Saturday, June 21, 2008

Commentary June 21.08

www.lemetropolecafe.com

 

 

gold closed down by 40 cents to 901.70.  Silver fell by one cent to 17.33.

The open interest on both silver and gold rose in significant fashion on Thursday  (data released 24 hours later at 12:00 noon Friday).  The gold open interest rose by 12000 contracts to 409000 and silver rose by 3500 contracts to 135000.

 

It is clear that interest is flowing back into these metals  as speculators have re-entered this arena.  The cartel members still do their thing by supplying the paper.

 

Speculators have entered the precious metals market  as they see the hopelessness of the Fed raising rates when the Open Market Committee meet next week.   The market now gives the chance of raising rates at 12%.  I give it a fat zero chance.

 

Friday, we saw the Dow tank by 220 points and the Nasdaq fell by 55 points.  The big news of the day was Moody’s removing the triple A rating of Ambac and MBIA.  This will cause the liquidation of many hedge fund portfolios containing municipal bonds.  It will also cause a downgrade in major banks portfolios. 

When these line insurers finally go bust, then major writeoffs by the banks will occur.  This process will begin in earnest this fall, when the ARMS resets bloom.  The Alt A’s mortgages  resets also begin around this time so we should start to see more banking losses.

 

In headlines yesterday, we saw that UBS, Citibank and  Merrrill Lynch are greatly exposed to the downgrading of the monolines by Moody’s.  These stocks were hit pretty hard as we saw the SKF (a banking hedge) rise by 5 points signalling trouble in the banking sector.

 

S and P came out early in the session to warn that Ford and General Motors  may be downgraded as they need 1 billion and 1.5 billion dollars  respectively to combat worsening credit conditions in the usa.

GM stock is now trading below 15.00 per share, a price not seen for decades.

 

The other big news of the day was the report that Israel is carrying out  air exercises over Greece.  There is no doubt that they will try and knock out Iran’s nuclear facilities.

 

The lowering of the ratings of Ambac and MBIA and the Israeli news, took the wind out of the sales of the cartel who had planned to knock gold down on Friday.  However not to be undone, the cartel capped gold at 907.00 and then slowly knocked its price down  to contain gold and silver’s excitement.

Late in the day, we got this:

Property in US cities to fall $1.46 trln in '08

MIAMI, June 20 (Reuters) - Property values in U.S. cities are expected to tumble by $1.46 trillion in 2008 due to the housing downturn and subprime mortgage crisis that has pushed the U.S. economy to the brink of recession, American mayors were told on Friday.

Just eight months ago, researchers predicted property values would shrink by $1.2 trillion this year, according to the study by Global Insight for the U.S. Conference of Mayors meeting in Miami.

"Metro areas are expected to suffer a $1.46-trillion decline in property values in 2008," the study by the economic and market research firm said. "The increased loss is a result of even greater deterioration in home markets and prices than anticipated."

Ninety-three percent of metropolitan areas -- which collectively are home to about 85 percent of the U.S. population -- are expected to see declines in property values, the study said.

Los Angeles will suffer the biggest drop -- $203 billion -- followed by Washington, San Francisco and Riverside in California.

Only 24 of 360 cities will see property values increase, including Charlotte and Raleigh, in North Carolina, it said.

Foreclosure activity is expected to rise to 2.2 million homes, representing a property value of $488.4 billion, the study added.

"Unless institutional arrangements are made to bring mortgage holders together with buyers, 2008 will continue to see foreclosure activity accelerate," it said.

Please note that property values are set to fall by almost 1 and ½ trillion dollars.  These are the properties that banks use as collateral.  This collateral is shrinking exponentially and will cause further havoc to our banks.  We are witnessing huge credit contraction in the property areas and inflation on the commodity front.  This spells disaster to our bankers as their hands are tied.

 

The big fear of banks is the secondary effects of rising food and energy and that is labour costs.  This will send the usa into an inflationary spiral as unions seek higher wage rates to compensate for higher energy and food costs.

 

Also remember that energy is really a major component of the cost side of the equation.  It adds to the costs of things because oil is important in transporation and also a component of most of the things we make.  Prices of goods may be driven to levels which will ultimately cause the economy to freeze as nobody will be able to afford things.  This starts the deflationary cycle, a deadly “economic phenomenon”

that bankers despise.  They have no control over a deflation, only inflation.  To combat the deadly deflation, they will print paper dollar bills  like mad and thus try  to inflate their way out of this mess.

It is like trying to pick your poison.  The economy will spiral to death in short order.

 

We have witnessed major problems in South Africa, a major  producer of precious metals.  They have seen their production fall big time as they are rationing their electrical supplies. They also this week have decided to raise electricity rates something which annoyed the miners.  Also inflation has ravaged this nation badly as its inflation rate is over 13%.  The prime minister thought it was best to announce a 2% rate hike in its interest rate.   Riots occurred and that put an end to that reasoning!!

 

There is no doubt that the big announcement this week, by the Royal Bank of Scotland of a market crash certainly caused a stir on CNBC.  Goldman Sachs people thought it was irresponsible of RBS to give such a report.

 

As I commented to you during the week that  you must pay attention to these people as the  Royal bank of Scotland is a world class bank  I would also like to tell you that they themselves are caught up in the mess and yet they report that the financial world is in jeopardy. They are desperately seeking 7 to 10 billion dollars to shore up its balance sheet.

 

Throughout the week, we have seen all the usa banks attend to the wishing well at the Fed through the repo pool and the TAF auctions.  The Fed was only allowed to feed 75 billion dollars  to our needy banks when 89 billlion dollars was needed.

 

In a surprise announcement, the Swiss National Bank has ordered its two favourite sons, the Union bank of Switzerland and Credit Suisse to shore up their reserves quickly.  They ordered them to increase reserves greater than their Anglo friends, England and the USA.  I have highlighted to you their statement:

 

 

 

SWISS CENTRAL BANK ASKS TROUBLED UBS, CREDIT SUISSE TO BEEF UP CAPITAL Switzerland's central bank is demanding UBS and Credit Suisse build a bigger financial cushion to save a repeat of the subprime mortgage disaster that spoilt the country's reputation as an unshakeable powerhouse. If the influential central bank gets its way, UBS and Credit Suisse will have to hoard more capital than their anglo-saxon rivals and that would be a millstone around the necks of their investment banks.

The Swiss National Bank laid down its blueprint for a stronger banking system in its Financial Stability Report 2008 on Thursday. It highlighted the need for a "higher capital buffer at big banks" given their dominance in Switzerland. "Their size and importance for the Swiss economy justifies especially prudent decision making when determining the level of their capital base," the report said. The Alpine state is still reeling from the shock of seeing UBS write $37 billion off dud investments -twice that of Royal Bank of Scotland. Switzerland's Federal Banking Commission, which is ultimately in charge of banking regulation, has also suggested raising capital requirements for the investment banks. ALARM BELLS RINGING UBS, once a rock of Swiss financial prowess, is now Europe's biggest casualty of the global crisis triggered by risky U.S. home loans. Worse still, there are signs that UBS's prized wealthy clientele are growing nervous. Money flows into the bank's wealth management business slowed to a trickle in the first three months of the year. This has sent alarm bells ringing in Switzerland, whose economy is highly dependent on banking with the world's rich. Millionnaires from countries such as Germany and Russia take refuge under Switzerland's cloak of banking secrecy. But that is not the only reason UBS and Credit Suisse are important for Switzerland. Their retail branches dominate the country.

end

Late in the day, we got this news of brokers being threatened by losses in the “shadow bank system:”  I highlighted the passage for you:

okers threatened by run on shadow bank system

Regulators eye $10 trillion market that boomed outside traditional banking

By Alistair Barr, MarketWatch

Last update: 2:37 p.m. EDT June 20, 2008

Comments: 242

SAN FRANCISCO (MarketWatch) -- A network of lenders, brokers and opaque financing vehicles outside traditional banking that ballooned during the bull market now is under siege as regulators threaten a crackdown on the so-called shadow banking system.

Big brokerage firms like Goldman Sachs (GS:

Goldman Sachs Group, In
4:01pm 06/20/2008
Delayed quote data



Sponsored by:

MER 35.90, -1.79, -4.7%) , which some say are the biggest players in this non-bank financial network, may have the most to lose from stricter regulation.

The shadow banking system grew rapidly during the past decade, accumulating more than $10 trillion in assets by early 2007. That made it roughly the same size as the traditional banking system, according to the Federal Reserve.

While this system became a huge and vital source of money to fuel the U.S. economy, the subprime mortgage crisis and ensuing credit crunch exposed a major flaw. Unlike regulated banks, which can borrow directly from the government and have federally insured customer deposits, the shadow system didn't have reliable access to short-term borrowing during times of stress.

Unless radical changes are made to bring this shadow network under an updated regulatory umbrella, the current crisis may be just a gust compared to the storm that would follow a collapse of the global financial system, experts warn.

Such vulnerability helped transform what may have been an uncomfortable correction in credit markets into the worst global credit crunch in more than a decade as monetary policymakers and regulators struggled to contain the damage.

Unless radical changes are made to bring this shadow network under an updated regulatory umbrella, the current crisis may be just a gust compared to the storm that would follow a collapse of the global financial system, experts warn.

"The shadow banking system model as practiced in recent years has been discredited," Ramin Toloui, executive vice president at bond investment giant Pimco, said.

Toloui expects greater regulation of big brokerage firms which may face stricter capital requirements and requirements to hold more liquid, or easily sellable, assets.

'Clarion call'

"The bright new financial system -- for all its talented participants, for all its rich rewards -- has failed the test of the market place," Paul Volcker, former chairman of the Federal Reserve, said during a speech in April. "It all adds up to a clarion call for an effective response."

Two months later, Timothy Geithner, president of the Federal Reserve Bank of New York, and others have begun to answer that call.

"The structure of the financial system changed fundamentally during the boom, with dramatic growth in the share of assets outside the traditional banking system," he warned in a speech last week. That "made the crisis more difficult to manage."

On Thursday, Treasury Secretary and former Goldman Chief Executive Henry Paulson said the Fed should be given the authority to collect information from large complex financial institutions and intervene if necessary to stabilize future crises. Regulators should also have a clear way of taking over and closing a failed brokerage firm, he added. See full story.

Banking bedrock

The bedrock of traditional banking is borrowing money over the short term from customers who deposit savings in accounts and then lending it back out as mortgages and other higher-yielding loans over longer periods.

The owners of banks are required by regulators to invest some of their own money and reinvest some of the profit to keep an extra level of money in reserve in case the business suffers losses on some of its loans. That ensures that there's still enough money to repay all depositors after such losses.

In recent decades, lots of new businesses and investment vehicles have evolved that do the same thing, but outside the purview of traditional banking regulation.

Instead of getting money from depositors, these financial intermediaries often borrow by selling commercial paper, which is a type of short-term loan that has to be re-financed over and over again. And rather than offering home loans, these entities buy mortgage-backed securities and other more complex securities.

A $10 trillion shadow

By early 2007, conduits, structured investment vehicles and similar entities that borrowed in the commercial paper market and bought longer-term asset-backed securities, held roughly $2.2 trillion in assets, according to the Fed's Geithner.

Another $2.5 trillion in assets were financed overnight in the so-called repo market, Geithner said.

Geithner also highlighted big brokerage firms, saying that their combined balance sheets held $4 trillion in assets in early 2007.

Hedge funds held another $1.8 trillion, bringing the total value of asset in the "non-bank" financial system to $10.5 trillion, he added.

That dwarfed the total assets of the five largest banks in the U.S., which held just over $6 trillion at the time, Geithner noted. The traditional banking system as a whole held about $10 trillion, he said.

"These things act like banks, but they're not."

— James Hamilton,Economics professor

While acting like banks, these shadow banking entities weren't subject to the same supervision, so they didn't hold as much capital to cushion against potential losses. When subprime mortgage losses started last year, their sources of short-term financing dried up.

"These things act like banks, but they're not," James Hamilton, professor of economics at the University of California, San Diego, said. "The fundamental inadequacy of their own capital caused these problems."

Big brokers targeted

Geithner said the most fundamental reform that's needed is to regulate big brokerage firms and global banks under a unified system with stronger supervision and "appropriate" requirements for capital and liquidity.

Financial institutions should be persuaded to keep strong capital cushions and more liquid assets during periods of calm in the market, he explained, noting that's the best way to limit the damage during a crisis.

At a minimum, major investment banks and brokerage firms should adhere to similar rules on capital, liquidity and risk management as commercial banks, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said on Wednesday.

"It makes sense to extend some form of greater prudential regulation to investment banks," she said.

Separation dwindled

After the stock market crash of 1929, the U.S. Congress passed laws that separated commercial banks from investment banks.

The Fed, the Office of the Comptroller of the Currency and state regulators oversaw commercial banks, which took in customer deposits and lent that money out. The Securities and Exchange Commission regulated brokerage firms, which underwrote offerings of stocks and corporate bonds.

This separation dwindled during the 1980s and 1990s as commercial banks tried to push into investment banking -- following their large corporate clients which were selling more bonds, rather than borrowing directly from banks.

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5:37 PM 6/13/08

 

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In M&A drama, Anheuser-Busch's menu of options is limited

Top stories

6:18 PM 6/20/08

 

 

4:45 PM 6/20/08

 

 

 

 

Bank stocks capitulating: Merrill; Ambac, MBIA downgraded

 

|end.

 

This “shadow banking” is another name for the nuclear bomb of derivatives. They are blowing up and will send this world into a terrible economic downward spiral.

 I am going away with my bride to Italy.  I am bringing my computer and I will try and give a few commentaries.  My son Lenny, will pitch in and give reports  if financial conditions rapidly deteriorate. 

Please keep up with your reading

Have a great weekend

Harvey.

 

 

 

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