paulson delivered an upbeat assessment of the economy, saying growth was healthy and the housing market was nearing a turnaround. "All the signs I look at" show "the housing market is at or near the bottom," Paulson said in a speech to a business group in New York. The U.S. economy is "very healthy" and "robust," Paulson said.
~ CBS Marketwatch 4/20/07
"At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."
~ Ben Bernanke during Congressional Testimony 3/2007
"We will follow developments in the subprime market closely. However, fundamental factors – including solid growth in incomes and relatively low mortgage rates – should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system."
~ Ben Bernanke 6/5/07
"It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy."
~ Ben Bernanke 10/15/07
"We’ve got strong financial institutions…Our markets are the envy of the world. They’re resilient, they’re…innovative, they’re flexible. I think we move very quickly to address situations in this country, and, as I said, our financial institutions are strong."
~ Henry Paulson 3/16/08
After reading the above quotes, it should be clear to you that these gentlemen do not have a clue. Our economy and banking system is so complex and intertwined that no one knows where the next shoe will drop. Politicians and government bureaucrats are lying to the public when they say that everything is alright. They do not know. Therefore, it is in our best interest to cut through all the crap and examine the facts with a skeptical eye.
Last week, bank stocks, which had been falling faster than President Bush’s approval rating, soared higher based on earnings reports that were horrific, but not catastrophic. Again, the talking heads, like Larry Kudlow, were calling a bottom in the financial crisis. The bank with the largest increase in share price was Wells Fargo. Their earnings exceeded analyst expectations and the stock went up 22% in one day. Wells Fargo has $84 billion of home equity loans, with half of those in California and Florida. Coincidently, Wells Fargo decided to extend its charge-off policy in the 2nd quarter from 120 days to 180 days, in an effort to give troubled borrowers more time to reach a loan workout. A skeptical person might think that they did not change this policy out of the goodness of their hearts. Maybe, just maybe, they changed this policy to reduce their write-offs for the 2nd quarter, to beat analyst expectations.
There are many stories of people who are still living in houses, twelve months after making their last mortgage payment. Their banks have not started foreclosure proceedings. Is this due to incompetence by the banks, or is this a way to avoid writing off the loss? The FASB has joined the cover-up gang by delaying the implementation of new rules that would have made banks stop hiding toxic waste off-balance sheet. The new rule would have made banks put these questionable assets on their balance sheet and would have required a bigger capital cushion. What a surprise that bank regulators, the Treasury and Federal Reserve urged a delay in implementation. How very Enron like.
The Future FDIC Bailout
During the S&L crisis in the early 1990’s, 1,500 banks failed. So far, seven banks have failed in 2008, the largest being IndyMac. The FDIC has about $53 billion in funds to handle future bank failures. The IndyMac failure is expected to use $4 to $8 billion of those funds. Average Americans will lose $500 million in uninsured deposits in this failure. The FDIC says that they have 90 banks on their "watch list." They do not reveal the banks on the list, so little old ladies with their life savings in the local bank will be surprised when they go belly up. Based on the fact that IndyMac was not on their "watch list," I wouldn’t put too much faith in their analysis.
There are 8,500 banks in the U.S. Based on an independent analysis by Chris Whalen from Institutional Risk Analytics, they have identified 8% of all banks, or around 700 banks as troubled. This is quite a divergence from the FDIC estimate. Should you believe a governmental agency that wants the public to remain in the dark to avoid bank runs, or an independent analysis based upon balance sheet analysis? The implications of 700 institutions failing are huge. There is roughly $6.84 trillion in bank deposits. It is almost beyond belief that $2.6 trillion of these deposits are uninsured. There is only $274 billion of the $6.84 trillion as cash on hand at banks. This means that $6.5 trillion has been loaned to consumers, businesses, developers, etc. The FDIC has $53 billion to cover $6.84 trillion of deposits. Does that give you a warm feeling?
Based on the analysis done by Reggie Middleton, I would estimate that we are only in the early innings of bank write-offs. The write-offs will at least equal the previous peaks reached in the early 1990’s. If a large bank such as Washington Mutual or Wachovia were to fail, it would wipe out the FDIC fund. If the FDIC fund is depleted, guess who will pay? Right again, another taxpayer bailout. What’s another $100 or $200 billion among friends.
What Is a Level 3 Asset?
Other banks have been moving assets to Level 2 and Level 3 in order to put off the inevitable losses. The definition of these levels according to FAS 157 are as follows:
Level 1 Assets that have observable market prices. Level 2 Assets that don’t have an observable prices, but they have inputs that are based upon them. Level 3 Assets where one or more of the inputs don’t have observable prices. Reliant on management estimates. Also known as mark to model. CYBERSPACE !!
This is Warren Buffett’s view on the financial institution practice of valuing subprime assets on the basis of a computer model rather than the free market price.
"In one way, I'm sympathetic to the institutional reluctance to face the music. I'd give a lot to mark my weight to 'model' rather than to market."
So, the managements of the banks that loaned money to people who could never pay them back are now responsible for estimating what these assets are worth. According to Bill Fleckenstein, "Recently, the portfolio of Cheyne Finance, one of the more infamous structured-investment vehicles, or SIVs, was sold at 44 cents on the dollar. I suspect that similar assets are not marked anywhere near that valuation on financial institutions' balance sheets. So, the game of "everything's contained" continues, albeit in a different form."
Financial Institution Level 3 Assets as a % of Capital
Bear Stearns 314%
Morgan Stanley 235%
Merrill Lynch 225%
Goldman Sachs 192%
Fannie Mae 161%
Source: Company records
Merrill Lynch – Poster Child for Lack of Bank Credibility
John Thain is the Chairman and CEO of Merrill Lynch. He makes in excess of $50 million per year in compensation. He previously held positions as President, COO and CFO at Goldman Sachs. He is a good buddy of Hank Paulson. Here are a few recent quotes from Mr. Thain:
"...These transactions make certain that Merrill is well-capitalized." (January 15, 2008 – Thain in a statement after selling $6.6 billion of preferred shares to a group that included Japanese and Kuwaiti investors)
"...Today I can say that we will not need additional funds. These problems are behind us. We will not return to the market." (March 8, 2008 – Thain in an interview with France's Le Figaro newspaper)
"We deliberately raised more capital than we lost last year ... we believe that will allow us to not have to go back to the equity market in the foreseeable future." (April 8, 2008 – Thain to reporters in Tokyo, as reported by Reuters)
"Right now we believe that we are in a very comfortable spot in terms of our capital." (July 17, 2008 – Thain on a conference call after posting Merrill's second-quarter results)
Merrill Lynch reported a loss of $4.7 billion for the 2nd quarter on July 17. On July 28, eleven days after this earnings report they announce a $5.7 billion write-down and the issuance of $8.5 billion of stock. Thain, the $50 million man, is either lying or completely clueless regarding the company he runs. The SEC needs to investigate him, rather than short-sellers. Their books are a fraud and anything their CEO says cannot be trusted.
Below is Barry Ritholtz’ assessment of the Merrill Lynch deal:
Merrill appears to be moving $30.6 billion dollars of bad paper off of their books. This paper was carried at a value of $11.1, meaning there was almost $20B in prior related write-downs. After this transaction, Merrill’s ABS CDO exposure in theory drops from $19.9 billion to $8.8 billion (hence, the $11.1B number). The $6.7B purchase price relative to the $30.6B notational value is 21.8% on the dollar. Merrill is providing 75% of the financing – and MER’s only recourse in the event of default is to retake the CDO paper back from the buyer. While Merrill hopes to be made whole, the reality is they still have potential exposure to these ABS CDOs via the financing; Actual sale price = 5.47% on the dollar "Less than five and half cents on the dollar? That's an even cheaper sale than originally advertised. What this transaction actually accomplishes is getting the paper – but not the full liability – off of Merrill's books. How very Enron-like!"
Merrill Lynch has a market cap of $24 billion and has raised $30 billion since December just to keep making their payroll. How long will investors be duped into supporting this disaster? You can be sure that the other suspects (Citicorp, Lehman Brothers, Washington Mutual) will be announcing more write-downs and capital dilution in the coming weeks.
Is Housing Near the Bottom?
The one person who has been consistently right regarding the housing market is Yale Professor Robert Shiller. (He also called the top in the stock market in 2000). The chart in Mr. Shiller’s book Irrational Exuberance clearly shows that home prices are so far out of line with historical averages that there is no doubt that further decreases are in store.
Home prices have historically tracked inflation and are likely to revert to the mean. The latest data from Case-Shiller does not paint a pretty picture. Sale prices of existing single family homes declined by 15.8% in the past year, with markets in California declining by 22% to 28%. Over 10% of the U.S. population lives in California. Bank of America, Wells Fargo, Washington Mutual, and Wachovia have a large exposure to California. The link below gives a U.S. and market by market analysis of how bad things are.
Many pundits have been downplaying the resetting of adjustable rate mortgages, saying that the worst is over. I don’t think so. There are $440 billion of adjustable mortgages resetting this year. That means that the majority of foreclosures will not occur until 2009. This means that the banks will still be writing off billions of mortgage debt in 2009. The reversion to the mean for housing prices and the continued avalanche of foreclosures is not a recipe for a banking recovery. Home prices have another 15% to go on the downside. An article by John Mauldin proves that there is much further to go on the downside for housing.
Fannie & Freddie Fiasco
President Bush signed the Housing Recovery bill this week. We are now on the hook for all of their bad decisions. We believe in capitalism when there are obscene profits, but we prefer socialism when it comes to losses. The CBO estimates that we will pay $25 billion for their mistakes, with a 5% chance that it reaches $100 billion. The only problem is that they have been given an open-ended guarantee. According to former Fed governor William Poole, Fannie Mae is technically insolvent. Their shareholder equity was $35.8 billion at the end of 2007. It plunged by $23.6 billion to $12.2 billion as of March 31, 2008. Does anyone think that as of June 30, they have any equity left? We’ll know shortly. Fannie Mae has guaranteed $2.4 trillion of mortgages. According to the Mortgage Bankers Association, as of June, 2.5% of U.S. mortgages were in foreclosure and 6.4% of mortgages are delinquent. Fannie and Freddie are on the hook for $5.2 trillion in mortgages. It doesn’t take a rocket scientist to figure out that about 4% of the $5.2 trillion of guaranteed mortgages will default. This would be $208 billion in defaults. If they are able to recover 50% (current recovery rate) from foreclosure sales, their losses would be $108 billion. Oh yeah, that would be our losses. This is assuming things don’t get worse.
Next Shoes to Drop – How High Will the Losses Go
Banks and security firms have reported $468 billion of losses thus far. Bridgewater Associates, a well-respected analytical firm, thinks things will get much worse.
According to Bridgewater, the models used have grossly underestimated the actual losses. They doubt the financial institutions will be able to generate enough capital to cover the losses. According to the report, "Lenders would have to curtail loans by roughly 10-to-one to preserve their capital ratios. This would imply a further contraction of credit by up to $12 trillion worldwide unless banks could raise fresh capital."
Not all of these losses are in the sub-prime market. According to the report, more than 90% of the losses from sub-prime loans have already been written off. Unfortunately, the losses from the prime and Alt-A loans could be much larger than we have already seen. The sizes of these loan portfolios are much larger than the sub-prime portfolios. Further, Bridgewater expects about $500 billion in corporate losses that must be written off. This leads to the current estimate of more than $1 trillion in losses yet to be written off. The link below shows that the consumer is stressed to the maximum.
Bill Gross, the well-respected manager of the world’s largest bond fund, expects financial firms to write down $1 trillion. "About 25 million U.S. homes are at risk of negative equity, which could lead to more foreclosures and a further drop in prices. The problem with writing off $1 trillion from the finance industry's cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both that in turn begins to affect economic growth.'' Nouriel Roubini, economist at NYU, believes that losses could reach $2 trillion.
The other shoes have begun to drop. Last week Amex reported a 40% decline in earnings as their wealthy super-prime customers are not paying their bills. So, even the well-off are struggling. This week, CB Richard Ellis, the largest commercial real estate broker in the country reported an 88% decline in earnings. So, commercial real estate is imploding. Bennigans’s and Mervyn’s filed for bankruptcy this week. The consumer is being forced to cut back on eating out and shopping. The marginal players will fall by the wayside. Big-box retailers, restaurants, and mall developers are about to find out that their massive expansion was built upon false assumptions, driven by debt.
The U.S. banking system is essentially insolvent. The Treasury, Federal Reserve, FASB, and Congress are colluding to keep the American public in the dark for as long as possible. They are trying to buy time and prop up these banks so they can convince enough fools to give them more capital. They will continue to write off debt for many quarters to come. We are in danger of duplicating the mistakes of Japan in the 1990’s by allowing them to pretend to be sound. We could have a zombie banking system for a decade.
My advice is:
Absolutely do not have more than $100,000 on deposit with any single institution.
Do not buy financial stocks. There are years of write-offs to go. When you see a bank CEO or a top government official tell you that everything is alright, run for the hills. They are lying. They didn’t see this coming and they have no idea how it will end. Educate yourself by reading the writings of Ron Paul, John Mauldin, Barry Ritholtz, Mike Shedlock, Bill Bonner, Paul Kasriel, John Hussman, Bill Fleckenstein and Jeremy Grantham. They will tell you the truth. Truth is in short supply today.
By: pelicanbrief114 17 Sep 2008, 11:25 AM EDT Msg. 765959 of 765970 Jump to msg. # Message In A Bottle II
A few Snippets from "A Friend".
"Whether you believe this or not a good friend of mine went on a photo shoot and got to know a vip for the government. The guy is a mathematician and has been hired by many presidents to consult on various risk models."
"He told my friend quote” I ran 12 different models and 30% came up with great civil unrest and martial law to be instated.” I know it sounds like left field stuff, but I have always produced the goods from the left field."
"He went on to say that he predicted 4 recessions and that he pulled all his money out of the market in early 07. He was expecting the mother of all crashes."
" He also told my friend the real value of the DOW is 34. No it is not a typo…He did not say that the markets are going to 34, but the value is 34 due to inflation in M3."
"Do some research his name is Frank J Cillufo."
Due to the sensitivity of this information this will be my last tansmission ever.
We are a rather surprised that this morning's stunning Treasury International Capital report has not gotten far more prominent attention. The reason: in it we read that in May 2010, China dumped $33 billion in Treasuries, bringing its total to the lowest since June 2009. Furthermore, Japan also offloaded $8.8 billion in bonds, as did the Oil Exporters. Yet total foreign Treasury holdings increased from $3,957 billion to $3,964 billion almost exclusively as a result of ongoing exponential UK accumulation. It is time someone in the mainstream media asked just who is doing all this "UK-based" buying? It is not hedge funds, which operate out of Caribbean Banking Centers, and which saw an increase in holdings from $151.8 billion to $165.5 billion as risk went completely off in the month of May courtesy of the Flash Crash, Greece, and the general insolvency of Europe. It is also not China due to a diverging pattern in Bills accumulation versus disposition. Additionally, May saw a dramatic decline in total foreign purchases of total US assets, dropping from $110.3 billion to just $33 billion, with Corporate Bonds and Corporate Stocks seeing a rare monthly sell off ($9 billion and $432 million).
Notably, foreigners sold US Corporate Bonds for the first time since February 2009, after $432 million in bonds were sold:
So cutting to the chase, the key observations as always were in the holdings of the top 3 - China, Japan and the UK. As noted previously, China dumped $32.5 billion worth of bonds, which consisted exclusively of US Bills selling to the tune of $35.4 billion, even as the country bought a nominal $2.9 billion in Bonds.
The selloff has resulted in Chinese bond holdings dropping to the lowest since June 2009, and their Bill holdings, at just $7 billion, to the lowest ever!
But China was not alone: Japan also dumped USTs - a total of $8.8 billion, although unlike China, Japan sold $11.1 billion in Long Term Bonds even as it bought $2.4 billion in Bills.
Yet in what is (and continues to be) the most perverse observation, that proceeds without any questions from the mainstream media, the otherwise broke UK, once "bought: a stunning amount of Bonds, or just over $28 billion in the month of May, consisting of $27 billion in Bonds, and $1.3 billion in Bills. The "UK" accumulation patterns continues growing in an exponential pattern, and the country which owned "just" $180 billion in USTs in December, has doubled its holdings to $350 billion in less than half a year.
This is not hedge fund accumulation, as Caribbean Banking Centers, traditionally the locus of HF accumulation saw a $14 billion increase in May, and if it is China, as is widely rumored, why was there an increase in Bill holdings? This is increasingly appearing as shadow Fed debt monetization operation, operating out of the United Kingdom.
By: pelicanbrief114 24 Nov 2010, 08:14 PM EST Rating: Rate this post: Msg. 972680 of 972832 Jump to msg. # In The End
Betting in the Endgame
There is a difference between betting in the endgame and betting on the endgame. The former is a fool’s avocation whereas the latter is a once in a lifetime opportunity.
The endgame of capitalism is a uniquely different environment where investors find themselves faced with increasingly dangerous options. In the endgame, proven strategies are improvident, buying and holding becomes a time bomb and speculators are favored over investors because of excessive liquidity and volatility.
Capitalism, a system of credit and debt that produced 300 years of growth is now dying. The bankers’ debt-based money has created such levels of debt that even 0 % credit can no longer induce growth. In the endgame, the problem is not the lack of credit - it’s the excessive amount of debt.
…sooner or later, too much credit always turns into a giant debit as borrowers crumple under the burden of escalating interest payments… - Melchior Palyi, economist, 1892-1970
Capitalism’s problem has always been debt, the inevitable byproduct of credit-driven expansion. In times of economic growth, merchants of debt, i.e. bankers, sell debt to those seeking returns; but, in the endgame when economies contract, IOUs cannot be repaid as defaulting debt overwhelms the ability to pay what is owed.
Today, central bankers are caught in a trap of their own making. Removing gold from the international monetary system in 1971 allowed governments and bankers to expand their balance sheets to historic heights. The price, however, was the debasement of their currencies, a price which is now being exacted.
Gold is up 29 percent this year and is heading for a 10th annual gain, the longest winning streak since at least 1920 in London, partly on demand for an alternative asset to protect against the debasement of currencies. - Bloomberg.com, November 8, 2010
In 1971, on the advice of Milton Friedman (Ben Bernanke’s mistaken mentor), President Nixon ended the convertibility of the US dollar to gold; and, since then, central bankers have been fighting to keep their debt-based paper money functioning without the backing of gold - a fight they are now losing.
Gold..has risen again today in most currencies and reached new record nominal highs in sterling (877.30/oz) and is targeting record nominal highs in euros . Competitive currency devaluations and currency debasement is seeing all fiat currencies fall in value against gold. - Goldcore.com, November 9, 2010
That an economic system based on leveraged debt actually lasted three centuries is a miracle as well as an abomination. Its passing will nonetheless be mourned by those who still believe that bankers are benign wizards of modern finance overseeing orderly and just markets.
In truth, bankers are self-serving parasites whose dispensation of credit ultimately leaves societies, businesses and nations bankrupt on the gallows of compounding unpayable debt.
INVESTORS FORCED TO TAKE ON RISK
By keeping interest rates low, central bankers are trying to force investors to take on more risk to keep their economies functioning. By so doing, however, central bankers are distorting underlying free market dynamics as investors should be reducing, not increasing risk, in such times.
The consequences of distorting free-market forces have devastating repercussions in the endgame. This is what happened in 2002 when Greenspan cut interest rates to 1% and in so doing created the catastrophic US real estate bubble whose collapse brought global credit markets to a halt in 2007.
Capitalism’s free markets are only free as long as they serve the bankers’ quid pro quo that markets accept the bankers’ leveraged debt, i.e. capital, as money. Such markets flourished before gold’s complete removal from bankers’ bogus money in 1971, setting the endgame in motion; and, now, 39 years later, the endgame is almost over as monetary disarray and defaulting debt take their toll.
In should be noted that Greenspan’s real estate bubble could not have expanded without the collusion of credit-rating agencies and US regulators. As regulators looked the other way, credit agencies such as Moody’s, S&P and Fitch fraudulently gave subprime mortgages the highest AAA rating allowing institutional investors, e.g. pension funds and insurance companies, to buy trillions of dollars of high yielding toxic debt extending capitalism’s endgame a few more years.
The critical role that credit rating agencies played in the collapse of markets was predicted by economist Melchior Palyi. In The Wall Street Journal article The Man Who Called the Financial Crisis - 70 Years Early (11/6/10), the WSJ credited Palyi (1892-1970) with having predicted the current financial crisis and its cause in 1936.
PALYI’S NEXT PREDICTION
Palyi later made another prediction about a trend that could eventually cause the collapse of the western banking system. Palyi noted that after 1950 gold was being drained from central bank monetary reserves at an unprecedented rate before disappearing then into private hoards.
Melchior Palyi first came to my attention in an article subtitled, Gold Vanishing Into Private Hoards (5/31/2007) by Professor Antal E. Fekete, another Hungarian-born economist. In that article, Fekete wrote:
While doing research in the Library of the University of Chicago in the early 1980's I came across the unfinished manuscript of a book with the title: The Dollar: An Agonizing Reappraisal. It was written in the year 1965. It has never been published (although it has received private circulation).
The author, monetary scientist Melchior Palyi, a native of Hungary, died before he could finish it. Monetary events started to spin out of control in 1965, culminating in the default on the international gold obligations of the United States of America six years later in August,1971. Palyi had correctly prophesied that event which occurred after he died.
Palyi observed that beginning in 1950, gold bullion began moving out of government reserves into private hoards, a trend that would eventually empty government coffers of the gold that backed their paper currencies. If continued, Palyi predicted this would lead to the breakdown of the entire gold-based monetary setup of the West.
Palyi was right. Six years later, gold was removed as the foundation of the global monetary system. For the first time in history all money was fiat. The following is excerpted from Palyi’s unpublished work, The Dollar: An Agonizing Reappraisal (1965):
1950 is the watershed year marking the start of a new era in the relationship between gold and paper money. In the twelve-year period ending in 1964 the Western World's gold mines and Russian gold sales (about $1 billion in 1963-64) combined, produced $16 billion worth of gold, but official gold reserves have grown only by $7 billion. More than 50 percent, on average, of the new gold bypassed official reserves and vanished in private hoards.[bold, mine]
On the top of that the prime reserve currency, the U.S. dollar (that is backing many other currencies) had lost close to one-half of its gold reserves. By the end of 1965 our reserves have declined from a peak of $24.7 billion in September, 1949, to less than $14 billion -- of which $835 million is a sight deposit of the International Monetary Fund.
Not only has the richest country [the US] failed to attract any part of the new gold supply; it has actually lost more than $10 billion's worth. If continued, this process would herald the breakdown of the entire gold-based monetary setup of the West, with incalculable consequences. [i.e. the endgame)
Professor Fekete wrote that in 2007 the amount of gold now in private hoards was greater than all the gold produced before 1950:…gold absorption into private hoards for the 15-year period from 1950 through 1965 was of the same order of magnitude as the U.S. gold reserve at its peak in 1949, the largest gold concentration ever in history.
This private absorption of gold is unprecedented, both as to its magnitude and to its speed. The total amount of gold absorption for the entire 57-year period 1950-2007 [is] an amount greater than all the gold produced in history before 1950. ..Fifty percent of all gold in existence has been produced since 1960. The same fifty percent has been withdrawn during the same period of time from the public domain, and disappeared in private hoards.
There is no way to account for this gold. We do not know the location, the identity of owners, nor their intentions what they wanted to do with it…
The question is: Who has been buying all that gold?
In the endgame, systemic stress often reveals information that would otherwise never be discovered. One such discovery is an unexpected clue to the identity of those buying the world’s gold reserves since 1950. The clue emerged as a consequence of the UK’s increasingly perilous finances.
A clue to the mystery buyers surfaced on November 1st when in a speech in the House of Lords, Lord James of Blackheath revealed that a shadowy group [referred to as Foundation X by Lord James]had contacted him with an offer to help solve the UK's economic problems, a group that possesses more gold than all the world's bullion reserves combined.
On the basis of these gold holdings - in excess of 30,000 tons - Foundation X is in all likelihood a front for the Rothschilds, the infamous banking family which has a long history with gold.
The family patriarch, Nathan Rothschild, first began dealing in gold in 1809, in 1840 the Rothschilds were appointed bullion brokers for the Bank of England and from 1919 to 2004 the family firm oversaw the daily fixing of the gold price in London - and, most likely, are now the mysterious buyers who have been purchasing most of the world’s gold since 1950.
Note: This is a link to the speech where Lord James revealed Foundation X’s offer of aid to the UK. Prior to his peerage, Lord James had a career as a highly respected banker and corporate director and his reference to “laundering terrorist money” refers to his work for the UK in dissolving bank accounts used by the IRA. Read here.
The multi-billion pound offer of “Foundation X” to aid the UK is an indication of just how serious these times are. The collapse of the global banking system threatens the power of all who have benefited from the systemic indebting of others, a group that certainly includes the Rothschilds.
It is clearly in the Rothschilds’ self-interests to now help England, the nation which made their banking empire possible through its legitimization of debt-based capital as money. The fortunes of England and the Rothschilds have been intertwined for centuries and should England collapse, the power and influence of the Rothschilds would decline as well.
The endgame is bringing about the end not only of capitalism, but the vast empires of wealth to which it gave rise. That the elites are now worried about the economic stability of sovereign nations is evidence that the endgame is drawing closer to its inevitable end.
Debt is the critical issue now facing the world’s governments. How it should be approached is the focus of much debate. In a recent exchange of views hosted by the news program, Russia Today, I and others discussed the global debt crisis. To view the discussion, click here.
The debt crisis is part of capitalism’s endgame. In 1981, Buckminster Fuller predicted that the world’s power structures would collapse. In 1991 communism fell and today capitalism is following in communism’s fatal footsteps.
Fuller was not the only one who predicted the seriousness of the present crisis. Among them were economists Melchior Palyi, Ludwig von Mises, John Exter, economic historian David Hackett Fisher, American historians William Strauss and Neil Howe and others. Given the severity of this crisis, it is a short list.
Another unlikely source, however, recently came to my attention; a psychic channeling in 1992 also predicted today’s debt-driven economic troubles [note the use of the word monetary in the channeling]:
... In your country [USA] right now you see some signs of economic recovery on some levels. However, it has not reached its full stage of recovery and there will be additional times of turmoil in the monetary sense concerning your country and the world as a whole.
The monetary situation is not good as most of you are aware...The debt of the country is phenomenal. If it were a private individual it would have been forced to declare bankruptcy long before now. There will be some financial challenges throughout the world in the years ahead… - Dr. Blair, channeled message, March 20, 1992.
That a psychic message predicted an event completely missed by the vast majority of trained economists says something about (1) economists, (2) the training of economists and (3) psychics.
Dr. Blair, channeled by the late medium, Dr. Robert Ireland in Tucson, spoke on many subjects. Some of Dr. Blair’s economic predictions are included in a talk I gave at the Temple of Universality on October 31st. To view, click here.
THE REASONS FOR THE CRISIS
In his channeling in 1992, Dr. Blair explained the reasons for the coming crisis, reasons that bear a close similarity to those given by Buckminster Fuller in the introduction to Fuller’s book, the Critical Path.
It will be a spiritual revolution…It will be a time of trials and tribulations but one that brings mankind closer together. Man will come to each other’s aid for the purpose of helping and uplifting his brother. - Dr. Blair, channeled message, March 20, 1992
Humanity is moving ever deeper into crisis - a crisis without precedent. First, it is a crisis brought about by cosmic evolution irrevocably intent upon completely transforming omnidisintegrated humanity from a complex of around-the-world, remotely-deployed-from-one-another, differently colored, differently credoed, differently cultured, differently communicating, and differently competing entities into a completely integrated, comprehensively interconsiderate, harmonious whole. - Critical Path, Buckminster Fuller, St. Martin’s Press, 1981, page xvii:
The crisis has not yet brought about the radical transformation of humanity that Buckminster Fuller and Dr. Blair predicted. This is because the requisite level of severity has not yet been reached. It will be.
By: pelicanbrief114 25 Nov 2010, 08:58 AM EST Rating: Rate this post: Msg. 972732 of 972833 Jump to msg. # Round Robin And Whistling
In The Grave Yard
The backdrop has turned dire on several front simultaneously. The great millstone around the USEconomy's neck continues to drag it down. CoreLogic reported 2.1 million units have created a swamp in Shadow inventory of the housing market. That equates to 23 months inventory, whereas normal is 7 months. They tallied the growing tumor of bank owned properties as a result of home foreclosures, also called the REOs (real estate owned). Look for no housing market recovery for at least another two years. Starting in summer 2007, the Jackass forecast each year has been for another two years of housing market declines, all correct. Ireland might be squarely in the news, but the big enchalada is Spain. The Irish banks have presented a grand headache for the European banks, with a $150 billion exposure. Ironically, Ireland has done more to reduce its budget spending effectively than any EU member nation, yet is left to twist in the soft rain. They cut their government budget by 20%. The USGovt budget grows every year without remedy or remorse. Few seem to remember that Irish fund managers lost the German civil service pension funds a couple years ago, a source of hidden tension and great resentment. Spain will rock Europe and the Euro currency in the springtime. The gold price consolidation will center on the Spain debt crisis hitting fever pitch, with the Euro hit. Then again, perhaps a mammoth new wave of European gold demand will neutralize any USDollar stability. On Tuesday this week, the Euro fell by 200 basis points, but the gold price was stable like a rock. That is notable strength. But the bigger story of strength is with silver. The round robin of destruction to major currencies that makes the Competing Currency War, the race to the bottom in rotated currency debasement, it will lift gold & silver in a round robin of strong demand.
MISDIAGNOSIS: INSOLVENCY NOT ILLIQUIDITY
The US bankers often go home to mommy and order a giant slosh of monetary inflation whenever in deep intractable trouble, like after the previous mistake in QE1 when ordering a giant slosh of monetary inflation. The USFed, led by the academic professor with no business experience, has ordered a fresh supply of gasoline from a lit fire hose, but he does so on a collapsing building. Bernanke has very erroneously diagnosed lack of liquidity within the system to be the underlying problem. He has prescribed a huge swath of 'free money' to be sent into the bond market as a solution. He has prescribed that cheap money continue to be delivered to the USEconomy. Bernanke has failed to notice the insolvency in banks, and has failed to notice that 0% has yet to prompt any revival in lending among banks. Bernanke is fighting INSOLVENCY with LIQUIDITY for a second time after learning nothing the first time.
The USTreasury 10-year yield has risen from a grand bond market dare, not at all from evidence of growth. Bond players dare the USFed to create another $1 trillion in new money. In no way does another lift in retail spending constitute a recovery. Household insolvency rises every month from worsening home loan balances. The USFed wants households to spend more on borrowed funds, yet they have depleted home equity and vanished income security. No, US bankers are confused with their wrecked financial engineering aftermath and the broad banking system insolvency that they refuse to acknowledge or discuss. Ever since the April 2009 decision by the USCongress to bless the falsified accounting practices by the Financial Accounting Standards Board, the big US banks have masked their ruined balance sheets, sold stock for their dead entities, and pretended to act as banks. Instead they are mere carry trade shells taking advantage of the USTreasury yield differentials, and storing the cash profits in the USFed, where it earns interest.
Finance minister Wolfgang Schauble from Germany was hostile in public remarks toward the desperate monetary decisions. At the recent G-20 Meeting, Schauble called USFed Chairman clueless openly (his word), describing his policies as reckless (his word). He ridiculed the USGovt approach to urge China and Germany to reduce their trade surpluses. Take surpluses as signs of success and competent industrial and policy management, where the US is void. He gives his nation credit for a strong competitive industry. He cites a direct contradiction. Schauble said, "The American growth model, on the other hand, is in a deep crisis. The United States lived on borrowed money for too long, inflating its financial sector unnecessarily, and neglecting its small and mid-sized industrial companies. There is no lack of liquidity in the USEconomy, which is why I do not recognize the economic argument behind this measure." Exactly on both counts!!! The USFed is fighting insolvency with liquidity rather than debt restructure for a second time, after learning nothing the first time. The US economists have lost their way so badly, that they no longer comprehend the concept of legitimate income. The US counselors push for putting more cash in consumer hands, regardless of where it comes from. Call it heresy, or call it incompetence, or call it blindness from the Keynesian bright lights that burn bright in the inflation laboratory.
New money does not cure an insolvent banking system or insolvent households. No sterilization of QE2 is in the plan, to serve as protection for the USEconomy. Not in QE2!! My forecast is for the hollowing out of the USEconomy from a massive cost drain with puny export benefit, compounded by continued income erosion. Price inflation will be labeled as growth, even income growth, the chronic sins. The borrowing costs have been near 0% for 18 months with no economic response, making Bernanke's points again vacant, myopic, and deficient. He is fighting an endemic insolvency problem with amplified monetary inflation. A voice with hint of wisdom came from former New York Fed President E Gerald Corrigan Corrigan. He said, "Even in the face of substantial margins of under-utilization of human and capital resources, efforts to achieve an upward nudge in today's very low inflation rate make me somewhat uncomfortable." His experience came under ex-USFed Chairman Volcker during the late 1970 decade, who raised interest rates to 20% to combat inflation, pushing the economy into the 1981-82 recession. That was the final chapter of anti-bubble USFed chieftain linneage. Since the Greenspan Era, it has been full speed ahead with inflation engineering, asset bubble creation, erudite apologists, permitted bond fraud, careful collusion, and reckless management. They have systemic failure to show for it.
The claim by Bernanke and a supporting chorus of economists that QE2 will bolster USEconomic competitiveness is fallacious, and patently backwards as usual. It will push the US further into a wasteland, a vestibule to the Third World. The higher cost structure uniformly imposed will render great damage in a profit squeeze for businesses and discretionary spending squeeze for households. New money does not cure an insolvent banking system or insolvent households. It presents a new problem of significiant price inflation. They want it, so they can call it growth!! Producing high value products efficiently and cost effectively makes the nation competitive. Imposing a fair tax structure that is stable, reasonable, and with proper incentives makes it competitive. Having an active legal prosecution staff to combat bond fraud and defense appropriation fraud makes it competitive. Having a strong education system makes it competitive. A weaker currency raises the cost structure, increases import costs, and assists the export trade if a nation has one. The United States has shipped a large segment of it away in the last 10 years to China, after having shipped a larger segment away in the 1980 decade to the Pacific Rim. Not only did the US promote its financial sector, but it denigrated the industrial sector as dirty. By removing a significant portion of the nation's capacity to generate legitimate added value income, the USEconomy was left vulnerable to debt overload and insolvency. The US Ship of State was hoisted on its own petard. For those ignorant of naval terminology, that means the US killed itself in a great display of cannon backfire in recoil. The QE2 initiative will be disastrous from many angles, certain to push the nation into an Inflationary Depression, from the current chronic Deep Recession.
MARGIN HIKE AS FINAL LIMP WEAPON
Increases to the silver margin requirement in futures contracts should be viewed as the final act of desperation. It is a device to control price within the paper silver arena. However, in a grand backfire, a higher margin produces a lower price for the physical buyers, who eagerly step up to place and fill orders. The margin maintenance hike on November 9th was six times greater for silver than for gold. The Big Four US banks are caught in an historically unprecedented short squeeze, bleeding $billions. Tuesday November 9th saw a powerful gold & silver price downdraft. The COMEX raised the silver margin requirement in a bland attempt to slow a raging bull market amidst a broken global monetary system. One week later they raised the margin again for both monetary metals. The price downdraft continued. But some calmer winds in Europe enabled precious metals prices to recover. Silver has snapped back much more than gold.
The Chicago Mercantile Exchange raised the margin requirements for silver on November 9th. It was highly motivated. They wanted to prevent a blowout upside move in silver past $30 before Christmas, and to relieve some of the pain to the Big Four US banks. Unlike gold & silver, no margin hikes were doled out for soybeans, corn, sugar, or cotton despite their concurrent price gains. The message is clear, that desperation has set in relative to precious metals, as conditions are breaking down badly. The CME sent out a memo raising the margin maintenance requirements for silver futures by up to 29%, from $5000 to $6500 per contract. Initial positions have a slightly higher margin. It is their right, being the market maker. Let not their fast disappearing silver inventory deter their path. Less than two weeks later, the CME raised the silver margin maintenance requirement another 11.5% to $7250 in a sign of desperation. They also raised the gold margin, but only by 6% from $4251 to $4500 in a symbolic gesture. The CME motive is less about risk mitigation concerns and more driven by the desire to restrain the bull market movement. The investment world will regroup long before Christmas, like in the next week or two. Just when the European woes focused on Ireland, and a rescue aid package seemed in the offing, the silver price jumped upward by $2.00 on a single day, November 18th, a strong telegraph across the paper-physical silver table. The Powerz cannot halt the silver juggernaut, which will see $30/oz by January. If a double hike in the silver margin is the best they have, then they are truly whistling in the grave yard.
The demand for gold is global, diverse, and motivated by the gradual disintegration of the monetary system. Sovereign bonds that support the major currencies are in deep trouble the world over. The consensus actions toward Quantitative Easing, also known as hyper monetary inflation, have boosted demand for gold & silver monumentally in a natural offset. Dozens of nations and billions of people around the world are slowly awakening to the grand deception of money itself and the crumbly foundation that make up fiat currencies. They are losing money in supposedly safe government bonds, a trend without precedent. Most of Southern European nations will declare debt default within two years. Foreign central banks are attempting to diversify their oversized US$-based reserves without causing a run on the USDollar. Gold is gradually being seen as part of the solution, at least in private wealth preservation. Gold is the new reserve safe haven asset, since it is true money.
Important changes have come to the precious metals market. Silver has taken a leadership role. It has broken out in Europe to new highs. Its snapback was impressive after the weak-kneed COMEX hike in margin requirements. Silver is no longer only seen as just an industrial metal, a commodity, but rather as a safe haven alternative, a monetary brother to gold. The European Union bond fracture has wrought great damage to the structural foundation of the global monetary system. It is exposed as having a debt backbone, a paper spine fashioned of weakness, vulnerable to central bank abuse. Money is fleeing the EU Govt bonds, and fleeing even to some extent the USTreasurys. Horrible publicity has befallen the Big Four US banks with class action lawsuits at a time when Asian buyers have targeted the silver market. The Asians of unidentified origin (probably China) have descended with waves of layered orders, exploiting the discount offered from the paper impact after the margin hikes by COMEX officials. Recall that the US & China are locked in a trade war. The louder the USGovt accuses China of currency manipulation, the more they bid up Gold & Silver on the quiet. The strongest months of the year for Gold & Silver are December and January. The margin hike seemed designed to interrupt momentum. It only delayed the next powerful upward thrusts in price.
TITANIC BATTLE OVER PHYSICAL METAL
The nature of the Gold & Silver markets is two-headed. The price discovery aspect is driven by the paper futures contracts. Intended as devices to aid in pricing, to protect from drawn out periods under which business is conducted with commitments made, the paper futures arena turned into a monster two decades ago. The paper tail has led the metal dog, a backwards condition. Some important developments have taken place in recent weeks and months. Secure allocated account holders at both the COMEX and LBMA have forced the situation, demanding physical delivery of futures contracts. They openly cite their distrust, as suspicion is aroused of improper lease of allocated accounts. Huge delivery demands have come from Chinese and Arab investors. The remarkable new wrinkle is that silver paper price ambushes have led to strong silver physical purchases. Stories abound of an Asian assault on the silver market underway. Interviews granted by those with direct information have appeared on reliable websites. The skirmishes result in backfires to the paper market mavens, as they offer repeated discounts to the Asian physical buyers, who grab at the discounts with layered orders, as reported. Therefore, the actions by the paper mavens works to accelerate their own destruction. Investors should hope for occasional ambushes, so that the physical side can reload and obtain more physical metal at lower prices. Also, with occasional bouts of consolidation, the price advances are more stable. A very bizarre pathogenesis of the silver paper market is evident, hidden from view.
The London contact source has shared details to the inner workings of the Asian silver market assault on New York and London with an update. The Asian buyers have been squeezing the shorts in the silver market, causing great pain as the silver price has risen 50% since late summer. After the drop in price from a brief touch of $29 down to the low $25's, the physical market has responded with strong demand. Keep in mind that the paper silver market is the opposite, a key point. The bizarre anomalous paper market results in more selling when the price drops, the opposite to normal. The ambush catches the leveraged players off guard, forcing paper position sales in sudden liquidations. So a collision is in progress. The paper arena cannot produce enough silver after the raids push down the paper price in order to relieve their tenuous short condition. By pushing down the paper price, they must bring to the table the discounted silver at the lower price, in physical deliveries. The paper market is playing directly into the hands of the physical participants who want to drain the exchanges of their bullion metal. The credibility of the London source was enhanced by the quick jump above $26 as he predicted earlier in interviews. He described lines being crossed between the paper and physical orders, stops, covers, and delivery demands. Details are provided in the November Hat Trick Letter. Great intrepid work by King World News for developing the valuable source.
A staggering rise in physical demand is noted from Chinese & Indian buyers. Physical demand growth more than offsets the miner de-hedging, a process almost wound down fully. Investment demand globally is skyrocketing. According to the World Gold Council, global demand for gold bars climbed by over 30% between 2Q2009 and the second quarter this year. De-regulation in China might permit much broader gold ownership. That would unleash huge demand and pressure the Anglo bankers. Chinese demand has been strong for years, soon to reach a higher gear. With domestic mine output not expected to grow much next year, China will tap the global market, pushing up the gold price. New rules in China have already enabled tremendous increases in private gold demand, whose volume surpasses and overwhelms European central bank sales. The Chinese gold demand in 2010 will be a mammoth consensus estimated 500 tonnes. It will rise by as much as 20% in the year 2011, enough to surpass India as the top consumer in the next three years. Demand is forecasted to rise to around 600 tonnes in 2011, according to a Reuters survey of five analysts. Recent Chinese Govt restrictions imposed on property investment and speculation in other markets have resulted in more money going into gold and jewelry, which seems a calculated policy by the crafty government officials in Beijing. Gold will not burn their citizens in a bubble bust. Jewelry demand has risen by an average of 7% annually in steady fashion.
Investment demand for gold in China has surged by 60% in 2009 to 150 tonnes. On an annualized basis, China is on course to import 118 tonnes of gold through Hong Kong. Domestic gold mine output is expected to be flat inside China for 2011, the first time in years. Couple strong demand and flat output, and big net import of gold bullion will result. The Peoples Bank of China announced in August a relaxation of gold rules, a prelude to broader reform of financial markets pertaining to bonds and currencies. Banks would be permitted to export and import more gold in a program to drive the development of their market in the precious metal. Regard this as a direct assault on the COMEX in New York and LBMA in London, since huge physical gold demand will ramp up to a staggering high level. The PBOC wants to draw gold tonnage into their country without disrupting market equilibrium unduly, as it diversifies more of its burgeoning $2.6 trillion in FOREX reserves.
STATE VERSUS FEDERAL BATTLE
A great battle is being waged, but not presented in the light preferred by the Jackass. Witness the Tenth Amendment battle by the states versus the USGovt on the federal front. The battle has myriad microcosms in the mortgage court decisions made against the big Wall Street banks. So far the decisions favor the people, but the USCongress is busy preparing an unconstitutional bill to permit interstate contracts and possibly to whitewash any mortgage contract fraud. Bank lobby funds flow briskly to the craftsmen of the legislation. If challenged, such a bill might not withstand a constitutional battle. Sheeple justice versus mega-banks could reveal a quintessential states rights battle versus the federal govt controlled by the banking syndicate. Local judges are taking action against obvious criminal and predatory behavior by the big US banks. Some Florida homeowners were foreclosed by the big banks when no home loan was active in force. The Robo-Signers have captured much attention in document forgery. People who challenge are often winning their homes free & clear. Fraudulent attempts to foreclose and seize homes are being interrupted by those who challenge, and demand to prove property title. Legal precedents are set. Banks are worried. Regard the battle as an extension of the Tenth Amendment challenge, with proxy brigades doing battle. The big US banks represent the federal authority when a certain lens is applied.
The struggle in my view reveals a bigger macrocosm, where the states are pitted against the federal government. The proxy warriors for the states are local courts, where mortgage jurisdiction lies. The proxy warriors for the USGovt are the big Wall Street banks, whose syndicate has taken control of the national government bodies in their financial ministries. The states are fighting and winning the battle on home property challenges. Recall that in separate movements, 20 states have invoked the Tenth Amendment in a struggle to wrest back control from the New York and WashingtonDC syndicate. Their turf struggle has been over taxation, waged war, national security directives, border immigration, even threats of pandemic. Witness numerous local battles, erupting conflicts that serve as substitutes for state revolt against the encroaching federal apparataus. The legal structure favors the states. Watch the movements in reaction in counter-attack. What comes next might be Fascist Business Model corrupt extensions. The November Hat Trick Letter includes a review of some legal cases and their implications, which seem to be centered in metropolitan New York City. Some confusion might come from different decisions in different jurisdictions that lack consistency across the 50 states. That lack of uniformity might work to the advantage of upholding state rights, since the nation has always favored individuality of the states, a strength from diversity. Either way, a gigantic hairball is building within the system pipelines at a time when the majority of states are ruptured with huge budget shortfalls and pension shortfalls. They point a finger to the Wall Street corner where the housing & mortgage bust rendered damage. They point a finger to the USGovt colossus where the bloat exists, the deficits have expanded, and the control is centered.
By the way, notice how Bank of America quietly is approaching the funeral parlor. Word from my sources tell of Wall Street buying heavily the Credit Default Swap contracts for Irish and Portuguese Govt debt, in order to lift the bond yields enough to create a renewed crisis. That accomplishes two goals. EU financial distress creates some selling pressure for the Euro currency, thus supporting the USDollar. But a buoyed buck did not soften the gold price!! Sabotage of PIIGS sovereign debt is the order of the day so as to force the situation in Europe, which is stuck. The US bankers sense the need for contagion and crisis to befall Europe once more. Ruinous monetary policy is being exported from US locations. In the recent spring months, the USDollar was given a relative lift from Greek financial woes. This time, the effect will not be the same. Perhaps they can engineer an eerie calm in the FOREX currency market. The USDollar image and condition are so damaged and crippled, that the funds in flight will find Gold & Silver in heavy volumes. But the more hidden motive is to provide effective diversion from Bank of America. It is in a death spiral that requires almost daily cash infusions. As one source put it, "The wires for funds transfers at the Federal Reserve are burning from daily rescues of BOA." Witness the demise of Bank of America, again. Its own 200-day moving average serves as a ceiling on a dark pathway leading to the cemetery. Its managed death decline has come without news items. The mortgage mess is their curse.
Bank of America Corp
WORKABLE SOLUTION FAR TOO LATE
The solution to the USEconomy and financial structure is long past available with the removal of the USTreasury gold. Here is a solution that could have worked. QE2 is the antithesis of a solution, one certain to cause great damage. Collateral, industry, and smaller government are the cornerstones to a solution. The $500 billion in gold collateral leased in the 1990 decade by Wall Street would be useful nowadays. People grope for bonafide solutions. Try this: Multiply the gold price 7-fold to obtain a hefty realistic $10,000 price level, sufficient to provide $3.5 trillion for US banking system collateral. Presto, some stability for the USDollar vis-a-vis the USGovt debt. Then the task shifts to reducing the USGovt deficit by means of terminating the endless war based upon dubious motives, ending Medicare largesse, cutting entitlements from pensions, eliminating several worthless agencies (like Energy and Homeland Security), and offering major incentives for the return of US manufacturing industry to US shores. The defense budget must be cut by 50%, and be declared no longer sacred. But the opportunity is long gone, since the USTreasury of gold was leased and sold for a few $trillion in private Wall Street gains. The usual suspects are deemed national heros.
These steps could have constructed the foundation for recovery, with $300 to $600 billion in budget cuts. Painful but progress. In two years, the deficit could have been tremendously reduced. That math works for me, but it is too late really. The nation repeatedly kicked the can down the road, the road that leads to the Third World. The opportunity for solution begins with a placement of gold collateral for both currency and debt, and a basis of industry for legitimate income. Both are absent, due to wretched leadership and profound corruption, as debt suffocates the system. Almost all attempts toward remedy mask the true motive at work, the preservation of power. The remedies turn out to be deceptive, adding $trillions to the clean-up bill without results. The squander of new money and the dissipation of asset bubbles are the essence of the Gold bull, which will take it well past $2000 in the coming two years, and much higher. The policy is not about solution, but rather power over money. Hyper-inflation, economic deterioration, and USTreasury default lie directly ahead, just a matter of time. Gold is the personal lifeboat, whose silver oars row to safety.