Due to the complexity of the banking crisis, I have decided to review to you a little more detail into the banking crisis. I hope that this will enlighten you as you take precautions in everything you do.
In July 07, Bear Stearns announced that two of its hedge funds were in trouble with subprime mortgages and in the next few weeks, both failed. I alerted you that the subprime mortgage mess will travel into two arenas such as prime mortgages and other exotic mortgages.
It was not long after that we heard of many companies in trouble and that the mortgage crisis spread to other countries. We have seen failures in Black Rock Financial in England and this entity was nationalized by the Bank of England. We have had major problems with the French banking giant, Societe de Generale , as well as Swiss giant UBS. The crisis spans the globe.
Many are confused as they do not know who to believe. Do we listen to CNBC who proclaim that the crisis is contained or do we read Willie who proclaims that the entire banking sector is toast?
I will try and give you my two cents worth and I hope that this will explain what will happen in the next few months.
First of all, the banks which originally held all of these subprime and other exotic mortgages on the balance sheet have basically done a swap deal with the Fed. The Fed has swapped good treasuries for toxic junk held by the banks. Many comment that this is temporary. Believe me on this on: they will roll these things over until eternity.
Many have asked me if the Fed has a balance sheet of 800 billion of treasuries, if this the maximum that they can loan out!. The answer is no, they will just continue to swap as the Fed continues to get bigger in worthless paper.
The Fed announced on Friday , another 100 billion dollars of infusion of capital. To date, 490 billion dollars have been he lent into the system in the usa. If you include Europe, England and Canada, the total injection greatly exceeds 1 trillion dollars. Believe it or not, the banks need more. Why? Because their reserves have been depleted to below zero. In other words, all depositors have lost their money.
If you are an American do not worry..the Fed Insurance Agency guarantees the first 100,000$. However you can now understand the mess that they are in.
Everybody’s cash balance must be paid in the same fashion as the Bank of England guaranteed everyone at Black Rock. This will be in the trillions of dollars.
On top of that, the mess will get bigger this summer. This is when prime mortgages with all their ARM’s resets come into play. At that point, the banks will be more negative on their balance sheets with the Fed. When Bernanke announces a rate cut, it has no effect on the banks. Why? Their reserves are negative. A rate cut solves nothing. When they auction money from the Fed all the banks hoard the dollars because their reserves are negative.
As house prices decline, their collateral also declines and further margin calls are issued. The Fed will have to continue issuing federal notes to the banking system, causing massive hyperinflation. This is the only way out for the banks. THEY MUST REMOVE THESE SUBPRIME MORTGAGES FROM THEIR BALANCE SHEET (OR THE feds BALANCE SHEET) IF THE CRISIS IS TO END. AS LONG AS THESE TOXIC INSTRUMENTS REMAINS, THE RISK OF DEFLATION IS UPON US AND THIS IS THE SCARIEST ASPECT THAT THE FED IS WORRIED ABOUT.
So please avoid the noise. Gold will trade inversely to the usa dollar. And there is no way that the usa dollar will rise. They are printing trillions of dollars in order to bail out the banks.
You all saw how they rescued Bear Stearns. This will be a template for all banking entities. JPMOrgan will be the bank purchasing the junk with the Fed providing the cover.
In the next few weeks or days, you will see Lehman Brothers tank as they have the same toxic mess as Bear Stearns. They too will be bailed out the JPMorgan.
Then the next bank to go will probably we Citibank and then we will see Morgan Stanley.
Goldman Sachs on Friday stated that they went to the Fed window to “test” the functionality of getting funds from the Fed. This is a bunch of crock. Goldman Sachs went to the Fed because of margin calls on its derivatives. As a matter of fact, all banks and near banks received massive margin calls and this will explain the huge 88 billion of bids by the banks for only 50 million of dollars auctioned by the Fed on Thursday.
When you see Gold hammered by the cartel, remember it is very easy to sell if profit is not a motive.
I hope this gives you a better idea of what is going on.
I will speak to you tomorrow night.