Saturday, August 6, 2011

S and P downgrades USA debt/fair jobs report/gold withstands another raid

Good morning Ladies and Gentlemen:

Yesterday was an extremely volatile day with the Dow, the price of precious metals and just about all markets witnessing huge volatility to the extreme.  In mid session there were rumours of a USA downgrade and that occurred late Friday night which should cause real problems for the USA economy starting  Monday as many companies and individual states will also be downgraded.  The price of gold finished the comex session at $1659.90  up $11.10 for the day.  Silver with the huge shackles at its feet due to the onerous margin requirements did not participate with gold and finished unchanged at $38.21.  The bankers are manipulating silver with ease.

Let us head over to the comex and see how things fared yesterday. There are considerable alarming details that I must go over with you.

The total gold comex open interest fell by over 5500 contracts to 521,070 from Thursday's level of 526,679
The volatility is frightening some longs probably due to margin calls as losses on their equities are hurting some hedge funds. The front delivery month of August saw its OI fall from 5106 to 4185 for a drop of 921 contracts which is very big.  We had only 163 deliveries so we lost 756 contracts or 75,600 oz of gold standing.  Maybe some of these longs had to liquidate because of losses in other accounts or they settled with Blythe for fiat.  The Oct OI lowered to 24,381 contracts.
The big December contract OI lowered from 383,241 to 378,571 for a loss of just under 5000 contracts.
The estimated volume at the gold comex was a monstrous 244,890 with no switches. The confirmed volume on Thursday the day of the huge stock market fall saw the confirmed volume at 352,375 contracts.
This represents 35.23 million oz of gold.  The world produces 75 million oz so the Thursday volume represented 47% of annual gold production. And our regulators just stand there quite aloof to the situation of a massive supply of non backed gold paper by the bankers.

The total silver comex OI again sits in the 119,000 channel.  The OI Friday which is basis Thursday rests at 119,241 falling over 700 contracts from Thursday's OI of 119,981.  Some of the bankers are feeling the heat.
The front options exercised month of August mysteriously saw its OI rise from 40 to 54.  We had zero deliveries on Thursday so there was a big gain in silver oz standing and no cash settlements which is quite a contrast to gold.  (If I were to bet I believe the large gold drop in August was due to cash settlements and not
longs being frightened off).  The next big delivery month of September saw its OI fall from 59,490 to 58,069
as the bankers were a little timid in the silver arena and they decided to cover some of their shorts.  The estimated volume at the silver comex on Friday was an extremely good day at 89,980.  Take a look at the confirmed volume on Thursday:  a huge 128,215 contracts.  This represents 641 million oz or roughly 88% of annual production of silver.  Please remember that the comex is not the biggest bourse for silver and gold as that belongs to London.

Inventory Movements and Delivery Notices for Gold:  August 6.2011:



Gold
Ounces
Withdrawals from Dealers Inventory in oz
nil
Withdrawals fromCustomer Inventory in oz
nil
Deposits to the Dealer Inventory in oz
nil
Deposits to the Customer Inventory, in oz
129 oz (Brinks)
No of oz served (contracts)  today
1600 oz  (16)
No of oz to be served  (notices)
 416,900 (4169 )
Total monthly oz gold served (contracts) so far this month
 571,100 (5711)
Total accumulative withdrawal of gold from the Dealers inventory this month
nil
Total accumulative withdrawal of gold from the Customer inventory this month
132,759



The activity inside the gold comex complex was basically nil.
There was only a tiny 129 oz of gold withdrawn from Brinks.
There were two adjustments: where the Scotia vault removed 3 oz of gold from the customer.

There was another very unusual adjustment to report from the JPMorgue vault:

There was a very sizable 19,291 oz removed from JPMorgan dealer vault
Strangely 17,800 was added to the customer account and the remainder
flew from JPMorgan's nest out of all registered comex vaults. (1491 oz)

The comex folk notified us that only 16 notices were served upon our longs yesterday
and this remember is a big delivery month.  This represents 1600 oz of gold.
The total number of notices sent down so far this month total 5711 for 571,100 oz
To obtain what is left to be served, I take the OI standing (4185) and subtract out Friday's deliveries
(16) which leaves me with 4169 notices or 416900 oz left to be served upon.

Thus the total number of gold oz standing in this delivery month is as follows:

571,100 oz (served)  +  416,900 oz (to be served)  =   988,000 oz.
we lost a huge 75,600 oz of gold probably due to cash settlements. It would it unusual for these guys to have paid 100% of the money only to pitch without receiving a fiat bonus.

I am going to give you another alarming detail.  They posted already what will be delivered upon in gold on Monday.  Are you ready for this:  only 1 contract. Ladies and Gentlemen, it looks like the gold is being depleted at the gold comex.


And now for silver 

First the chart:


Silver
Ounces
Withdrawals from Dealers Inventory nil
Withdrawals fromCustomer Inventory nil
Deposits to theDealer Inventory nil
Deposits to the Customer Inventory nil
No of oz served (contracts) 155000  (31)
No of oz to be served  (notices) 115,000  (23)
Total monthly oz silver served (contracts) 1,660,000  (332)
Total accumulative withdrawal of silver from the Dealers inventory this month nil
Total accumulative withdrawal of silver from the Customer inventory this month 1,805,233
wow! when have you seen this:  zero activity in silver
no silver deposits, no silver withdrawals and no adjustments.

The comex folk notified us that a rather large 31 delivery notices were served upon our longs yesterday for a total of 155,000 oz.  The total number of notices served thus far this month total 332 or 1,660,000 oz.  To obtain what is left to be served upon this month, I take the OI standing for August (54) and subtract out Friday deliveries (31) which leaves us with 23 notices left to be served upon or
115,000 oz.

Thus the total number of silver oz standing in this non delivery month of August is as follows:

1,660,000 oz (served)  +  115,000 (to be served)  =  1,775,000oz
we gained a rather large 70,000 oz of silver standing.

I would also like to point out that only 4 notices will be served upon our longs on Monday.  Looks to me like the cupboard is bare in both gold and silver.

end



 Let us now proceed to our ETF's SLV and GLD and then our physical gold and silver funds:

Sprott and Central Fund of Canada.

 The two ETF's that I follow are the GLD and SLV. You must be very careful in trading these vehicles as these funds do not have any beneficial gold or silver behind them. They probably have only paper claims and when the dust settles, on a collapse, there will be countless class action lawsuits trying to recover your lost investment.
There is now evidence that the GLD and SLV are paper settling on the comex.
Thus a default at either of the LBMA, or Comex will trigger a catastrophic event.



First GLD inventory changes:  August 6.2011.

Total Gold in Trust

Tonnes: 1,286.30
Ounces:41,355,739.38
Value US$:
68,571,350,867.71





Total Gold in Trust: aug 4.2011

Tonnes: 1,286.30
Ounces:41,355,739.38
Value US$:
69,430,233,934.91

Total Gold in Trust: aug 3.2011:



Tonnes: 1,286.30
Ounces:41,355,739.38
Value US$:
69,007,098,493.89



we neither gained nor lost any gold into the GLD vaults.





Now let us see inventory movements in the SLV:  August 6:2011

Ounces of Silver in Trust321,843,340.800
Tonnes of Silver in Trust Tonnes of Silver in Trust10,010.45

august 4.2011:

Ounces of Silver in Trust321,843,340.800
Tonnes of Silver in Trust Tonnes of Silver in Trust10,010.45


 we neither gained nor lost any paper silver at the SLV.




1. Central Fund of Canada: it is trading at positive 3.1  percent to NAV in usa funds and positive 2.7% in NAV for Cdn funds.  ( aug 6.2011).  
2. Sprott silver fund  (PSLV):  Premium to NAV lowered  to a  positive 17.8% to  NAV August 6.2011
3. Sprott gold fund (PHYS): premium to NAV rose slightly to a  2.11% to NAV  August 6.2011).

Note:  the central fund in back into positive territory as investors seek out physical supplies.

Note:  Sprott silver still commands a huge premium in silver. The gold premium is starting to rise 

end

Friday night saw the release of the COT report which shows how traders fared with respect to positions held in silver and gold.


First the gold COT:

Gold COT Report - Futures
Large Speculators
Commercial
Total
Long
Short
Spreading
Long
Short
Long
Short
291,974
44,799
15,714
155,014
442,648
462,702
503,161
Change from Prior Reporting Period
13,501
1,943
-8,550
-3,246
1,415
1,705
-5,192
Traders
239
64
56
46
55
308
155


Small Speculators




Long
Short
Open Interest



66,701
26,242
529,403



-8,756
-1,859
-7,051



non reportable positions
Change from the previous reporting period

COT Gold Report - Positions as of
Tuesday, August 02, 2011


Here  those large speculators that have been long in gold saw the turmoil in the world and they decided to add a monstrous:  13,501 contracts to their long side.


Those large speculators that have been short in gold were brave and added another 1943 short positions to their shortfall and are sorry that they did.


And now for our commercials:


Those commercials that are long in gold and are close to the physical scene covered a rather large
3,246 contracts as they suspected a raid was forthcoming.


And now for our famous commercial short  JPMorgan and friends: they added only a tiny 1415 contracts to the shortfall.  However remember that for the past several weeks, these guys have been adding huge number of shorts while gold climbed past the 1600 dollar level.  


The big change was in the small spec category:


the small specs that have been long in gold and sensing a raid by the bankers covered a huge 8756 longs and they are very sorry for their error in judgment.
the small specs that have been short in gold covered a rather large 1859 contracts.


Conclusion:  still not bullish as the bankers continue to short gold and supply the non backed paper.
This must resolve itself pretty soon!


And now for silver:

Silver COT Report - Futures
Large Speculators
Commercial
Total
Long
Short
Spreading
Long
Short
Long
Short
38,265
13,414
20,805
30,441
75,029
89,511
109,248
907
-31
-527
451
2,266
831
1,708
Traders
81
39
46
33
46
144
108

Small Speculators




Long
Short
Open Interest



30,874
11,137
120,385



-9
-886
822



non reportable positions
Change from the previous reporting period

COT Silver Report - Positions as of
Tuesday, August 02, 2011


a very tame COT in silver quite in contrast to gold.

Those large speculators that have been long in silver added 907 contracts to their longs.
Those large speculators that have been short in silver  covered a tiny 31 contracts.

And now for our commercials:
Those commercials that are long in silver and close to the physical scene saw them add a small
451 contracts to their long positions.
And now for our famous bankers who are always short i.e.  JPMorgan added another 2266 contracts to their short positions.
Forgot the small specs in silver.  They have been blown out since May 1 with the huge margin hikes.

Conclusion:  also not bullish as the commercials continue to supply the non backed paper.
Again this must come to a resolution soon.

end.

There is huge developments yesterday in the news.
The jobs report was rather tame with a gain of 115,000 jobs.  The unemployment rate
falls to 9.1%.  The U6 number of unemployed remains high at 16.1%. However the labour participation rate falls to 63.9% from 64.1%

(courtesy zero hedge)


NFP Prints At 117K, Beats Expectations Of 85K, Unemployment Rate Down To 9.1%

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  • Change in Non-Farm Payrolls M/M 117K vs. Exp. 85K (Prev. 18K)
  • Change in Private Payrolls (Jul) M/M 154K vs. Exp. 113K (Prev. 57K)
  • Change in Manufacturing Payrolls (Jul) M/M 24K vs. Exp. 10K (Prev. 6K)
  • US Average Hourly Earnings (Jul) M/M 0.4% vs. Exp. 0.2% (Prev. 0.0%)
  • US Unemployment Rate (Jul) M/M 9.1% vs. Exp. 9.2% (Prev. 9.2%)
Bloomberg's take:
  • Private payrolls rose 154k vs est. 113k (range 70k-150k);prior revised to 80k from 57k
  • Unemployment fell to 9.1% vs est. holding at 9.2% (range 9.1%-9.4%)
  • Unemployment decline due to labor force participation rate decline to 63.9%, a cyclical low, says Bloomberg economist Joseph Brusuelas
  • Avg. hourly earnings 0.4% increase a function of minimum wage gains; govt. continues to furlough workers, says  Bloomberg economist Rich Yamarone
  • Underemployment rate 16.1% vs prior 16.2%
  • Monthly growth below 150k not consistent with supporting sustained unemployment declines, notes Brusuelas
  • TJ Marta writes that the report is not all bright: unemployment rate fell because labor participation fell to 63.9% from 64.1%
  • Payrolls “beat” was within +/- 50k statistical “white noise” for non-farms econometric models
  • Longer term, report doesn’t change downward trajectory of economy, which needs 150k+ just to keep pace with new entrants to labor force
  • Household survey showed 38k decline in employment
And Wall Street knee jerk response:
GENNADIY GOLDBERG, FIXED INCOME ANALYST, 4CAST INC., NEW YORK
"In the broader scheme of things it's really not quite as stunningly high as we would hope for but it's definitely a positive surprise. The positive revisions to last month are also a good thing.
"We would have to see a few months of job gains at a higher level than this to correct the trend higher.
"Right now Treasuries are just chopping around, which is quite interesting. They predictably fell right after the release but they're reluctant to fall too much because the trend is still weaker.
"The Fed will probably comment on recent developments but they normally don't get very excited about one data print. Maybe they will use it to justify the idea that things aren't as bad as the market thinks."
MICHAEL GAPEN, SENIOR U.S. ECONOMIST, BARCLAYS CAPITAL, NEW YORK
"I wouldn't say that (a double dip recession) is totally off the table but it's a much better number than the market had priced in. It's a number that is likely to give policymakers some comfort that the poorest months were May and June.
"It likely means that the fed doesn't take action next week. It doesn't allow us to totally turn the corner and put all of this behind us but it's a much better than expected number."
MICHAEL MARRALE, MANAGING DIRECTOR, AND HEAD OF SALES TRADING AT RBC CAPITAL MARKETS IN NEW YORK
"Doesn't solve anything. View it more as a selling opportunity rather than a reason to get back involved on the long side. The prior revision up is encouraging but at the end of the day, we are coming off the back of last Friday's weak GDP number, Monday's ISM report and we are starting to hear some company commentary that we may be heading into or already be in a recession."
"We did trade as low as 1182 on the S&P futures overnight, the futures coming back were a function of not only concern that the number would be OK, but also some concern on behalf of the shorts that the ECB could make an announcement over the weekend, which would rally the markets. So in the futures markets there has definitely been some short covering ahead of the number and ahead of the weekend."
ERIC STEIN, PORTFOLIO MANAGER, EATON VANCE, BOSTON
"It's definitely stronger than expected. It's not robust by any stretch of the imagination, but compared to a market that was nervous beforehand it's a relief. In the context of a normal recovery it's not a strong number, but in the context of the fear that's been permeating the market it's not a terrible number."
JAY FEUERSTEIN, CHIEF INVESTMENT OFFICER OF 2100 XENON GROUP IN CHICAGO
"These are pretty good numbers. Revision is up and it is stronger than expected across the board. I don't think this is enough to bring us out of a slowdown, but these are not recessionary numbers.
"In the short run, markets will react positively, but then it will become about the forward perception. How will they be going forward? How will recent events impact next month's read?"
DAVID SLOAN, ECONOMIST, IFR ECONOMICS, A UNIT OF THOMSON REUTERS
"July's payrolls should provide a sigh of relief to those fearing a move back into recession. The 117k increase is not dramatically above expectations for a rise of 85k, but it contained upward revisions to the two preceding months, a fall in unemployment to 9.1% from 9.2% which was expected to be unchanged, and a 0.4% rise in average hourly earnings that was significantly above a 0.2% consensus. The data suggests the economy, while far from strong, is going to see some improvement from the weak pace seen in the first half of the year."
More coming as soon as bls.gov actually comes up

end

This is why the unemployment rate "dropped", a big drop in the labour force participation rate.
Earlier this week, the number of people on food stamps rose from 44 million to 45.8 million folk:


Labor Force Participation Rate Drops To 63.9%, Lowest Since January 1984

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While we still await for BLS.gov to finally come back up online half an hour after printing the actual NFP number, here is the one data point that we know for a fact: the labor force participation rate, and the reason why the general unemployment rate declined to 9.1%, just dropped to 63.9%, the lowest in 16 years, or matches the participation rate from January 1984.


end

This set alarm bells all over Europe as bond yields on both Italian bonds and Spanish bonds exceed 6%.  This is the collateralization trigger explained quite well by zero hedge:

(courtesy zero hedge)

Italy And Spain Spreads Approaching Incremental LCH Margin Collateralization Trigger

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As both Italian and Spanish bond spreads continue slowly creeping wider toward the half a century territory, we are reminded once again that once both countries pass 450 bps, LCH will automatically hike collateral triggers for both countries, in essence initiating another waterfall effect whereby less cash is released upon repo, requiring more bonds to be pledged, which in turn means other assets have to be sold off to make up for the shortfall, which in turn leads to a sell off of the underlying financial institution (recall that banks in Europe buy their nation's sovereign debt and immediately pledge it back via various repo mechanisms) and so on. What this practically means is that the bond vigilantes now have a far more achievable task in terms of endgoals when it comes to punishing the offending debt, in this case Italy and Spain. Expect a prompt move to this appropriate level as debt holders start panicking what an extra margin demand will mean for them, and in turn try to lock up cash at current repo levels.
As a reminder, from May 5, 2011 Dow Jones:
LONDON (Dow Jones)--Clearing house LCH.Clearnet said Thursday it is raising the extra margin it requires for positions in Irish government bonds cleared through its RepoClear service.

Back in October, the clearing house said it would generally consider a spread of 450 basis points over the 10-year AAA benchmark to be indicative of additional sovereign risk, meaning it may materially increase the margin required for positions in that issuer."
Translation: price, or as the case may be, yield, target.

French, Italian CDS Hit Record, Yen Resumes Climb

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After a brief intermission in which even the robots apparently took some long overdue shut-visual sensor, things are back in motion, with both French and Italian CDS pushing out to record wides, France hitting 150, 7 bps wider, while Italy rising 15 bps to over 405 bps at last check. And what is more disturbing for all those who keep pounding the table that Spain should blow up first dammit so stop looking at Italy, Italian 10 Year yields just surpassed those of Spain, for the first time since April 2010. Elsewhere, as Bloomberg reports, the Yen has resumed its rally as the BOJ, has ceased its intervention after spending over Y4 trillion according to some accounts, only to realize what we said from the beginning: the yentervention will fail. "Both BOJ and SNB have made clear they oppose further currency appreciation but absence of other safe-haven alternatives means the yen and swiss franc will remain in demand", Lutz Karpowitz, strategist at Comerzbank, writes in note. And some more observations courtesy of Bloomberg: "Confidence is waning over EU policymakers’ ability to contain debt crisis, Derek Halpenny, strategist at BOTM-UFJ writes in note. These will make it all the more difficult for BOJ to find intervention success in yen. Without further BOJ intervention, intensifying risk aversion will result in further yen gains, Halpenny adds." What is ironic is that the Italian stock market is rebounding rapidly from overnight lows of -3.and 5%, is now green courtesy primarily due to alleged additional ECB bond purchases of Italian bonds, which rumor has in turn stabilized Italian financial stocks which are, as expected, soaring. We are confident this response will be as transitory as all other central bank interventions.

Fannie Demands Another $5.1 Billion In Aid From Treasury In Q2, $103.8 Billion Total Since Conservatorship

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There is just one number that is important in the just released Fannie Mae Q2 earnings release, in which the firm reported a loss of "just" $2.9 billion, which includes $6.1 billion in credit related expenses all of which was blamed on Bush (no, really "substantially all of which were related to the company’s legacy (pre-2009) book of business"). The number that matters is that for the 11th consecutive quarter a bankrupt Fannie Mae came running to the Treasury, this time requesting $5.1 billion from Tim Geithner, the second highest number in the past year. This brings the total cumulative bailout since Fannie's conservatorship to a stunning $103.8 billion. And wasn't it pathological liar Tim Geithner who himself said a month ago that the GSEs are no longer a burden on the Treasury? Perhaps he can explain the chart below taken from the company's announcement.
As for the reasons for the ongoing losses, it has everything to do with the abysmal ongoing situation in housing.
The loss in the second
quarter of 2011 reflects the continued weakness in the housing and mortgage markets, which remain under pressure from high levels of unemployment, underemployment, and the prolonged decline in home prices since their peak in the third quarter of 2006. Pursuing loan modifications,  key aspect of the company’s strategy to reduce defaults, also contributed to its loss in the quarter. Fannie Mae expects its credit-related expenses to remain elevated in 2011 due to these factors.

“We remain the largest source of liquidity for the U.S. mortgage market, and we are committed to creating long-term value by helping to build a stable, sustainable housing market for the future,” said Michael J. Williams, president and chief executive officer. “We are focused on reducing taxpayer exposure by limiting our credit losses and building a strong new book of business. Our new book of business is now nearly half of our overall single-family book and we expect these new loans will be profitable over their lifetime.”

Fannie Mae’s net loss attributable to common stockholders in the second quarter of 2011 was $5.2 billion, or $(0.90) per diluted share, including $2.3 billion in dividend payments to the U.S. Treasury. The company’s net worth deficit of $5.1 billion as of June 30, 2011 reflects the  recognition of its total comprehensive loss of $2.9 billion and its payment to Treasury of $2.3 billion in senior preferred stock dividends during the second quarter of 2011. The Acting Director of the Federal Housing Finance Agency (“FHFA”) will submit a request to Treasury on Fannie Mae’s behalf for $5.1 billion to eliminate the company’s net worth deficit.Upon receipt of those funds, the company’s total obligation to  Treasury for its senior preferred stock will be $104.8 billion.
On the other hand, should American homeowners, aka squatters, actually start paying their mortgages, Fannie may be amazed at how quickly it will be able to turn that frown (and quarterly bailout request) upside down. Alas, that would mean fewer iPads sales and the Borg collective can not have that. After all what better reason to justify an imminent TARP 2 than an infinity +1 number of purchases of Angry Birds.

Got Bank Of America CDS? New York AG Says BAC's $8.5 Billion Settlement Is "Unfair and Misleading"; BAC Equity Offering Imminent

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When we last looked at the Bank of America joke of a "non-settlement" settlement for a paltry $8.5 billion when $424 billion in total misrepresented (530 in total) Countrywide mortgage trusts were at stake, we said, "we are confident that the legal process will prevail and that the presiding judge on this case, and if not him then certainly the New York District Attorney, will step up and demand a thorough reevaluation of the settlement process." We were, oddly enough, correct. According to a just released filing from the New York Attorney General Eric Schneiderman, Bank of America (and Bank of New York Mellon, one of the tri-party repo banks mind you), violated New York state law and "misled investors." In a knock out punch to Bank of America (and Brian Lin who was profiled here previously), the  bank allegedly violated the New York’s Martin Act and misled investors about its conduct tied to mortgage securitization as Bloomberg summarizes. Schneiderman said he has "potential claims" against Bank of America Corp. and its Countrywide Financial unit. As Zero Hedge alleged all along, "The proposed cash payment is far less than the massive losses investors have faced and will continue to face." What does that mean? Well, as the countersuit by the FHLB indicated (which we are certain will be the basis for the NY AG claims), the likely final settlement is probably going to beabout $22 to $27.5 billion. Which also means that the bank's Tier 1  capital is about to be discounted by about 25% lower. Which, lastly, means that the stock is about to plunge due to a massive litigation reserve shortfall which will have to be plugged with, surprise, a new equity capital raise. Which brings us to our original question: got CDS (which closed around 200 bps today, roughly 25 bps wider - it is going much wider tomorrow, especially if the expected Sarkozy-Merkel-Zapatero meeting achieves absolutely nothing)? Cause this baby is going down... and it is probably about to be broken up into good BAC and bad bank, consisting almost entirely of all legacy Countrywide operations. Said otherwise, it could well be time for a CFC-BAC CDS pair trade.
From the suit:
The Attorney General of the State of New York Eric T. Schneiderman (the “Attorney General”) has statutory and common law authority to safeguard the welfare of New York investors and the integrity of the securities marketplace generally.

Pursuant to this authority, the Attorney General seeks to intervene in this proceeding to protect the marketplace and the interests of New York investors, the vast majority of whom otherwise are not present before the Court in this proceeding.

Moreover, the Attorney General has an interest in this proceeding because the proposed settlement may interfere with his ability to pursue claims against BNYM, Countrywide, BoA, or affiliated entities. 

The Attorney General therefore seeks an order pursuant to CPLR 401, 1012, and 1013 granting him permission to intervene as an adverse party in this proceeding to protect the interests of the People of the State of New York.”
Some more from Bloomberg with another quick summary of the facts:
“The allegations by the New York Attorney General are outrageous, baseless, unsupported by fact and law and we will fight them if necessary in court,” Ron Gruendl, a BNY Mellon spokesman, said in an e-mail.

“We are confident that we have fulfilled in all respects our responsibilities as trustee,” Gruendl said. “The AG’s action is misguided and fails to comprehend the role of the trustee and the benefit the settlement would provide to investors.”

Bank of America and Countrywide separately face liability for “persistent illegality” in breaching contractual promises about the quality of loans, as well as failing to provide complete mortgage files, Schneiderman said in court papers.

Lawrence Grayson, a spokesman for Bank of America, declined to comment.
And for those who are completely unfamiliar with the situation here is the big picture gist from a recap by HuffPost:
New York Attorney General Eric Schneiderman asked a state judge to reject a proposed $8.5 billion settlement agreement over soured loans between Bank of America and a group of investors, claiming in court documents that a separate bank representing the investors committed fraud for failing to ensure that the mortgage securities were created in accordance with state law and for failing to act in the investors' best interest. Bank of New York Mellon, the trustee representing the investors, "knowingly, repeatedly, and consistently" misled investors into thinking that the mortgage bonds were created properly, Schneiderman said in court documents. BNY Mellon also put its own interests before those of the investors it's supposed to represent, he said.

BNY Mellon, the 11th-largest U.S. bank by assets and one of the nation's largest trustees, stands accused of "repeated fraud and illegality," according to court filings, which alleges that the abuses "were repeated literally hundreds of times." 

...

In short, Countrywide Financial, the lender purchased by BofA in 2008, failed to properly assemble loan documents needed for the creation of mortgage securities, and BNY Mellon effectively looked the other way, which "apparently triggered widespread fraud," Schneiderman said in court documents. BNY Mellon should have known the mortgage securities were improperly created because the evidence was "abundant," Schneiderman asserted, citing the bank's own documents, news coverage of "foreclosure fraud" and foreclosure actions brought on the bank's behalf.

It also opens up new worries for BofA, the nation's largest handler of home loans, as the company could be faced with the prospect of having New York's top legal officer determining that untold billions of dollars' worth of mortgages turned into securities by Countrywide, the nation's largest mortgage company when purchased by Bank of America during the credit crisis, aren't really securities at all due to failures in the security-creating process.

In court documents, Schneiderman is demanding that his agency be allowed to further examine loan documents to ensure the securities were properly created. New York's top law enforcement officer is using the Martin Act, a powerful state law that gives prosecutors broad powers to investigate fraud.
Long story short: Bank of America is now totally skewered (as incan you spell U-N-D-E-R-R-E-S-E-R-V-E-D), as this process throws the entire existing settlement, which most certainly was cobbled together with the assistance of the purported legal adversaries so that the American financial system was not scuttled when BAC has to file for bankruptcy, out of the window.
Now that a politically upstart AG is in the pic, and now that he has raised some serious rucus, we expect, as noted above, that the final settlement ask will increase by about $15-20 billion, and in the process sent the company's CDS soaring as the fear of counterparty risk suddenly rears its ugly head in a self-fulfilling prophecy along the same lines as took down Lehman Brothers.
Prepare for a Bank of America public offering. And for our Paulson & Co. LP readers: pray that the billionaire sold his remaining shares in this toxic dump of a bank on which he once upon a time had a $30 price target.
Full filing:

U.S. loses prized AAA credit rating from S&P

 Section: 
By Walter Brandimarte and Daniel Bases
Reuters
Saturday, August 6, 2011
NEW YORK -- The United States lost its top-tier AAA credit rating from Standard & Poor's on Friday in an unprecedented blow to the world's largest economy in the wake of a political battle that took the country to the brink of default.
S&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about the government's budget deficit and rising debt burden. The action is likely eventually to raise borrowing costs for the American government, companies, and consumers.
"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," S&P said in a statement.
The outlook on the new U.S. credit rating is "negative," S&P said in a statement, indicating another downgrade was possible in the next 12 to 18 months.
The move reflects the deterioration in the global economic standing of the United States, which has had a AAA credit rating from S&P since 1941, and it could have implications for the U.S. dollar's reserve currency status.
"The global system must now adjust to the many implications and uncertainties of the once-unthinkable loss of America's AAA," said Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co which oversees $1.2 trillion in assets.
The outlook on the new U.S. credit rating is "negative," S&P said in a statement, indicating another downgrade was possible in the next 12 to 18 months.
The decision follows a fierce political battle in Congress over cutting spending and raising taxes to reduce the government's debt burden and allow its statutory borrowing limit to be raised.
On August 2, President Barack Obama signed legislation designed to reduce the fiscal deficit by $2.1 trillion over 10 years. But that was well short of the $4 trillion in savings S&P had called for as a good "down payment" on fixing America's finances.
The political gridlock in Washington over addressing the long-term fiscal problems facing the United States came against the backdrop of slowing U.S. economic growth and led to the worst week in the U.S. stock market in two years.
The S&P 500 stock index fell 10.8 percent in the past 10 trading days on concerns that the U.S. economy may be heading into another recession and because the European debt crisis has worsened.
Treasury bonds, once indisputably seen as the safest security in the world, are now rated lower than bonds issued by countries such as Britain, Germany, France, or Canada.
Obama was briefed earlier in the day regarding S&P's intentions, but discussions only took place with Treasury officials and did not include the White House, a source familiar with the discussions told Reuters.
Late on Friday, the Treasury said the rating agency's debt calculations were wrong by some $2 trillion.
S&P confirmed it changed its economic assumptions after discussion with the Treasury Department but said it did not affect its decision to downgrade.
"We take our responsibilities very seriously, and if at the end of our analysis the committee concludes that a rating isn't where we believe it should be, it's our duty to make that call," David Beers, head of sovereign ratings at S&P, told Reuters.
The theme running throughout S&P's analysis is the breakdown in the ability of the Democratic and Republican parties to govern effectively.
The agency said that policymaking and political institutions had weakened in the past few months "to a degree more than we envisioned." This has major implications for the nation's budget and debt problems.
For example, S&P now assumes that tax cuts brought in under President George W. Bush in 2001 and 2003 would not, as planned, expire by 2012 because of staunch Republican opposition to any measure that would raise revenues.
The compromise reached by Republicans and Democrats this week calls for creation of a bipartisan congressional committee to find $1.5 trillion of deficit cuts by late November, beyond the $917 billion already identified.
While the downgrade is a blow to U.S. prestige, it was largely expected and may not have a big impact on trading of U.S. Treasuries and other assets when markets reopen in Asia on Monday.
In fact, Treasuries have rallied this week, driving the yield on the benchmark 10-year note to 2.34 percent, its lowest level in about 10 months. This reflects a belief among investors that U.S. government debt is still a safe bet at a time when prices of stocks and commodities are falling on concern about slowing global economic growth.
"To some extent, I would expect that when Tokyo opens on Sunday we will see an initial knee-jerk selloff (in Treasuries), followed by a rally," said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut.
But the downgrade has implications for the country's financial sector, ranging from insurance companies to government-related firms such as housing financiers Fannie Mae and Freddie Mac.
"At least initially, the impact on the market will be negative because there will some forced liquidation of U.S. assets," said Boris Schlossberg, GFT director of currency research.
The downgrade could add up to 0.7 of a percentage point to Treasuries' yields over time, increasing funding costs for public debt by some $100 billion, according to SIFMA, a U.S. securities industry trade group.
The Federal Reserve and other bank regulators moved on Friday to reassure global markets that the downgrade would not mean that additional capital would be needed by banks and other institutions holding Treasury securities.
The Fed also said the cut would not impact the operation of its emergency lending window for banks, nor its buying and selling of Treasury securities to conduct monetary policy.
The impact of S&P's move was tempered by Moody's Investors Service's decision earlier this week confirming, for now, the U.S. Aaa rating. Fitch Ratings said it was still reviewing its AAA rating and would issue its opinion by the end of the month.
S&P's move is also likely to concern foreign creditors especially China, which holds more than $1 trillion of U.S. debt. Beijing has repeatedly urged Washington to protect its U.S. dollar investments by addressing its budget problems.
"China will be forced to consider other investments for its reserves. U.S. Treasuries aren't as safe anymore," said Li Jie, a director at the reserves research institute at the Central University of Finance and Economics.
One currency strategist, however, did not think there would be wholesale selling by foreigners.
"One of the reasons we don't really think foreign investors will start selling U.S. Treasuries aggressively is because there are still few alternatives to the Treasury market in terms of depth and liquidity," said Vassili Serebriakov, currency strategist at Wells Fargo in New York.
He said there was likely to be weakness in the U.S. dollar but a sharp sell-off was unlikely.
S&P had already placed the U.S. credit rating on review for a possible downgrade on July 14 on concerns that Congress was not adequately addressing the fiscal deficit of about $1.4 trillion this year, about 9.0 percent of gross domestic product, one of the highest since World War II.
But Obama administration officials grew increasingly frustrated with the rating agency during the debt limit debate and accused S&P of moving the goal posts in its downgrade warnings, sources familiar with talks between the administration and the agency have said.
The downgrade was immediately pounced on by candidates vying for the Republican presidential nomination. Mitt Romney said the move was "a deeply troubling indicator of our country's decline under President Obama," while Jon Huntsman said it was due to spreading of a "cancerous debt afflicting our nation."
The downgrade, 15 months before the next presidential election, and debt will be top campaign issues.

On the S&P Downgrade and further volatility

thetrader's picture





Yes, the rumor The Trader wrote about yesterday proved right. S&P is downgrading the US, despite many well  respected pundits saying that was impossible. Interesting times ahead to continue. Although S&P’s timing is not the best, both for market volatility and their popularity, some of the effects are priced in.

Expect more volatility, as risk has been mispriced for several years. As we have written during the spring, too many young quant academics have been pricing risk looking back at Garch etc models, and giving the past year’s low volatility environment way too much weight. It will take time to rinse out all these wrongly priced risk. For more reading on volatility, check (once again) this year's best vol report, Broken Volatility, not any more…


From Bloomberg,

Standard & Poor’s downgraded the U.S.’s AAA credit rating for the first time, slamming the nation’s political process and criticizing lawmakers for failing to cut spending enough to reduce record budget deficits.
S&P lowered the U.S. one level to AA+ while keeping the outlook at “negative” as it becomes less confident Congress will end Bush-era tax cuts or tackle entitlements. The rating may be cut to AA within two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt, the New York-based firm said yesterday.
Lawmakers agreed on Aug. 2 to raise the nation’s $14.3 trillion debt ceiling and put in place a plan to enforce $2.4 trillion in spending reductions over the next 10 years, less than the $4 trillion S&P had said it preferred. Even with the specter of a downgrade, demand for Treasuries surged as investors saw few alternatives amid concern global growth is slowing and Europe’s sovereign debt crisis is spreading.
“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” S&P said in a statement late yesterday after markets closed.
Full article, click here.

Expect war between the Fed and the S&P. First comments from Fed below. QE3 imminent?
From Dow Jones,
Standard & Poor’s downgrade of the U.S. government’s debt will not affect the risk-based capital requirements for U.S. banks, federal regulators said Friday evening.
The Federal Reserve, Federal Deposit Insurance Corp. and other federal banking regulators said in a statement that the lowering of the U.S. government debt rating from AAA to AA+ “will not change” the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government or government agencies.
“The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations, including, for example, the Federal Reserve Board’s Regulation W, will also be unaffected,” the regulators said.

On the S&P ratings move

Bruce Krasting's picture




What to make of the move by S&P? I will tell you that I was surprised that it happened this weekend. I expected that S&P would have given the US to November to sort things out. From the news reports it appears that the White House  and Treasury were equally unprepared for this to happen now. Some thoughts:

Market Reaction
It is quite likely that we will see some interesting market action come Sunday night as this news is digested. But I will stick my neck out and say that once the dust settles a bit the ratings drop is not going to have a significant effect. (for now)
It looks as if the US is going to have a split rating. (AAA {equivalent} by Fitch/Moody’s and AA+ by S&P) If this were a high-grade corporate credit the split rating status would make no difference in how the underlying bonds trade. I doubt that the S&P action will have a different (lasting) consequence.

S&P Timing
What was S&P thinking when they pushed this on August 5th?Have they no sense of timing at all? We have just gone through the most gut wrenching market week in three years. This action could be very upsetting to global capital market conditions. While I think that is not going to be the case there certainly is risk for things to become unglued for a bit.
While I don’t fault S&P for their action (they said they would do this on April 18th) I think they made a big mistake with bringing public last Friday. For this, I would give S&P a single D rating

The Rationale

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending is less likely than we previously assumed and will remain a contentious and fitful process.
My read of this is that they are blaming the politicians. As well they should. I hope that this is the message that comes to the public. It’s the idiots in D.C. that did this to us. They could not come to a compromise when the Nation required that they do so. The “Deciders” let us down. The economy will pay a price for what has happened. I truly hope that some of those Deciders pay a big price too. I think they will.

The Political Fallout
All of the big hitters in Washington have egg on their face today. But the one with the most egg is Tim Geithner. He said that a downgrade would not happen. It has. I think Geithner will have to go as a result. I think his “resignation” announcement will come before September 1st.

The Fed’s Response
Last night the Fed gave the S&P action a “We don’t care”response. There will be no change in how the Fed adjusts collateral requirements. There will be no change in their calculations of risked based capital for financial institutions.
It’s predictable that the Fed would take this position. What else could they do but ignore the downgrade? A key question is how central banks outside the US look at US collateral. Will any of them change the haircuts on US paper? I doubt it. But if I’m wrong and we see the Bank of Canada, England or ECB do anything regarding collateral ratios there will be hell to pay.That’s the best reason why they won’t do anything.

China/Russia Reaction
The Chinese downgraded the US some time ago. They don’t think so much of our paper. Russia is a big holder too. I would expect that we see evidence in the coming months that these two are going to be lowering their holdings. I don’t expect to see some big headline that says, “China to sell”. That’s not going to happen. The critical issue is, "Will they buy more?" I doubt they will.
The Russians must be jumping for joy at this. As this plays out we will see very clearly who are friends and who are not. On this issue, these two are not our friends. Yet they hold a total of $1.5 trillion of our paper.

On the Knock on Affect
S&P lists the entities related to the US that will have their ratings dropped. Fannie, Freddie and Ginnie Mae have been cut. Together that is about $6 Trillion worth of paper.
S&P has said that the ratings change for the US does not impact corporate ratings. But the states and cities are another matter. To me it's just nutty to think that the city of Syracuse is a AAA and the federal government is worth less than that. No doubt but that Muni downgrades will be forthcoming. This should have happened years ago.

Impact on Fed Policy
If I was a rating Agency I would look at the policies of the government as a whole when setting a rating. Clearly the federal government is running up too much debt and S&P has said, “No mas”. The rating agencies want to see saner and more sustainable policies from D.C. They do not want to see kick the can down the road stuff.
There is no greater “kick the can” policies than those of the Federal Reserve. They have cut interest rates to zero. A desperation policy that is leading to big distortions in the basic funding markets today. They have bought Trillions of government paper. They have facilitated the expansion of US debt. They are part of the problem when it comes to long-term fiscal sustainability.
If the Fed announces another LASP (QE3) I now anticipate that the rating agencies will react negatively. More QE = More downgrade. I hope Bernanke and his cohorts get this message. Their hands are now tied at so many levels. They are pushing their own limits on inflation targets. They know that ZIRP is a failure. They understand that QE (LSAP) has only marginal benefits (at best) and they also understand (and have acknowledged) that additional QE efforts now come with more risk than reward.
It would have been helpful if the S&P had provided some thinking on this critical issue. S&P was willing to take on the entire legislative part of government. But they didn't have the balls to take on the Fed. Interesting.

On Entitlements:
We have just a few months before the next explosion. S&P has put the US on a negative alert. Meaning further downgrades are going to happen if the US fiscal house is not put in better order.
Folks, that CANNOT HAPPEN without substantial cuts in both Medicare and Social Security.
So over the next few months when Harry Reid and Nancy Pelosi tell us that there will be no cuts to these mega programs, respond by immediately shorting the stock market. If Obama sticks in the mud and says, “We will not cut SS” the Dow will fall 500 points.
This will be a gut wrenching process. The fate of the nation now rests on it however. Either these programs get contained in a meaningful way or everything we have come to know and love about this country will go into a two-decade collapse.
.

It Was Leaked
This article/chart  from FTAlphahville makes the point that US long term rates had one of the biggest runups in years yesterday. How did that happen? Easy. The info that S&P would make a move after the close was leaked. There are insiders all over Wall Street that got the "heads up".What kind of system is this?
.
On Vigilantes
Paul Krugman (and many others) have been pounding the table and pointing to the bond market and saying, “See! Rates are low! We have to issue more debt, not less! We have to spend more, not less!
On several occasions in the past month Krugman has made this point. He says there are no vigilantes in the bond market. Well there are vigilantes. They are not the tough guys who trade bonds for a living. They are the white shirt boys at S&P.
Face it Krugmans of the world. Keynesian economics has hit its limit. You can’t spend your way out of this problem. That door is now closed.
If there is a silver lining to the S&P action it is that mainstream economists on both coasts of the US (but not Chicago) have also been downgraded. The notion that Debt = Growth is now a dead concept. I couldn’t be happier.

Yu Yongding: China can break free of the dollar trap

 Section: 
By Yu Yongding
Financial Times, London
Thursday, August 4, 2011
Chinese officials are understandably angry about the irresponsible brinkmanship demonstrated by their American counterparts in recent weeks. Unfortunately, anger counts for little in international finance. The danger facing the United States is that after Tuesday's debt deal any sense of urgency over a dire fiscal situation will dissipate. The danger for China is that it does not learn the right lesson -- namely, that now is the time to end its dependency on the US dollar.
China is worried about the possibility of a US default for obvious reasons. As the largest foreign holder of US Treasuries, either a default or a downgrade would bring huge losses. Even after this week's debt deal, however, the risk remains that US debt will continue to grow to the point where its government is left with no option but to inflate the burden away. While there is little China can do about its existing Treasury holdings, it can rethink past policies -- and ask both how it fell into this trap, and how it might free itself.
China has run a current account surplus and a capital account surplus almost uninterruptedly for more than two decades. Inevitably this has led to an accumulation of foreign reserves. It is clear, however, that running these surpluses persistently is not in China's best interests. A developing country, with per-capita income ranking below the 100th in the world, lending to the world’s richest country for decades is not reasonable. Even worse is the fact that, as one of the largest foreign direct investment-absorbing countries in the world, China essentially lends money it borrowed at a high cost back to its creditors, by buying US Treasuries, rather than importing goods and services.
China holds a large stash of dollar-denominated foreign assets, as well as significant amounts of renminbi-denominated liabilities. Clearly this currency structure of assets and liabilities makes its net international investment position very vulnerable to any devaluation of the dollar against the renminbi.
The Chinese government has admitted that its foreign-exchange reserves have already exceeded its needs. It has tried various measures to slow down the growth of these reserves and protect the value of its existing stock. This has included demand stimulation, allowing the renminbi to appreciate gradually and creating sovereign wealth funds. It has also promoted reform of international monetary systems and the internationalisation of the renminbi. Sadly, none of these has worked. With large capital inflows and a current account surplus, China's foreign exchange reserves have continued to rise rapidly.
These policies failed because they did not address the real cause of the rapid increase in foreign exchange stocks, namely state intervention aimed at controlling the pace of renminbi appreciation. The question is: what losses is China willing to bear in its foreign exchange reserves in order to slow the pace of the renminbi appreciation?
One further factor is that any losses in the financial assets held by China will not be realised until their holders decide to cash out. If the US government continues to pay back its public debt, and China continues to pack its savings into US securities, this game may continue for a very long time. However, the situation is ultimately unsustainable. The longer it continues, the more violent and destructive the final adjustment will be.
If there is any lesson China can draw from the US debt ceiling crisis, it is that it must stop policies that result in further accumulation of foreign exchange reserves. Given that many large developed countries are simply printing money (and the recent rumours are that the US might return to quantitative easing) China must realise that it can no longer invest in the paper assets of the developed world. The People's Bank of China must stop buying US dollars and allow the renminbi exchange rate to be decided by market forces as soon as possible. China should have done so a long time ago. There should be no more hesitating and dithering. To float the renminbi is not costless. However, its benefits for the Chinese economy will vastly offset those costs, while being favourable to the global economy as well.
-----
The writer is a former member of the monetary policy committee of the Chinese central bank.
suppress gold's demand.  Here is his address last night.

(courtesy, GATA  Goldseek.com, Chris Powell  )

Chris Powell: Who will put the gold questions to central banks?

 Section: 
Remarks by Chris Powell, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
GATA Gold Rush 2011
Savoy Hotel, London
Friday, August 5, 2011
Those of you who have been following GATA for a long time are owed a bit of an apology from me today. For I will say some things you have heard before, as they may be new to others here, as I'm reminded of the advice given to me some years ago by a friend who was twice elected to Connecticut's state legislature, three times to the U.S. House of
Representatives, and three times as governor of Connecticut. He told me that repetition is crucial in politics, and that, tedious as it may seem, just when you think you're going to have to kill yourself if you say something over again, that's when people are just starting to listen.
Of course that was before he disgraced the state, was caught taking gifts from government contractors, resigned under threat of impeachment, pleaded guilty to a federal corruption charge, and was sent to prison for a year. But I guess he didn't get everything wrong.
GATA is still about what it was about when it was founded in January 1999 -- exposing and opposing the rigging of the gold market and related markets.
Why is the gold market rigged?
It's rigged because, despite Federal Reserve Chairman Ben Bernanke's insistence the other day that gold is not money, just "tradition," gold is indeed a currency that competes brutally with government-issued currencies and helps determine not only the value of those currencies but also the level of interest rates and the value of government bonds. This was all documented in an academic study published in June 1988 in the Journal of Political Economy written by Harvard economics professor Lawrence Summers and University of Michigan economics professor Robert Barsky. This Summers-Barsky study was unearthed and interpreted by another speaker at this conference, gold price suppression litigator Reg Howe. The study implied that if governments could get control of the gold price, they could also get control of interest rates.
Of course Summers went on to become U.S. treasury secretary, an office in which expertise in controlling the gold price is highly desirable.
How is the gold price rigged, and by whom?
It is rigged openly through outright sales of gold by central banks, as it was rigged openly in the 1960s by the association of Western central banks known as the London gold pool, and, since the gold pool's collapse in 1968, rigged both openly and surreptitiously through central bank sales and leases and by bullion bank short positions and derivatives that are backstopped by access to Western central bank gold.
GATA has established this extensively from official sources whose admissions are compiled in the "Documentation" section of our Internet site:
That is, the gold price suppression scheme is not what it is disparaged as being, "conspiracy theory." Rather it is a matter of public record -- at least for those who want to look at the record. I would welcome an opportunity to examine and discuss this record in detail, document by document, with any doubters in a public forum. Some of the most incriminating material remains posted at Federal Reserve Internet sites.
But the official record of gold price suppression is not merely historical. Thanks to GATA's work, it is very contemporary as well. That's what I'd like to update you about today.
Two years ago, using the federal Freedom of Information Act, GATA asked the Federal Reserve to provide access to its gold records, particularly its records involving gold swaps. Gold swaps are trades of gold between central banks, enabling one central bank to intervene in the gold market at the behest of another, keeping the other's fingerprints off the intervention. Gold swaps are a primary mechanism of the gold price suppression scheme.
While the Fed refused to give us access to its gold records, in adjudicating our request internally the Fed did make, perhaps inadvertently, a sensational disclosure. On September 17, 2009, the member of the Fed's Board of Governors who was acting as the judge of our request, Kevin M. Warsh, wrote a letter to GATA's lawyer, William Olson of Vienna, Virginia, confirming the Fed's denial of access. Among the records being withheld from us, Warsh disclosed, were records about the Fed's gold swap arrangements with foreign banks, which, he wrote, "is not the type of information that is customarily disclosed to the public":
This admission of gold swap arrangements plainly contradicted previous statements by the Fed that it was not involved in the gold market in any way.
Unwilling to let Fed Governor Warsh's letter be the last word on access to the Fed's gold records, on December 31, 2009, GATA sued the Fed in U.S. District Court for the District of Columbia. The Fed told the court that the Fed really couldn't find many records involving gold. Implausible as this was, unfortunately the judge, Ellen Segal Huvelle, denied GATA's request to interrogate Fed officials under oath about what seemed to us to be their wholly inadequate search. Whereupon the judge reviewed, privately in her chambers, the few documents the Fed had submitted, and on February 3 this year she ruled that the Fed could keep secret all but one of those records. She ordered the Fed to disclose that one record to GATA within two weeks.
On February 18 this year the Fed released the document -- the minutes of the April 1997 meeting of the G-10 Gold and Foreign Exchange Committee as compiled by an official of the New York Federal Reserve bank. The minutes showed government and central bank officials conspiring in secret to coordinate their gold market policies.
Perhaps of equal interest, the Fed claimed not to be able to find minutes of any other meeting of the G-10 Gold and Foreign Exchange Committee. Either the the G-10 Gold and Foreign Exchange Committee has met only that once, in April 1997, or the Fed was not represented at any other such meetings, or such minutes were conveniently misplaced for the purposes of GATA's lawsuit.
Thus GATA's lawsuit established that the Fed, despite its protests of innocence, has many gold secrets after all even as we managed to pry a couple of those secrets loose and publicize them -- first, that the Fed has gold swap arrangements, and second, that in 1997 the Fed was conspiring with other central banks to coordinate their gold market policies, and that there was no announcement of this.
Almost as gratifying to us was that, since the court found that the Fed had illegally withheld that one document from us, Judge Huvelle ordered the Fed to pay court costs to GATA, which the Fed did in May, sending us a check for $2,870, which we'll display here later today.
But the revelations about central bank gold swaps don't end there. In August 2009, while GATA was waging its freedom-of-information battle against the Fed, our consultant, Rob Kirby of Kirby Analytics in Toronto, wrote to the German central bank, the Bundesbank, about a report that most of the German national gold was being kept outside Germany, particularly in New York, presumably at the New York Fed.
The Bundesbank replied to Kirby as follows:
"The Deutsche Bundesbank keeps a large part of its gold holdings in its own vaults in Germany, while some of its gold is also stored with the central banks located at major gold trading centres. This has historical and market-related reasons, the gold having been transferred to the Bundesbank at these trading centres. Moreover, the Bundesbank needs to hold gold at the various trading centres in order to conduct its gold activities."
So the Bundesbank says it keeps much of its gold at "trading centers" so that it may conduct its "gold activities."
What are those activities exactly?
In late 2010 the German journalist Lars Schall, who is here at this conference today, sought to follow up with the Bundesbank, posing 13 questions about those "gold activities," particularly as to whether the Bundesbank has any gold swap arrangements with the United States. The Bundesbank replied to Schall as follows:
"In managing foreign reserves, the Bundesbank fulfils one of its mandated tasks as an integral part of the European System of Central Banks. We trust you will understand that we are not able to divulge any further information regarding this activity. Particularly with respect to the confidential nature of information about where gold holdings are kept, we are unable to go into any greater detail concerning exact locations and the quantities stored at each of these. Likewise, owing to the strategic nature of the activity, we are not at liberty to provide you with more detailed information about gold transactions."
That seems like a pretty good confession that the Bundesbank has undertaken gold swaps as part of what it considers "strategic activity."
Another pretty good confession of the secret maneuvers being played with gold came at the hearing held by U.S. Rep. Ron Paul's House Subcommittee on Domestic Monetary Policy and Technology on June 23 this year, a hearing I attended. The Treasury Department's inspector general, Eric M. Thorson, testified that he had been told that no part of the U.S. gold reserve was encumbered. But he did not say exactly who told him this, so his comment was only hearsay. And when Thorson was asked just where the gold pledged by the United States to the International Monetary Fund is kept and how it is accounted for, Thorson couldn't say.
Three years ago when GATA put similar questions to the IMF -- "Exactly where is your gold, and do you possess it or is it just a claim on the gold reserves of your member nations?" -- the IMF was at first evasive and then abruptly cut off the correspondence without answering.
But then most official gold data is actually disinformation.
For the six years prior to 2009 China reported to the IMF that it held 600 tonnes of gold. But in April 2009 China reported that its gold reserves had increased by 76 percent, from 600 tonnes to 1,054 tonnes. Had China obtained the new 454 tonnes only in the past year? Of course not; China had been accumulating gold steadily without reporting it for six years.
In June 2010 the World Gold Council reported that Saudi Arabia had increased its gold reserves by 126 percent since 2008, from 143 tonnes to 323 tonnes. But a few weeks later the governor of the Saudi Arabia Monetary Authority said Saudi Arabia had not been purchasing gold lately and that the 143 tonnes in question had been held all along in what he called "other accounts" -- held in accounts not being reported by Saudi Arabia.
That is, the true disposition of national gold reserves is a secret more sensitive than the disposition of nuclear weapons. For gold is a weapon just as powerful -- a weapon crucial to market rigging, the secret knowledge of the financial universe. And while nuclear weapons can be used for blackmail, market rigging is a far more effective mechanism for looting the world.
Many of you have heard about the looting of Europe undertaken by the Nazi German occupation during World War II. But most of that looting did not take place as it is imagined, at the point of a gun. No, it took place through the currency markets.
This looting through the currency markets was spelled out by the November 1943 edition of a military intelligence letter published by the U.S. War Department, a letter called Tactical and Technical Trends. Of course the Nazi occupation seized whatever central bank gold reserves had not been sent out of the occupied countries in time. But then the Nazi occupation either issued special occupation currency that could not be used in Germany itself or, in countries that had strong banking systems, took over the domestic central bank and enforced an exchange rate much more favorable to the reichsmark. Or else the Nazi occupation simply printed for itself and spent huge new amounts of the regular currency of the occupied country.
It was this control of the currency markets that drafted everyone in the occupied countries into the service of the occupation and achieved a one-way flow of production, a flow out of the occupied countries and into Nazi Germany.
For a few years Nazi Germany had one hell of a trade deficit -- and couldn't have cared less about it. For controlling the currencies of occupied Europe, Nazi Germany never had to cover that deficit, at least not as long as the military occupation continued.
Since the United States now issues the reserve currency for the world, the dollar, the United States now more or less occupies most countries economically, even those countries that have their own currencies, since even those countries hold most of their foreign exchange reserves in dollars. Thus the current one-way flow of production -- out of the rest of the world and into the United States.
This exploitation is not well-publicized but it is no secret.
In the 1960s France's finance minister called it an "exorbitant privilege" for just one country -- the United States -- to be able to issue the world reserve currency.
In 2004 the deputy chairman of the Bank of Russia, Oleg Mozhaiskov, told the London Bullion Market Association conference held in Moscow:
"Although there are several reserve currencies, the blatant lack of discipline is demonstrated by the U.S. dollar. I am leaving aside the main aspects of this problem, such as the social and economic injustice of a world order that allows the richest country in the world to live in debt, undermining the vital interests of other countries and peoples. What is important for us today is another aspect, which is connected with the responsibility of the state issuing the reserve currency and for the international community preserving that currency's buying power."
Incidentally, the only words of English spoken by Mozhaiskov in that speech were "Gold Anti-Trust Action Committee." The Bank of Russia long had been following our work without our knowledge.
And just this week Russia's prime minister, former president, and perhaps future president, Vladimir Putin, called the United States a "parasite" on account of its huge external debt and the dominance of the dollar.
The whole gold price suppression scheme -- a dollar-support scheme -- is exposed by any serious questioning. But who will ask the questions? The scheme survives only because of negligent journalism about the true reserve currency, gold.
The falsity of the data about the gold market practically screams at financial journalists:
-- There is the omission from official gold reserve reports of leased and swapped gold.
-- There are the sudden huge changes in official gold reserve totals.
-- And there are the deception and conflicts of interest built into the prospectuses of gold and silver exchange-traded funds, whose metal custodians happen also to be the world's biggest gold and silver shorters.
Valid documentation about the gold market also practically screams at financial journalists:
-- There are the huge and disproportionate gold, silver, and interest rate derivative positions built up at just a few international banks, positions that never could be undertaken without the expressed or implicit underwriting of government, particularly the U.S. government.
-- There are the many official records, collected and publicized by GATA over the years, demonstrating the explicit plans and desire of the U.S. government to suppress and control the price of gold.
Most obvious is the question that should follow the common disparagement of gold, a question that somehow is never asked. You've heard it: the constantly reported observation that gold has not come close to keeping pace with inflation over the last 30 years. Oil has kept up, food has kept up, other metals have kept up, but not gold.
So why not? Why hasn't gold kept up with inflation?
Could it be that someone found a way to vastly increase the supply of gold without having to go through the trouble of mining it -- to dishoard and lease it from central bank reserves and then issue certificates against gold that never existed in the first place?
"Why" is supposed to be a basic question of journalism. But it has fallen out of financial journalism when it comes to gold.
In May I spent an hour in New York with the commodities reporter of The Wall Street Journal. That newspaper has been given much of the documentation GATA has collected but has not yet published anything about it.
Also in May a nationally broadcast television program interviewed me for an hour, with the cameras rolling, on the steps of the Federal Reserve in Washington. That program has all the documentation too. Nothing has been broadcast yet, though I'm hopeful.
Over the last year I've spent much time briefing a reporter for a major news agency, at her request. At my urging, unlike all other reporters, she even called the Fed and got a very telling "no comment" about the gold swaps. But last I heard from her, she couldn't get her editor's permission to write a gold story.
Frustrating as all this is, it can't be too surprising. After all, who are the major advertisers in the financial news media and the major sources of news? The market manipulators and governments themselves. And journalists seem to take for granted that central banks operate in secret, particularly in regard to gold, so there's no point in questioning them.
Well, maybe someday some journalist somewhere will put to a central banker a critical question about gold. Maybe it will be one of the journalists we met at our press conference yesterday.
In any case, whenever I come to this great city I can't help falling into June 1940 mode and reminding myself that liberty is worth contending for no matter how bad the odds -- that there really isn't much else.
The other day a few blocks from here I went through the museum that has been made out of the old Cabinet War Rooms, where the rescue of all decent civilization was arranged even as the bombs of the most evil totalitarianism fell all around and Britain, at Churchill's urging, heroically faced them alone.
At the museum there was, of course, a photo of General DeGaulle, who refused to accept the fall of France and flew to London to fight on. For the time being, De Gaulle decided, in exile he would be France, and he was -- though maybe, years later, he thought himself to be France even after France was once again able to do the job itself.
From GATA's beginning I have wondered whether we could really presume to speak for gold. And not just for gold, of course -- we are not idolaters -- but for the economic and political liberty it serves and stands for. With gold always under attack precisely for what it represents, and with no others coming forward to defend it for what it represents, with the gold mining industry's main trade association refusing to acknowledge the attack, we have hoped that any presumption on our part might be forgiven.
We remain largely amateurs. At the outset we did not half understand what was going on and what we were setting about to do. Our name preserves that imperfect understanding. We thought we had discovered just another anti-trust violation. It was a while before we perceived that we were up against government policy and that most of what we were discovering had been discovered long ago, at least in principle, just not well taught, publicized, preserved, and made timely again.
Because it can work only through surreptitiousness and deceit, this government policy will be defeated when it is more widely understood -- and every day it isbeing better understood.
Just yesterday GATA Chairman Bill Murphy was invited on CNBC Europe -- GATA's first invitation on CNBC in 12 years. And two more speakers at this conference, James Turk and Ben Davies, were on CNBC Europe this morning.
The word is getting around now, and thanks to you and the speakers who have come here today, we are no longer alone. That, I think, will prove decisive.
Some of our speakers will talk about what should be. At this turbulent time for its financial system, the world surely needs new options. But with your support GATA will keep working to reveal what is.
This is, we think, a great cause. And as Churchill said even as the bombs fell on this city, "When great causes are on the move in the world, we learn that we are spirits, not animals, and that something is going on in space and time, and beyond space and time, which, whether we like it or not, spells duty."

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