Good evening Ladies and Gentlemen:
On Thursday night , news came out on the settlement with respect to Citibank and the Attorney Generals of various states regarding the civil fraud case on auction rate securities.
We also heard that fighting erupted in Georgia who is in dispute with
One would expect gold to be up in Toyko and instead it was down a few dollars. Lenny and I knew that a huge raid was on and that 850 gold was the target. I wrote to you saying that Friday was going to be rough and rough it was. Gold closed down 17.00 to 855.00 and silver fell 90 cents to 15.32.
James Turk noticed that on the Fed webpage that foreign deposits rose by a huge 38% on an annual basis from July 16.08 to Aug 8, a gain of 51 billion dollars. This intervention along with black box models propelled the
The open interest on gold comex fell by a whopping 26000 to 376000 on Thursday. Our bet is that another 10,000 or so left on Friday. The COT report also indicated that the commercials covered a huge numbers of their gold shorts. We saw capitulation on Friday although it was on the criminal side with respect to actions by cartel members and collusion with central banks globally.
The key price that had to be defended was 850.00 It would be a blow to gold bugs if the price pierced this level. The price of 850 is the previous high of gold set in 1980 and it took 28 years to get to that level again. The fact that it took 28 years means a formidable resistance of 850 on the downside was created. The cartel threw 160,000 gold comex contracts and drove the price right to 850 but it held and the price im
The silver OI for some strange reason rose on Thursday by 1000 to 135000 on a falling silver price. The only explanation is that the specs were supplying the paper. The commercials were buying silver back but not in the same quantity as in the gold comex pits.
As for the economic news of the day, I will spend time on banks and on the consumer.
During the day, we learned that the consumer which represents 70% of the GDP saw credit card balances for the month of July jump from 7 billion to over 14 billion dollars a record high. This is a huge 100% gain month over month.
The consumer obviously is strapped and is relying on the credit card for food purchases. WalMart reported its sales for the quarter have slowed and remarked that sales at the end of the month are brisk but in the middle of the month, volume is low. The consumer is strapped.
This is putting a lot of pressure on the state and Fed finances. The state is not getting his sales taxes and the Fed’s income from taxes are falling.
We are seeing commercial mortgages failing for the first time. Bankers sliced and diced many commercial property mortgages to investors and now these are starting to fail. We are seeing many chain failures such as Linen and Things and closures of stores in malls, like Disney and Lord and Taylor. Many workers are being laid off.
On the banking front you will witness bigger bank losses from this point onward.
I Initially told you back in 2007 that the subprime mortgage sector of the economy is around 750 billion and that probably 400-500 billion will fail. So far about 450 billion of loans have been written off so far.
The rescue of Fannie and Freddie Mae by Paulsen was needed as they knew they were in trouble. Fannie reported on Friday morning with a loss of 2.52 per share or 2 and ½ billion dollars worth of losses.’They cut their dividend to 5 cents from 25 cents. ( They are receiving funds from the fed and still paying a dividend. It makes no sense at all.)
This was an unaudited statement so in truth the real loss is a number far greater than that.
On Wednesday, Freddie`s President Mr Syron announced that he was still well capitilized and everything would be OK and that they would not have to raise funds. Just look what they announced on Friday morning:
The scheduled offerings include $2 billion of three-month bills due Nov. 10, 2008, and $1 billion of six-month bills due Feb. 9, 2009.
Settlement is Aug. 12.
The bills will be sold over the Internet in a Dutch auction. In such uniform price auctions, successful bidders pay only the price of the lowest accepted bid rather than the actual price as in a conventional multiple-price auction.
Bids will be accepted from authorized dealers from 8:00 a.m. (1200 GMT) until 9:45 a.m. (1345 GMT)
Late Thursday and early Friday we heard about a settlement with respect to Citibank and their civil fraud case with Attorney Generals in NY (Cuomo) and
The settlement: Citibank agreed to pay back 7.5 billion of individuals by Oct 31.08 and agreed to buy back institutions to the tune of 12.00 billion dollars from Jan 09 until the end of the 09 year.
Soon after this announcement came word that Merrill Lynch has offered voluntarily to pay back 10 billion of worthless notes commencing in January.
Friday morning, saw Union Bank of
Bank of America announced that it would study the announced settlement and would respond in kind.
Then came the haughty response of Credit Suisse:
Credit Suisse auction-rate debt suit may start frenzy
Fri Aug 8, 2008 8:34am EDT
By Duncan Martell
STMicro claimed in its lawsuit that "at least a dozen other multinational corporations are victims of the same scheme carried out by the same group of brokers and directors at Credit Suisse Securities and furthered by Credit Suisse."
STMicro said it believed more than $2 billion of these clients' money ended up invested in auction-rate securities.
"The banks are playing chicken here, thinking that companies like STMicro aren't going to take the steps they did," said Steve Williams, a plaintiffs attorney at law firm Cotchett, Pitre & McCarthy in Burlingame, California. "Banks are going to be very mistaken in that judgment, and I think a lot of big entities are going to start filing these to get their cash out."
When the dust settles expect 400- 500 billion dollars that will be paid by these fraudsters to their victims. The amounts include interest, penalties and fines.
Expect many collateral damage suits. ( E.g. the investor lost on a deal that he could not close etc….)
Expect all moneys to come from the Fed begging bowl. I doubt if anyone stupid enough would invest in these guys any more.
Merrill Lynch early in the week sold all of its CDO`s at a haircut price of 22 cents on the dollar and they funded the purchase with their own money.
They paid 1 billion to their sovereign wealth provider for losses already occurred on their investment. It looks like they are going to be needing a lot more money. Please note that no other bank has lowered its CDO level to 22 cents matching Merrill;s.
We are now entering the next phase of the mortgage fiasco. The ALT A`s have just started and already the delinquencies are running 50%. This market is 1.2 trillion dollars, so this is going to be devastating to our bankers. These loans are also known as Liar Loans or loans given without any documentation. However the recepients are a better class of people than subprime. They are walking away just the same as the subprimers.
However the biggest defaults are going to occur in the ARMs resets or as they are termed ; Option Adjustable Rate Mortgages. Together with Prime Mortgages these total 1.5 trillion dollars. The bankers are freaking out because the home owners are already walking or refusing to pay and the adjustments have just started. Price resets involve monthly costs rising 50% per month. In cases were triggers are hit for negative amortized loan balances having grown by 10 to 15% above the original loan balance, past interest and penalties are added atop new principal payments. Often one can then expect their monthly bill to triple due to these onerous conditions. Defaults will occur on most of these and this is why most will abandon their home or stop paying.
Very few analysts have factored in these ARMS resets. They have not factored into their analysis on banks, any of the commercial mortgages which are also faltering. The market for the ARMs is estimated to be 5 x the subprime mortgages, so you can visualize the damage that will be created.
All of the
1. The Price over Earnings Ratio
2. Price over book ratio.
The banks have no earnings so no 1 and no 2 are void. All fail because they have no profits.
Banks are not lending any money as we see commercial paper decline by 60%. Libor rates remain high globally which is a signal that banks do not trust one another. A bank does not lend money when it is broke. Instead it fakes its solvency and fights to con investors into investing into this entity without any controls.
The bank seeks funds from the Fed and they exchange toxic notes for fresh cash. Cash is needed to prevent a run on the bank as depositors look for their cash The non borrowerings from the Fed remain at 120 billion dollars as of last week.( In other words all depositors money is toast.) The banks borrow from the Fed and trade against ordinary investors in a fight for survival. They collude in order to save themselves.
Expect, the entire nationalization of all the banks.
After the ARM`s resets expect home loan defaults to rise . To Canadians these are like 2nd mortgages which stand behind the primary mortgage.
Expect 100% of losses to occur here. These will commence once the primary resets start in earnest. As an example, Wells Fargo has 84 billion of home loans on its balance sheet. It is listed as a prime asset. Good luck to them. They will get zero cents on the dollar for these.
Fannie and Freddie will cost the Fed 1.5 trillion dollars as they must guarantee all of these mortgages. This is the reason for the raising of the Federal Debt to 10.6 trillion dollars.
The investment community in concert refuse to comment on this fiasco despite alarm bells sounding from these individuals:
1,Nouriel Roubini..noted economist with
2. Larry Lindsay has been sounding the bell on Fannie and Freddie.
3. Meredith Whitney, chief analyst with Oppenheimer has been reporting on the affairs of Citibank and Lehman and she was originally scoffed at.
4. Alan Greenspan re the insolvency of Fannie and Freddie…
With respect to the civil fraud case, the Fed will no doubt have to fork over400-500 billion dollars of fresh money for trash. The problem here is the money goes out for settlement and cannot be used by the companies.
As of Friday morning, the entire financial world blew up. Smoke is all around Wall Street.
Have a great weekend