Posts Tagged ‘jp morgan’
by Gonzalo Lira
December 27, 2011
Nine weeks after its bankruptcy, the general public still hasn’t quite realized the implications of the MF Global scandal.
My own sense is, this is the first tremor of the earthquake that’s coming to the global financial system. And how the central banks and financial regulators treated the “Systemically Important Financial Institutions” that had exposure to MF Global—to the detriment of the ordinary, blameless customer who got royally ripped off in its bankruptcy—is both the template of how the next financial crisis will be handled, and an accelerator that will make the next crisis happen that much sooner.
So first off, what happened with MF Global?
Simple: It went bankrupt—because it made bad bets on European sovereign debt, by way of leveraging positions 100-to-1. Yeah, I know: Stupid. Anyway, they went bankrupt—which in and of itself is no big deal. It’s not as if it’s the first time in history that a brokerage firm has gone bust. But to me, the big deal in this case was the way the bankruptcy was handled.
Now there are several extremely serious aspects to the MF Global case: Specifically, how their customers were shut out of their brokerage accounts for over a week following the bankruptcy, which made it impossible for those customers to sell out of their positions, and thus caused them to lose serious money; and of course how MF Global was more adept than Mandrake the Magician at making money disappear—about $1 billion, in fact, which still hasn’t turned up. These are quite serious issues which merit prolonged discussion, investigation, prosecution, and ultimately jailtime.
But for now, I want to discuss one narrow aspect of the MF Global bankruptcy: How authorities (mis)handled the bankruptcy—either willfully or out of incompetence—which allowed customer’s money to be stolen so as to make JPMorgan whole.
From this one issue, it seems clear to me that we can infer what will happen when the next financial crisis hits in the nearterm future.
Brokerage firms hold clients’ money in what are known as segregated accounts. This is the money that brokerage firms hold for when a customer makes a trade. If a brokerage firm goes bankrupt, these monies are never touched—because they never belonged to the firm, and thus are not part of its assets.
Think of segregated accounts as if they were the content in a safety deposit box: The bank owns the vault—but it doesn’t own the content of the safety deposit boxes inside the vault. If the bank goes broke, the customers who stored their jewelry and pornographic diaries in the safe deposit boxes don’t lose a thing. The bank is just a steward of those assets—just as a brokerage firm is the steward of those customers’ segregated accounts.
But when MF Global went bankrupt, these segregated accounts—that is, the content of those safe deposit boxes—were taken away from their rightful owners—that is, MF Global’s customers—and then used to pay off other creditors: That is, JPMorgan.
(The mechanics of how this was done are interesting, but insanely complicated, and ultimately not relevant to this discussion. To grossly simplify, MF Global pledged customer assets to JPMorgan, in a process known as rehypothecation—customer assets which MF Global did not have a right to. Needless to say, JPMorgan covered its ass legally. Ethically? Morally? Black as night.)
This was seriously wrong—and this is the source of the scandal: Rather than being treated as a bankruptcy of a commodities brokerage firm under subchapter IV of the Chapter 7 bankruptcy law, MF Global was treated as an equities firm (subchapter III) for the purposes of its bankruptcy.
Why does this difference of a single subchapter matter? Because in a brokerage firm bankruptcy, the customers get their money first—because after all, it’s theirs—while in an equities firm bankruptcy, the customers are at the end of the line.
In the case of MF Global, what should have happened was for all the customers to get their money first. Then everyone else—including JPMorgan—would have picked over the remaining scraps. And the monies MF Global had already pledged to JPMorgan? They call it clawback for a reason.
The Chicago Mercantile Exchange, which handled the bankruptcy, should have done this—but instead, the Merc was more concerned with making JPMorgan whole than with protecting the money that rightfully belonged to MF Global’s 40,000 customers.
Thus these 40,000 MF Global customers had their money stolen—there’s no polite way to characterize what happened. And this theft was not carried out by MF Global—it was carried out by the authorities who were charged with handling the firm’s bankruptcy.
These 40,000 customers were not Big Money types—they were farmers who had accounts to hedge their crops, individuals owning gold (like Gerald Celente—here’s his account of what happened to him)—
—in short, ordinary investors. Ordinary people—and they got screwed by the regulators, for the sake of protecting JPMorgan and other big fry who had exposure to MF Global.
That, in a nutshell, is what happened.
Now, what does this mean?
It means that nobody’s money is safe. It means that regulators care more about protecting the so-called “Systemically Important Financial Institutions” than about protecting Ordinary Joe investors. It means that, when crunchtime comes, central banks and government regulators will allow SIFI’s to get better, and let the Ordinary Joes get fucked.
So far, so evil—but here comes the really troubling part: It is an open secret that there are more paper-assets than there are actual assets. The markets are essentially playing musical chairs—and praying that the music never stops. Because if it ever does—that is, if there is ever a panic, where everyone decides that they want their actual asset instead of just a slip of paper—the system would crash.
And unlike with fiat currency, where a central bank can print all the liquidity it wants, you can’t print up gold bullion. You can’t print up a silo of grain. You can’t print up a tankerful of oil.
Now, question: When is there ever a panic? When is there ever a run on a financial system?
Answer: When enough participants no longer trust the system. It is the classic definition of a tipping point. It’s not that all of the participants lose faith in the system or institution. It’s not even when most of the participants lose faith: Rather, it’s when a mere some of the participants decide they no longer trust the system that a run is triggered.
And though this is completely subjective on my part—backed by no statistics except scattered anecdotal evidence—but it seems to me that MF Global has shoved us a lot closer to this theoretical run on the system.
As I write this, a lot of investors whom I know personally—who are sophisticated, wealthy, and not at all the paranoid type—are quietly pulling their money out of all brokerage firms, all banks, all equity firms. They are quietly trading out of their paper assets and going into the actual, physical asset.
Note that they’re not trading into the asset—they’re simply exchanging their paper-asset for the real thing.
Why? MF Global.
“The MF Global scandal has made it clear that the integrity of the system has disappeared,” said a good friend of mine, Tuur Demeester, who runs Macrotrends, a Dutch-language newsletter out of Brugge. “The banks are insolvent, the governments are insolvent, and all that’s left is for the people to realize what’s going on—and that will start a panic.”
He hit it on the head: Some of the more sophisticated people—like Tuur, like some of my acquaintances, (like myself, frankly)—have realized that the MF Global scandal means that there is no safety for any paper investment: The integrity of the systems has been completely shattered. If in the face of one medium-sized brokerage firm going under, the regulators will openly allow ordinary people to be ripped off for the sake of protecting the so-called “Systemically Important Financial Institutions”—in this case JPMorgan—what will happen if there is a system-wide run? What if two or three MF Globals happen simultaneously?
Will they protect the citizens’ money? Or will they protect the “Systemically Important Financial Institutions”?
I think we know the answer.
And I think we all know the answer to the question of whether there will be crisis flashpoint in the near-term future: After all, as Demeester pointed out, all the banks and all the governments are broke.
Thus it’s only a matter of time before they come for your money.
At SPG, we’ve been putting together Scenarios for other black swan events which are becoming increasingly likely: What to do if the eurozone breaks up, what to do if you have to leave America, what to do if there is an Israeli-Iranian war, what to do if there is forced dollar devaluation, and so on.
Now, because of this open kleptocracy and cronyism being shown by the financial authorities in the wake of the MF Global bankruptcy, we’ve been obliged to put together a new Scenario, devoted exclusively to preparing for a run on the markets: What to do in order to protect your assets from regulatory malfeasance, if there is a system-wide MF Global-type breakdown and a subsequent run on the entire financial system.
And there will be such a run on the system: It’s only a matter of time. In fact, the handling of the MF Global affair has sped up the timeframe for this run on the system, because the forward-edge players—such as Demeester, myself, and my other acquaintances who understand the implications of the bankruptcy—realize that the regulators will side with the banksters, and not the ordinary investors: So we are preparing accordingly.
Once there is a full-on panic, anyone with money in the system will lose at least a big chunk of it, in one of two ways, or a combination thereof:
• One, the firms—commodities brokerage firms, equity firms, investment banks and commercial banks—will not allow people to withdraw the totality of their money, and/or they will put a withdrawal cap of some sort, enforced by the central banks and other regulatory bodies. (Like they did in Argentina.)
• Two, the central banks will “provide liquidity”—that is, print money—while simultaneously declaring a banking holiday to, quote, “calm the markets”. During that bank holiday, the currency will be devalued by double digits—which will mean that your cash holdings will essentially be taxed to save the banksters—again. (Like they did in Argentina.)
Thus apart from proving that the United States really is Argentina with nukes, the MF Global bankruptcy has proven something crucial: The central banks and government regulators have completely fallen into the trap of confusing the welfare of the “Systemically Important Financial Institutions” with the welfare of the system itself. They don’t seem to realize that the SIFI’s are actors within the system—not the system itself.
We critics of the current, corrupt state of affairs also sometimes confuse the SIFI’s with the system itself, whenever we say, “The whole system is corrupt!”
But the system is not corrupt—it’s the regulators and SIFI’s who are corrupt. If nothing else, the handling of the MF Global bankruptcy has proven that, once and for all. That’s why we’re pulling out our money now—while we still can.
Because once the general public catches on to what we already know . . . oh boy.
Read the entire article HERE.
by Matt Taibbi
December 22, 2011
It seems America’s bankers are tired of all the abuse. They’ve decided to speak out.
True, they’re doing it from behind the ropeline, in front of friendly crowds at industry conferences and country clubs, meaning they don’t have to look the rest of America in the eye when they call us all imbeciles and complain that they shouldn’t have to apologize for being so successful.
But while they haven’t yet deigned to talk to protesting America face to face, they are willing to scribble out some complaints on notes and send them downstairs on silver trays. Courtesy of a remarkable story by Max Abelson at Bloomberg, we now get to hear some of those choice comments.
Home Depot co-founder Bernard Marcus, for instance, is not worried about OWS:
“Who gives a crap about some imbecile?” Marcus said. “Are you kidding me?”
Former New York gurbernatorial candidate Tom Golisano, the billionaire owner of the billing firm Paychex, offered his wisdom while his half-his-age tennis champion girlfriend hung on his arm:
“If I hear a politician use the term ‘paying your fair share’ one more time, I’m going to vomit,” said Golisano, who turned 70 last month, celebrating the birthday with girlfriend Monica Seles, the former tennis star who won nine Grand Slam singles titles.
Then there’s Leon Cooperman, the former chief of Goldman Sachs’s money-management unit, who said he was urged to speak out by his fellow golfers. His message was a version of Wall Street’s increasingly popular If-you-people-want-a-job, then-you’ll-shut-the-fuck-up rhetorical line:
Cooperman, 68, said in an interview that he can’t walk through the dining room of St. Andrews Country Club in Boca Raton, Florida, without being thanked for speaking up. At least four people expressed their gratitude on Dec. 5 while he was eating an egg-white omelet, he said.
“You’ll get more out of me,” the billionaire said, “if you treat me with respect.”
Finally, there is this from Blackstone CEO Steven Schwartzman:
Asked if he were willing to pay more taxes in a Nov. 30 interview with Bloomberg Television, Blackstone Group LP CEO Stephen Schwarzman spoke about lower-income U.S. families who pay no income tax.
“You have to have skin in the game,” said Schwarzman, 64. “I’m not saying how much people should do. But we should all be part of the system.”
There are obviously a great many things that one could say about this remarkable collection of quotes. One could even, if one wanted, simply savor them alone, without commentary, like lumps of fresh caviar, or raw oysters.
But out of Abelson’s collection of doleful woe-is-us complaints from the offended rich, the one that deserves the most attention is Schwarzman’s line about lower-income folks lacking “skin in the game.” This incredible statement gets right to the heart of why these people suck.
Why? It’s not because Schwarzman is factually wrong about lower-income people having no “skin in the game,” ignoring the fact that everyone pays sales taxes, and most everyone pays payroll taxes, and of course there are property taxes for even the lowliest subprime mortgage holders, and so on.
It’s not even because Schwarzman probably himself pays close to zero in income tax – as a private equity chief, he doesn’t pay income tax but tax on carried interest, which carries a maximum 15% tax rate, half the rate of a New York City firefighter.
The real issue has to do with the context of Schwarzman’s quote. The Blackstone billionaire, remember, is one of the more uniquely abhorrent, self-congratulating jerks in the entire world – a man who famously symbolized the excesses of the crisis era when, just as the rest of America was heading into a recession, he threw himself a $5 million birthday party, featuring private performances by Rod Stewart and Patti Labelle, to celebrate an IPO that made him $677 million in a matter of days (within a year, incidentally, the investors who bought that stock would lose three-fourths of their investments).
So that IPO birthday boy is now standing up and insisting, with a straight face, that America’s problem is that compared to taxpaying billionaires like himself, poor people are not invested enough in our society’s future. Apparently, we’d all be in much better shape if the poor were as motivated as Steven Schwarzman is to make America a better place.
But it seems to me that if you’re broke enough that you’re not paying any income tax, you’ve got nothing but skin in the game. You’ve got it all riding on how well America works.
You can’t afford private security: you need to depend on the police. You can’t afford private health care: Medicare is all you have. You get arrested, you’re not hiring Davis, Polk to get you out of jail: you rely on a public defender to negotiate a court system you’d better pray deals with everyone from the same deck. And you can’t hire landscapers to manicure your lawn and trim your trees: you need the garbage man to come on time and you need the city to patch the potholes in your street.
And in the bigger picture, of course, you need the state and the private sector both to be functioning well enough to provide you with regular work, and a safe place to raise your children, and clean water and clean air.
The entire ethos of modern Wall Street, on the other hand, is complete indifference to all of these matters. The very rich on today’s Wall Street are now so rich that they buy their own social infrastructure. They hire private security, they live on gated mansions on islands and other tax havens, and most notably, they buy their own justice and their own government.
An ordinary person who has a problem that needs fixing puts a letter in the mail to his congressman and sends it to stand in a line in some DC mailroom with thousands of others, waiting for a response.
But citizens of the stateless archipelago where people like Schwarzman live spend millions a year lobbying and donating to political campaigns so that they can jump the line. They don’t need to make sure the government is fulfilling its customer-service obligations, because they buy special access to the government, and get the special service and the metaphorical comped bottle of VIP-room Cristal afforded to select customers.
Want to lower the capital reserve requirements for investment banks? Then-Goldman CEO Hank Paulson takes a meeting with SEC chief Bill Donaldson, and gets it done. Want to kill an attempt to erase the carried interest tax break? Guys like Schwarzman, and Apollo’s Leon Black, and Carlyle’s David Rubenstein, they just show up in Washington at Max Baucus’s doorstep, and they get it killed.
Some of these people take that VIP-room idea a step further. J.P. Morgan Chase CEO Jamie Dimon – the man the New York Times once called “Obama’s favorite banker” – had an excellent method of guaranteeing that the Federal Reserve system’s doors would always be open to him. What he did was, he served as the Chairman of the Board of the New York Fed.
And in 2008, in that moonlighting capacity, he helped orchestrate a deal in which the Fed provided $29 billion in assistance to help his own bank, Chase, buy up the teetering investment firm Bear Stearns. You read that right: Jamie Dimon helped give himself a bailout. Who needs to worry about good government, when you are the government?
Dimon, incidentally, is another one of those bankers who’s complaining now about the unfair criticism. “Acting like everyone who’s been successful is bad and because you’re rich you’re bad, I don’t understand it,” he recently said, at an investor’s conference.
Hmm. Is Dimon right? Do people hate him just because he’s rich and successful? That really would be unfair. Maybe we should ask the people of Jefferson County, Alabama, what they think.
That particular locality is now in bankruptcy proceedings primarily because Dimon’s bank, Chase, used middlemen to bribe local officials – literally bribe, with cash and watches and new suits – to sign on to a series of onerous interest-rate swap deals that vastly expanded the county’s debt burden.
Essentially, Jamie Dimon handed Birmingham, Alabama a Chase credit card and then bribed its local officials to run up a gigantic balance, leaving future residents and those residents’ children with the bill. As a result, the citizens of Jefferson County will now be making payments to Chase until the end of time.
Do you think Jamie Dimon would have done that deal if he lived in Jefferson County? Put it this way: if he was trying to support two kids on $30,000 a year, and lived in a Birmingham neighborhood full of people in the same boat, would he sign off on a deal that jacked up everyone’s sewer bills 400% for the next thirty years?
Doubtful. But then again, people like Jamie Dimon aren’t really citizens of any country. They live in their own gated archipelago, and the rest of the world is a dumping ground.
Just look at how banks like Chase behaved in Greece, for example.
Having seen how well interest-rate swaps worked for Jefferson County, Alabama, Chase “helped” countries like Greece and Italy mask their debt problems for years by selling a similar series of swaps to those governments. The bank then turned around and worked with banks like Goldman, Sachs (who were also major purveyors of those swap deals) to create a thing called the iTraxx SovX Western Europe index, which allowed investors to bet against Greek debt.
In other words, banks like Chase and Goldman knowingly larded up the nation of Greece with a crippling future debt burden, then turned around and helped the world bet against Greek debt.
Does a citizen of Greece do that deal? Forget that: does a human being do that deal?
Operations like the Greek swap/short index maneuver were easy money for banks like Goldman and Chase – hell, it’s a no-lose play, like cutting a car’s brake lines and then betting on the driver to crash – but they helped create the monstrous European debt problem that this very minute is threatening to send the entire world economy into collapse, which would result in who knows what horrors. At minimum, millions might lose their jobs and benefits and homes. Millions more will be ruined financially.
But why should Chase and Goldman care what happens to those people? Do they have any skin in that game?
Of course not. We’re talking about banks that not only didn’t warn the citizens of Greece about their future debt disaster, they actively traded on that information, to make money for themselves.
People like Dimon, and Schwarzman, and John Paulson, and all of the rest of them who think the “imbeciles” on the streets are simply full of reasonless class anger, they don’t get it. Nobody hates them for being successful. And not that this needs repeating, but nobody even minds that they are rich.
What makes people furious is that they have stopped being citizens.
Most of us 99-percenters couldn’t even let our dogs leave a dump on the sidewalk without feeling ashamed before our neighbors. It’s called having a conscience: even though there are plenty of things most of us could get away with doing, we just don’t do them, because, well, we live here. Most of us wouldn’t take a million dollars to swindle the local school system, or put our next door neighbors out on the street with a robosigned foreclosure, or steal the life’s savings of some old pensioner down the block by selling him a bunch of worthless securities.
But our Too-Big-To-Fail banks unhesitatingly take billions in bailout money and then turn right around and finance the export of jobs to new locations in China and India. They defraud the pension funds of state workers into buying billions of their crap mortgage assets. They take zero-interest loans from the state and then lend that same money back to us at interest. Or, like Chase, they bribe the politicians serving countries and states and cities and even school boards to take on crippling debt deals.
Nobody with real skin in the game, who had any kind of stake in our collective future, would do any of those things. Or, if a person did do those things, you’d at least expect him to have enough shame not to whine to a Bloomberg reporter when the rest of us complained about it.
But these people don’t have shame. What they have, in the place where most of us have shame, are extra sets of balls. Just listen to Cooperman, the former Goldman exec from that country club in Boca. According to Cooperman, the rich do contribute to society:
Capitalists “are not the scourge that they are too often made out to be” and the wealthy aren’t “a monolithic, selfish and unfeeling lot,” Cooperman wrote. They make products that “fill store shelves at Christmas…”
Unbelievable. Merry Christmas, bankers. And good luck getting that message out.
Read the entire article HERE.
by Mark H. Melin
December 21, 2011
Commodity Customer Coalition founder James Koutoulas is requesting that MF Global bankruptcy Judge Martin Glenn investigate three potential legal issues that are said to have occurred in transferring of MF Global assets. The key issues include the fact that JP Morgan was able to purchase MF Global bonds at a discount without any open bidding process and the assets were apparently sold without disclosure to or approval from the U.S. bankruptcy court or trustees. The third issue centers on JP Morgan seeking special favors from the Federal Reserve to receive priority treatment over investor segregated fund accounts.
The first such non-transparent movement of assets occurred when JP Morgan is said to have purchased MF Global’s Sovereign Debt at a significant discount without an open bidding process, paying $0.89 and later selling that debt to investor George Soros for $0.95. No one is going to complain about JP Morgan generating profit. However, purchasing assets of a bankrupt firm without an open bidding process or disclosure to the bankruptcy court and trustees is where JP Morgan may be in trouble, according to Mr. Koutoulas. This sale could be subject to clawback provisions, legal experts speculate. (On December 9, 2011 The Wall Street Journal reported the fact that bonds were moved to KPMG London office, which was the bankruptcy administrator, but at the time the article did not discuss sale details or approval through the bankruptcy process. See “Corzine’s Loss May Be Soros’s Gain” by Gregory Zuckerman and Dana Cimilluca.)
The key issue is that such transfers is the bonds were purchased at a discount without open bidding and the process was not disclosed to or authorized by the U.S. Bankruptcy Court, according to Mr. Koutoulas. “Who gave JP Morgan permission to purchase those bonds at a discount without open bidding?”
The second questionable movement of assets is said to have occurred when JP Morgan purchased MF Global’s stake in the London Metals Exchange (LME) without proper disclosure. The event was widely reported at a basic level on November 28, 2011. The larger issue, however, appears to center on the fact that such a transaction was not approved by the U.S. bankruptcy court and trustee.
“Was this disclosed in court?” Mr. Koutoulas rhetorically asked. “No. Was their trustee approval? No.”
The third issue occurred in congressional testimony Thursday, December 15, 2011 where it was discovered JP Morgan asked the Federal Reserve to write a letter claiming that the segregated funds should not be categorized as client money.
“How many letters like this have they asked for in the past? I want all the statistics regarding the number and content of letters,” Koutoulas questioned. “JP Morgan wanted a ‘get out of jail free card’ from the Fed. Guess what? That doesn’t fly with me.”
“Their hubris is so severe. They think we don’t know the industry, like we are Occupy Wall Street radicals or something and don’t have a clue or message,” Mr. Koutoulas said, noting that the CCC is comprised of experienced industry participants who understand the financial services industry from the inside.
Mr. Koutoulas seeks to solve the problem with JP Morgan without dragging the issue through court. In speaking to JP Morgan, Mr. Koutoulas said “Listen, you are buying vulture MF Global claims at $0.86 ½ on the dollar. Why don’t you pay a fair price of $0.97 ½ take the customers out of the bankruptcy and we will indemnify you from any class actions resulting from this.” A vulture claim occurs when an MF Global claimant such as a farmer or small business person is in desperate need of cash and sells their claim to someone such as JP Morgan, who purchases the claim at a lower rate than the value at maturity. In this example if JP Morgan purchased the claim at $0.87 and all clients were eventually “made good” JP Morgan would receive the par value of $1.00. With the MF Global bankruptcy proceedings apparently moving along much quicker than expected, JP Morgan stands to potentially make a quick 13% return on such vulture claims.
Mr. Koutoulas reports that JP Morgan would not even discuss the issues. “I can see that you disagree with me,” said Mr. Koutoulas, whose organization represents over 7,000 MF Global clients, mostly professional investors. “They won’t even meet with me and talk with me.”
Mr. Koutoulas is currently working Pro Bono and many of the lawyers are working at a highly discounted rates and requested that industry participants donate to help . “I need professional litigators and bankruptcy attorneys backing me up,” said Northwestern Law School grad Koutoulas who also operates Typhon Capital Management, which is an NFA-registered Commodity Trading Advisor and Commodity Pool Operator. “We’ve had an outpouring of lawyers who want to help,” Mr. Koutoulas said, sitting with a young Yale Law School grad as we spoke.
In calling on MF Global presiding bankruptcy Judge Glenn to investigate these issues, Mr. Koutoulas is rallying the futures industry to boycott use of JP Morgan. “Call your FCM and if they are using JP Morgan say ‘We won’t do business with you if you work with JP Morgan,’” he said, requesting that industry participants get on Twitter and follow the #BoycottJPM hash tag.
We are at an economic crossroads like we’ve never seen in the history of the world. Oil production and Silver production have both hit their peaks and we are sliding on the down slope. As Oil peaks we will be moving into alternative power sources here in the U.S. and solar remains the preeminent option to take it’s place. Of course, with Solar Power comes the need for physical silver because of it’s superior reflective properties.
Today Silver is more undervalued than any commodity in existence today, yet it remains suppressed by banking and money powers. When speaking of precious metals, all media analysts state that Gold and Silver are in a bubble, but all their analyses are not based on physical supply. As you will see below, Silver is also becoming the most scarce commodity. Here is a clip by Mr. Vision explaining where we stand in the situation with silver and where we will be headed.
Submitted by SRSrocco
The world is about to peak in global silver production. This will not occur due to a lack of silver to mine, but rather as a result of the peaking of world energy resources, declining ore grades, and a falling Energy Returned On Invested – EROI. The information below will describe a future world that very few have forecasted and even less are prepared. This is an update to my previous article Peak Silver and Mining by a Falling EROI. In my first article I stated that global silver production may peak in 2009 if we were to enter a worldwide depression. We did not have the global depression as massive central bank printing and bailouts have thus far postponed the inevitable.
Full report (pdf)
Read the original article HERE.
Another example of why you should choose physical gold and silver rather than the paper counterpart. These derivatives are simply way too over leveraged and when the music stops someone is going to be left without a chair and the one sitting will most likely be JPMorgan or Goldman Sachs. And don’t expect the government to do anything about it. Lawrence Lepard describes the heist below:
By Lawrence Lepard
November 18, 2011
Imagine you are Ben Bernanke, or on the Board of Governors of the Federal Reserve. The time frame is July and August of 2011 and the price of gold is on a tear. Commodities inflation has been persistent and is breaking out everywhere. Your prediction that inflation “is contained” and is a “temporary phenomena” are beginning to look absurd. What do you do?
Simple. Hint that QE3, the primary drive of inflation, is coming and then fail to deliver at the September FOMC meeting. That takes care of the price of gold and the gold stocks. Ah, but those pesky commodities speculators keep making money and trading against what you want the markets to do. So what is to be done there? Hey Jon Corzine, how about you tank the largest broker for the small commodities punters in the world, and we let them twist in the wind? That will serve them right. Teach them to bet against the government approved scenario.
Think it did not happen? Well think again. All of the pieces fit. It sure is convenient that all those commodities speculators are now out of the box. Also, who will want to speculate on commodities in the future given customer funds are no longer protected. Furthermore, commodities speculators are not a very “All American” group. From the authorities point of view they can say: screw them, who will feel sympathy? Hell, James Bullard, Fed Governor, in an interview on CNBC yesterday said the MF Global collapse proves that the system works. Yes it does Jim, for you. Personally, I have $90,000 at MF Global and I would like to have my honestly earned money returned. Unfortunately, the odds of that happening any time soon seem slim. In part because when MF Global entered bankruptcy the judge appointed a Trustee whose law firm has done substantial work for JP Morgan, a deeply interested party. We will probably never find out what happened here. But for those of us whose eyes are open the results speak for themselves.
This whole mess stinks to high heaven. I am with Gerald Celente, if the largest commodity broker in America can go bankrupt and nothing is done, then where can you put your money and expect it to be safe? I, for one, do not accept that Jon Corzine is stupid enough to lever up MF Global 40:1 and use the proceeds and customer money to bet on European sovereign debt. This was a hit, pure and simple. That is why there is no resolution to the problem, and it is just another example of the deeply corrupt US political/financial axis. It may take money away from a bunch of commodities speculators, and it may cool down the perceived inflation, but it is just another hole in the dike which is The US Financial System. A dike whose life can probably now be measured in months, not years.
Read the entire article HERE.
An audit of the Federal Reserve has revealed that the privately owned Federal Reserve secretly doled out more than $16 trillion in zero interest loans to some of the largest financial institutions and corporations in the United States and throughout the world. The non-partisan, investigative arm of Congress also determined that the Federal Reserve acted illegally. In fact, according to the report, the Federal Reserve knew their financial transactions were illegal and provided conflict of interest waivers to its employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans. The report is evidence that reveals major securities fraud in the embezzlement of $16 trillion by the Federal Reserve. Securities fraud and embezzlement are both felony criminal offenses.
Embezzlement is the act of dishonestly appropriating or secreting assets by one or more individuals to whom such assets have been entrusted. Embezzlement is performed in a manner that is premeditated, systematic and/or methodical, with the explicit intent to conceal the activities from other individuals, usually because it is being done without their knowledge or consent. U.S. Code TITLE 18 > PART I > CHAPTER 31 – EMBEZZLEMENT AND THEFT § 644. Banker receiving unauthorized deposit of public money
Whoever, not being an authorized depositary of public moneys, knowingly receives from any disbursing officer, or collector of internal revenue, or other agent of the United States, any public money on deposit, or by way of loan or accommodation, with or without interest, or otherwise than in payment of a debt against the United States, or uses, transfers, converts, appropriates, or applies any portion of the public money for any purpose not prescribed by law is guilty of embezzlement and shall be fined under this title or not more than the amount so embezzled, whichever is greater, or imprisoned not more than ten years, or both; but if the amount embezzled does not exceed $1,000, he shall be fined not more than $1,000 or imprisoned not more than one year, or both.
$16 trillion is 10 times more than what the U.S. Congress authorized and Bush ($700 billion) and Obama ( $787 billion) signed off on. The Federal Reserve was only authorized by Congress to disburse $1.487 trillion in federal tax dollars in bailouts. The Federal Reserve embezzled another $14.5 trillion.
The Congressional report determined that the Fed secretly hide most of the embezzled money into their own banks. The rest the Fed unilaterally transfered trillions of dollars to foreign banks and corporations from South Korea to Scotland. Foreign banks and corporations which the Federal Reserve bankers had a personal financial interest or stake in.
The report reveals that the CEO of JP Morgan Chase served on the New York Fed’s board of directors at the same time that his bank received more than $390 billion in federal money from the Fed – conflict of interest. Moreover, JP Morgan Chase served as one of the clearing banks (money laundering banks) for the Fed’s emergency loans programs (aka – embezzlement schemes).
In another disturbing finding, the Government Accountability Office said that on Sept. 19, 2008, William Dudley, who is now the New York Fed president, was granted a waiver to let him keep investments in AIG and General Electric at the same time AIG and GE were given federal funds. One reason the Fed did not make Dudley sell his holdings, according to the audit, was that it would have exposed the Fed’s conflict of interest and major securities fraud in the embezzlement of $16 trillion.
The investigation also revealed that the Fed outsourced most of its embezzling to private contractors, many of which were rewarded with extremely low-interest and then-secret loans.
The Fed outsourced virtually all of the operations of their $16 trillion embezzlement scheme to private contractors like JP Morgan Chase, Morgan Stanley, and Wells Fargo. For their part the same firms also received trillions of dollars in Fed loans at near-zero interest rates. Morgan Stanley helped the Federal Reserve banker launder embezzled $trillions into AIG.
A more detailed Government Accountability Office investigation into corruption charges, securities fraud, embezzlement, money-laundering and conflicts of interest at the Fed was due on Oct. 18. The Sanders Report on the GAO Audit on Major Conflicts of Interest at the Federal Reserve
Did you know that the $14.5 trillion the Federal Reserve embezzled (US Congress only authorized $1.487 trillion) could pay the entire U.S. national debt – $14.346 trillion. To avert default the U.S. government need only to seize the assets of the Federal Reserve banks (the big six U.S. banks collectively hold about $9.399 trillion in assets) and get back the $trillions that the Federal Reserve illegally embezzled and money laundered to their foreign banks and corporations.
The U.S. government can recover $trillions from the Federal Reserve and their banks through asset forfeiture. Asset forfeiture is confiscation, by the State, of assets which are either (a) the alleged proceeds of crime or (b) the alleged instrumentalities of crime, and more recently, alleged terrorism. Proceeds of crime means any economic advantage derived from or obtained directly or indirectly from a criminal offense or criminal offenses. Crimes committed by the Federal Reserve banks against the United States and its people include; conflict of interest, securities fraud, embezzlement, fraud, money laundering, hoarding, profiteering, larceny, racketeering . . .
In 1982, a criminal forfeiture provision was enacted as part of the Racketeering Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961, which provided for the forfeiture of all property over which the RICO organization exercised an influence.
The Money Laundering Control Act of 1986 added new felony provisions at 18 U.S.C. § 1956 for the laundering of the proceeds of certain defined “specified unlawful activity,” as well as prohibiting structuring transactions under 31 U.S.C. § 5324 (with the intent to evade certain reporting requirements). The law also added civil and criminal forfeiture provisions at 18 U.S.C. §§ 981 and 982 for confiscating the property involved in money laundering.
According to the Legislative Guide to the United Nations Convention against Transnational Organized Crime and the Protocols Thereto, “Criminalizing the conduct from which substantial illicit profits are made does not adequately punish or deter organized criminal groups. Even if arrested and convicted, some of these offenders will be able to enjoy their illegal gains for their personal use and for maintaining the operations of their criminal enterprises. Despite some sanctions, the perception would still remain that crime pays. . . . Practical measures to keep offenders from profiting from their crimes are necessary. One of the most important ways to do this is to ensure that States have strong confiscation regimes”
Top 10 Banks in the United States
As of Mar. 31, 2010.
Source: Federal Reserve System, National Information Center.
According to United States Code, TITLE 12 CHAPTER 3 SUBCHAPTER IX § 341. Second. states that the U.S. Federal Reserve Banks can be dissolved today by “forfeiture of franchise for violation of law.” Securities fraud and embezzlement by the Federal Reserve Bank is cause for immediate forfeiture and imprisonment of the Federal Reserve and its bankers.
List of banks involved in the $16 trillion + securities fraud and embezzlement
The Federal Reserve Bank of New York provides an up to date list of “Primary Dealers” obligated to implement the Federal Reserve fraud and embezzlement scheme. http://www.newyorkfed.org/markets/pridealers_current.html
“Primary dealers serve as trading counterparties of the New York Fed in its implementation of (Fed) monetary policy. This role includes the obligations to: (i) participate consistently in open market operations to carry out U.S. monetary policy pursuant to the direction of the Federal Open Market Committee (FOMC); and (ii) provide the New York Fed‘s trading desk with market information and analysis (non-public stock market information – aka insider trading) helpful in the formulation and implementation of monetary policy (so that the Fed can profit from this insider information). Primary dealers are also required to participate in all auctions of U.S. government debt (acquiring wealth generated from the transactions of the illicit funds – aka money laundering for the Fed) and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders. (the New York Fed is stating who they are working for – on behalf of its foreign official account- holders)”
List of Primary Dealers (Fed’s money laundering banks. Listed in alphabetical order only.)
Bank of Nova Scotia, New York Agency (the third largest bank in Canada. Opened New York Agency in 1907)
BMO Capital Markets Corp. (the fourth largest Canadian bank)
BNP Paribas Securities Corp. (Paris, France)
Barclays Capital Inc. (London, United Kingdom)
Cantor Fitzgerald & Co. (United States)
Citigroup Global Markets Inc. (CIA drug money laundering bank, United States)
Credit Suisse Securities (USA) LLC (Zurich, Switzerland)
Daiwa Capital Markets America Inc. (Tokyo, Japan)
Deutsche Bank Securities Inc. (Frankfurt, Germany.)
Goldman, Sachs & Co. (United States)
HSBC Securities (USA) Inc. (founded in Hong Kong, headquarters London, United Kingdom)
Jefferies & Company, Inc. (United States)
J.P. Morgan Securities LLC (United States)
Merrill Lynch, Pierce, Fenner & Smith Incorporated (United States)
Mizuho Securities USA Inc. (Tokyo, Japan)
Morgan Stanley & Co. LLC (United States)
Nomura Securities International, Inc. (Tokyo, Japan)
RBC Capital Markets, LLC (a Canadian investment bank, part of Royal Bank of Canada)
RBS Securities Inc. (Royal Bank of Scotland Group)
SG Americas Securities, LLC (United States)
UBS Securities LLC. (Zürich & Basel, Switzerland. Rothschild controlled. The Rothschild family hold the popes purse strings from this bank – the keys of the Vatican is a predominate part of their logo.)
All of the above named banks (includes both U.S. and foreign banks) money launder the over $16 trillion (U.S) that the Federal Reserve embezzled. These banks money launder the Fed embezzled U.S. Tax Dollars in three steps:
1) the illicit funds are introduced into the financial system by “placement”,
2) the “Primary Dealers” carrying out complex financial transactions in order to camouflage the illicit funds (“layering”), and
3) they acquire wealth generated from the transactions (loans, mortgages, stock market trading) of the illicit funds (“integration”).
All listed banks are controlled by the European Central Bank (Rothschild family) which controls it all for the Vatican, which is headed by the Nazi German Pope. All are working to enslave the World under a New World Order, aka Fourth Reich, aka Fourth unHoly Roman Empire.
Read the entire article HERE.
by Bernie Sanders
U.S. Senator of Vermont
October 19, 2011
WASHINGTON, Oct. 19 – A new audit of the Federal Reserve released today detailed widespread conflicts of interest involving directors of its regional banks.
“The most powerful entity in the United States is riddled with conflicts of interest,” Sen. Bernie Sanders (I-Vt.) said after reviewing the Government Accountability Office report. The study required by a Sanders Amendment to last year’s Wall Street reform law examined Fed practices never before subjected to such independent, expert scrutiny.
The GAO detailed instance after instance of top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms, and, in at least one instance, themselves. “Clearly it is unacceptable for so few people to wield so much unchecked power,” Sanders said. “Not only do they run the banks, they run the institutions that regulate the banks.”
Sanders said he will work with leading economists to develop legislation to restructure the Fed and bar the banking industry from picking Fed directors. ”This is exactly the kind of outrageous behavior by the big banks and Wall Street that is infuriating so many Americans,” Sanders said.
The corporate affiliations of Fed directors from such banking and industry giants as General Electric, JP Morgan Chase, and Lehman Brothers pose “reputational risks” to the Federal Reserve System, the report said. Giving the banking industry the power to both elect and serve as Fed directors creates “an appearance of a conflict of interest,” the report added.
The 108-page report found that at least 18 specific current and former Fed board members were affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis.
In the dry and understated language of auditors, the report noted that there are no restrictions in Fed rules on directors communicating concerns about their respective banks to the staff of the Federal Reserve. It also said many directors own stock or work directly for banks that are supervised and regulated by the Federal Reserve. The rules, which the Fed has kept secret, let directors tied to banks participate in decisions involving how much interest to charge financial institutions and how much credit to provide healthy banks and institutions in “hazardous” condition. Even when situations arise that run afoul of Fed’s conflict rules and waivers are granted, the GAO said the waivers are kept hidden from the public.
The report by the non-partisan research arm of Congress did not name but unambiguously described several individual cases involving Fed directors that created the appearance of a conflict of interest, including:
- Stephen Friedman In 2008, the New York Fed approved an application from Goldman Sachs to become a bank holding company giving it access to cheap Fed loans. During the same period, Friedman, chairman of the New York Fed, sat on the Goldman Sachs board of directors and owned Goldman stock, something the Fed’s rules prohibited. He received a waiver in late 2008 that was not made public. After Friedman received the waiver, he continued to purchase stock in Goldman from November 2008 through January of 2009 unbeknownst to the Fed, according to the GAO.
- Jeffrey Immelt The Federal Reserve Bank of New York consulted with General Electric on the creation of the Commercial Paper Funding Facility. The Fed later provided $16 billion in financing for GE under the emergency lending program while Immelt, GE’s CEO, served as a director on the board of the Federal Reserve Bank of New York.
- Jamie Dimon The CEO of JP Morgan Chase served on the board of the Federal Reserve Bank of New York at the same time that his bank received emergency loans from the Fed and was used by the Fed as a clearing bank for the Fed’s emergency lending programs. In 2008, the Fed provided JP Morgan Chase with $29 billion in financing to acquire Bear Stearns.At the time, Dimon persuaded the Fed to provide JP Morgan Chase with an 18-month exemption from risk-based leverage and capital requirements. He also convinced the Fed to take risky mortgage-related assets off of Bear Stearns balance sheet before JP Morgan Chase acquired this troubled investment bank.
To read a more detailed analysis of the GAO report prepared for Sen. Sanders, click here.
To read the full GAO report, click here.
Read the entire article HERE.
HOLY BAILOUT – Federal Reserve Now Backstopping $75 Trillion Of Bank Of America’s Derivatives Trades
OCTOBER 18, 2011
The Daily Bail
This story from Bloomberg just hit the wires this morning. Bank of America is shifting derivatives in its Merrill investment banking unit to its depository arm, which has access to the Fed discount window and is protected by the FDIC.
This means that the investment bank’s European derivatives exposure is now backstopped by U.S. taxpayers. Bank of America didn’t get regulatory approval to do this, they just did it at the request of frightened counterparties. Now the Fed and the FDIC are fighting as to whether this was sound. The Fed wants to “give relief” to the bank holding company, which is under heavy pressure.
This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input. You will also read below that JP Morgan is apparently doing the same thing with $79 trillion of notional derivatives guaranteed by the FDIC and Federal Reserve.
What this means for you is that when Europe finally implodes and banks fail, U.S. taxpayers will hold the bag for trillions in CDS insurance contracts sold by Bank of America and JP Morgan. Even worse, The Total Exposure Is Unknownbecause Wall Street successfully lobbied during Dodd-Frank passage so that no central exchange would exist keeping track of net derivative exposure.
This is a recipe for Armageddon. Bernanke is absolutely insane. No wonder Geithner has been hopping all over Europe begging and cajoling leaders to put together a massive bailout of troubled banks. His worst nightmare is Eurozone bank defaults leading to the collapse of the large U.S. banks who have been happily selling default insurance on European banks since the crisis began.
Original Article HERE.
*****Bloomberg By Bob Ivry, Hugh Son and Christine Harper – Oct 18, 2011*****
Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.
The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.
Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.
“The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.”
Jerry Dubrowski, a spokesman for Charlotte, North Carolina- based Bank of America, declined to comment on the transfers or the firm’s discussions with regulators. The company “continues to accommodate the needs of our clients through each of our multiple trading entities, including Bank of America NA,” he said in an e-mailed statement, referring to the company’s deposit-taking unit.
Barbara Hagenbaugh, a Fed spokeswoman, said she couldn’t discuss supervision of specific institutions. Greg Hernandez, an FDIC spokesman, declined to comment.
Bank of America posted a $6.2 billion third-quarter profit today, compared with a loss of $7.3 billion a year earlier, as credit quality improved and the firm booked one-time accounting gains. The lender rose 7.3 percent to $6.47 at 1:54 p.m. in New York trading, making it the day’s best performer in the Dow Jones Industrial Average. Credit-default swaps on Bank of America eased 10 basis points to a mid-price of 380 as of 11:49 a.m. in New York, according to broker Phoenix Partners Group.
Moody’s Investors Service downgraded Bank of America’s long-term credit ratings Sept. 21, cutting both the holding company and the retail bank two notches apiece. The holding company fell to Baa1, the third-lowest investment-grade rank, from A2, while the retail bank declined to A2 from Aa3.
The Moody’s downgrade spurred some of Merrill’s partners to ask that contracts be moved to the retail unit, which has a higher credit rating, according to people familiar with the transactions. Transferring derivatives also can help the parent company minimize the collateral it must post on contracts and the potential costs to terminate trades after Moody’s decision, said a person familiar with the matter.
Bank of America estimated in an August regulatory filing that a two-level downgrade by all ratings companies would have required that it post $3.3 billion in additional collateral and termination payments, based on over-the-counter derivatives and other trading agreements as of June 30. The figure doesn’t include possible collateral payments due to “variable interest entities,” which the firm is evaluating, it said in the filing.
Dubrowski declined to comment on collateral or termination payments after the downgrade.
Bank of America’s rating is now four grades below the one Moody’s assigned to JPMorgan Chase & Co. (JPM), the biggest U.S. bank by deposits at midyear, and a level below the rating given to Citigroup Inc. (C), the third-biggest. Bank of America is the only U.S. lender that lacks a rating of A3 or higher among the five firms listed by the Office of the Comptroller of the Currency as having the biggest derivatives books.
“We had worked very hard over the course of the last nine months to be prepared to the extent that we did receive a downgrade, and feel very good about the way that we’ve minimized the potential impact” Bank of America Chief Financial Officer Bruce Thompson said in a conference call today with analysts. “Since the downgrade, we have not seen any change in our global excess liquidity sources.”
Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates.
Keeping such deals separate from FDIC-insured savings has been a cornerstone of U.S. regulation for decades, including last year’s Dodd-Frank overhaul of Wall Street regulation.
The legislation gave the FDIC, which liquidates failing banks, expanded powers to dismantle large financial institutions in danger of failing. The agency can borrow from the Treasury Department to finance the biggest lenders’ operations to stem bank runs. It’s required to recoup taxpayer money used during the resolution process through fees on the largest firms.
Bank of America benefited from two injections of U.S. bailout funds during the financial crisis. The first, in 2008, included $15 billion for the bank and $10 billion for Merrill, which the bank had agreed to buy. The second round of $20 billion came in January 2009 after Merrill’s losses in its final quarter as an independent firm surpassed $15 billion, raising doubts about the bank’s stability if the takeover proceeded. The U.S. also offered to guarantee $118 billion of assets held by the combined company, mostly at Merrill. The company repaid federal bailout funds in 2009 with interest.
‘The Normal Course’
Bank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.
That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.
The moves by Bank of America are part of “the normal course of dealings that we’ve had with counterparties since Merrill Lynch and BofA came together,” Thompson said today.
‘Created a Firewall’
Moving derivatives contracts between units of a bank holding company is limited under Section 23A of the Federal Reserve Act, which is designed to prevent a lender’s affiliates from benefiting from its federal subsidy and to protect the bank from excessive risk originating at the non-bank affiliate, said Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.
“Congress doesn’t want a bank’s FDIC insurance and access to the Fed discount window to somehow benefit an affiliate, so they created a firewall,” Omarova said. The discount window has been open to banks as the lender of last resort since 1914.
As a general rule, as long as transactions involve high- quality assets and don’t exceed certain quantitative limitations, they should be allowed under the Federal Reserve Act, Omarova said.
In 2009, the Fed granted Section 23A exemptions to the banking arms of Ally Financial Inc., HSBC Holdings Plc, Fifth Third Bancorp, ING Groep NV, General Electric Co., Northern Trust Corp., CIT Group Inc., Morgan Stanley and Goldman Sachs Group Inc., among others, according to letters posted on the Fed’s website.
The central bank terminated exemptions last year for retail-banking units of JPMorgan, Citigroup, Barclays Plc, Royal Bank of Scotland Plc and Deutsche Bank AG. The Fed also ended an exemption for Bank of America in March 2010 and in September of that year approved a new one.
Section 23A “is among the most important tools that U.S. bank regulators have to protect the safety and soundness of U.S. banks,” Scott Alvarez, the Fed’s general counsel, told Congress in March 2008.
Read the entire article HERE.
BY KEITH FITZ-GERALD
Chief Investment Strategist
October 12, 2011
Do you want to know the real reason banks aren’t lending and the PIIGS have control of the barnyard in Europe?
It’s because risk in the $600 trillion derivatives market isn’t evening out. To the contrary, it’s growing increasingly concentrated among a select few banks, especially here in the United States.
In 2009, five banks held 80% of derivatives in America. Now, just four banks hold a staggering 95.9% of U.S. derivatives, according to a recent report from the Office of the Currency Comptroller.
The four banks in question: JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC) and Goldman Sachs Group Inc. (NYSE: GS).
Derivatives played a crucial role in bringing down the global economy, so you would think that the world’s top policymakers would have reined these things in by now – but they haven’t.
Instead of attacking the problem, regulators have let it spiral out of control, and the result is a $600 trillion time bomb called the derivatives market.
Think I’m exaggerating?
The notional value of the world’s derivatives actually is estimated at more than $600 trillion. Notional value, of course, is the total value of a leveraged position’s assets. This distinction is necessary because when you’re talking about leveraged assets like options and derivatives, a little bit of money can control a disproportionately large position that may be as much as 5, 10, 30, or, in extreme cases, 100 times greater than investments that could be funded only in cash instruments.
The world’s gross domestic product (GDP) is only about $65 trillion, or roughly 10.83% of the worldwide value of the global derivatives market, according to The Economist. So there is literally not enough money on the planet to backstop the banks trading these things if they run into trouble.
Compounding the problem is the fact that nobody even knows if the $600 trillion figure is accurate, because specialized derivatives vehicles like the credit default swaps that are now roiling Europe remain largely unregulated and unaccounted for.
To be fair, the Bank for International Settlements (BIS) estimated the net notional value of uncollateralized derivatives risks is between $2 trillion and $8 trillion, which is still a staggering amount of money and well beyond the billions being talked about in Europe.
Imagine the fallout from a $600 trillion explosion if several banks went down at once. It would eclipse the collapse of Lehman Brothers in no uncertain terms.
A governmental default would panic already anxious investors, causing a run on several major European banks in an effort to recover their deposits. That would, in turn, cause several banks to literally run out of money and declare bankruptcy.
Short-term borrowing costs would skyrocket and liquidity would evaporate. That would cause a ricochet across the Atlantic as the institutions themselves then panic and try to recover their own capital by withdrawing liquidity by any means possible.
And that’s why banks are hoarding cash instead of lending it.
The major banks know there is no way they can collateralize the potential daisy chain failure that Greece represents. So they’re doing everything they can to stockpile cash and keep their trading under wraps and away from public scrutiny.
What really scares me, though, is that the banks
think this is an acceptable risk because the odds of a default are allegedly smaller than one in 10,000.
But haven’t we heard that before?
Although American banks have limited their exposure to Greece, they have loaned hundreds of billions of dollars to European banks and European governments that may not be capable of paying them back.
According to the Bank of International Settlements, U.S. banks have loaned only $60.5 billion to banks in Greece, Ireland, Portugal, Spain and Italy – the countries most at risk of default. But they’ve lent $275.8 billion to French and German banks.
And undoubtedly bet trillions on the same debt.
There are three key takeaways here:
There is not enough capital on hand to cover the possible losses associated with the default of a single counterparty – JPMorgan Chase & Co. (NYSE: JPM), BNP Paribas SA (PINK: BNPQY) or the National Bank of Greece (NYSE ADR: NBG) for example – let alone multiple failures.
That means banks with large derivatives exposure have to risk even more money to generate the incremental returns needed to cover the bets they’ve already made.
And the fact that Wall Street believes it has the risks under control practically guarantees that it doesn’t.
Seems to me that the world’s central bankers and politicians should be less concerned about stimulating “demand” and more concerned about fixing derivatives before this $600 trillion time bomb goes off.
Read the entire article HERE.
BY KATHRYN A DERBES CFA
Stay the Course: Lots of Physical Buying while Paper Sells Off:
We are witnessing significant financial crises unfold around the globe as the culmination of decades of financial mismanagement, miss-allocation of capital, over-indebtedness and the ultimate demise of fiat currencies begins their final reckoning. As events rapidly transpire, markets suffer huge volatility caused by confusion and questions about what is now happening and what is likely to happen in the near future.
While the road forward can take many turns, it should be clear that this final episode could spell the end of fiat currencies after a massive purging of global debt. Here we will try to distill a complex system of cause and effect and outline some potential paths. Ultimately, our quest is to understand the forces affecting both gold and silver, which we believe to be the ultimate currencies. To do that we need to look at what is happening with paper currencies around the world. This is our simplistic view, for what it’s worth. More importantly, we believe it is critical to watch fervently as events shake out in the coming days, weeks and months to gain clues as to where we are actually headed.
Short-Term Liquidity vs. Balance Sheet Problems:
The short-term liquidity issues that caused problems with large U.S. financial institutions in 2008 are now plaguing banks and insurance companies across the Euro Zone. The U.S. Federal Reserve’s response, as you may well know, was massive liquidity injections into the economy in the form of TARP, TALF, QE1, QE2, cash for clunkers, etc. and now “Operation Twist.” Because we have a printing press the Fed was able to “accomplish” their mission of recapitalizing the banks in the U.S, although these banks still have to deal with their own balance sheet issues which include declining real estate values. The individual European countries gave up their respective own printing presses when they joined the Euro, so now, faced with the same short-term liquidity problems, they must turn to the EU to bail them out.
The EU did just that last week in a massive coordinated effort with our Federal Reserve, the Swiss National Bank, the Bank of England and the Bank of Japan. All pledged to supply unlimited U.S. dollars to European banks in need of short-term funding through the end of this year (see our piece on the details here). That effort helped calm short-term fears of bank illiquidity, but it did not solve the real problem of insolvency. Insolvency is a balance sheet issue brought about by owning too much questionable sovereign debt (Greece, Portugal, Ireland, Italy) that cannot currently be repaid at anywhere near face value. Clearly, while there is a short-term liquidity issue (losing deposits through slow motion bank runs) in European banks, their balance sheet issues must also be addressed to restore health to the financial sector. Because valuable time was frittered away without a credible, cohesive “solution,” the issue now is whether the markets will give the central banks and finance ministers enough time to recapitalize their banking systems and address their debt issues before equity markets revolt in a global meltdown.
One thing we want to be clear about it is that the solution to excessive debt is not more debt. It may provide time to work toward a solution, but in and of itself money printing is not a solution. A reckoning of the debt will happen. Eventually, a sound money system must be implemented. A healthy economy depends on a credible currency to grow and prosper. Ultimately the same holds true for the equity markets.
Effect on Gold & Silver:
This brings us to gold and silver. The run up in both metals, starting with silver in the spring and gold in the summer, hinted that fiat currencies were at risk and confidence in central bankers was declining rapidly (and with good reason). Silver’s short-term overbought condition (late spring) and fear of a waning industrial demand due to slowing economic growth (recently) caused it to decline rapidly. Gold’s descent this past week (and silver’s too) was triggered by a fear of a less accommodative Fed and a potential meltdown in which everything is sold to raise cash. Both base commodities and equities have erased their gains for the calendar year to date, and anyone invested in them (individuals, pension funds, hedge funds etc.) is now experiencing losses. As deleveraging occurred in equities and commodities this past week, the need to raise cash to cover margin calls began. Gold, which is still positive for the year, became a source of funds while still booking a net gain for the calendar year.
While deleveraging in equity and commodity markets can continue and thus put more pressure on precious metals in the coming weeks and even months, the fundamental reason for owning them has actually become stronger, more pronounced and more critical. We believe a lot of the downside has already been experienced even though gold and silver could go lower in the wake of a worldwide equity meltdown (we are not predicting this, just pointing out the possibility).
What we want to be clear about is this: while the paper selling in gold and silver has been intense, so too has the physical buying. Lisa Sprott of Sprott Money announced Friday: “We have completely run out of physical silver, so we are temporarily out of stock.” At KDPM, all of our premiums on silver coins were raised Friday because the market is so tight (in short supply). We have access to silver, but demand is once again overwhelming supply in the short-term. We expect premiums to go up again on silver and gold due to intense buying and lower supplies.
Where Do We Go From Here?
The most important thing we can do is stay alert to what is actually happening, that way we can revise our short term thinking to match reality. Our long-term belief, as we tried to portray above, has not changed and has even grown stronger: we are eventually headed to a gold and/or silver standard, and if not, these metals will be the best means of preserving one’s wealth during chaotic times.
At this point here is what things looks like: the short-term deleveraging could continue, possibly precipitated by the recognition that Greece and possibly Portugal or Ireland have essentially defaulted. Or perhaps European banks lose deposits faster than they can effectively be re-liquified, causing a failure of one or more banks in Italy, France or elsewhere in Europe. That could cause gold to test its 200-day moving average (roughly $1525). Silver has already broken down below its 200 day moving average and could see one final swoon. At this point, it looks like this sharp decline in both metals could be short-lived due to the anticipated policy makers response of more money printing. Again, we are not predicting this to be the sequence of events, just trying to sort out some possibilities.
If the equity markets meltdown and thereby force their hand, the central bankers’ response to this crisis will be as it was before – to print more and more paper currencies. We have no reason to believe they will alter that path now, when faced with what is arguably the largest financial crisis in our history. Talk is cheap but behavior never lies. What central bankers have failed to realize is that they are the problem. Their interference in the free markets has caused unsustainable imbalances which must eventually be righted.
If a global central bank coordinated re-liquifying (money printing) effort materializes, the metals should eventually stabilize and continue their decade long bull run. While this decline may test your stomach, try not to let the volatility test your resolve. It is the health of the financial sector, not the stability of gold and silver, that is in question.
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