Saturday, October 22, 2011

Gold and silver rebound/Fed Vice Chairman:QEIII needed/

Good morning Ladies and Gentlemen:

Before commencing with our commentary, let me introduce to you our latest entrants into the banking morgue:

1.Community Banks of Colorado, Greenwich Village, Co
2.Community Capital Bank, Jonesboro, GA
3.Old Harbour Bank, Clearwater, FL
4.Decatur First Bank, Decatur GA.

May they rest in peace.

The price of gold rose by $24.20 to $1636 with silver tagging along for a 90 cents gain finishing the comex session at $31.17.  In the access market both metals continued to advance and here are the final closing prices:

Gold:  1642.00
silver:  $31.40

The Dow advanced by over 267 points propelled by hopes of a European settlement of differences between Germany and France and thus a rescue of the PIIGS countries.  The markets were also joyed with encouraging words from Fed presidents that QEIII is needed almost immediately.  With the Dow rising in full blast, the algos allowed silver and gold to advance as the risk trade was on (dow up, gold up and dollar down).  All markets are fully controlled by our banker crooks.  Let us head over to the comex and see inventory movements, deliveries and the release of the COT report.

The total gold comex OI rose by 4040 contracts to 437,339 from 433,299.  Yesterday we had a big raid.
The raid accomplished nothing as no gold leaves fell and instead of falling, the strong willed gold investors were waiting in the wings to pick up these contracts.  The bankers were not too thrilled with this news.
The front delivery month of October saw its OI fall by only 12 contracts from 683 to 671.  We had 25 deliveries on Thursday, so we gained 13 contracts standing and lost nothing to cash settlements.  Again Blythe is pulling her hair as these longs refuse to take her fiat cash.  The big December contract saw its OI rise by 1200 contracts to 260,800 despite the raid.  The estimated volume today was on the light side at 119,632. The confirmed volume yesterday was 196,733.  With all of that non backed firepower, the bankers shook zero gold leaves.

The total silver OI rose another 1004 contracts from 105441 to 106,445.  It seems that we have some very determined purchasers of silver waiting to tackle the likes of JPMorgan and cohorts.  The OI has been rising slowly but steadily every single trading day whether we have a raid or not.  The front options expiry month of October saw its OI fall from 164 to 18 for a loss of 146 contracts.  We had 153 deliveries on Thursday so we gained 7 contracts of silver standing (35,000 oz) and lost nothing to cash settlements.  The big December contract saw its OI rise by over 600 contracts to 61,377.  The estimated volume on Friday was extremely weak coming in at 31,041 as the bankers were loathe to supply the necessary non backed silver paper.  The confirmed volume on Thursday, the day of the raid was good at 57,435.


Inventory Movements and Delivery Notices for Gold: Oct 22.2011:
 Chart for Oct. 








Gold
Ounces
Withdrawals from Dealers Inventory in oz
nil
Withdrawals from Customer Inventory in oz
1700 oz(Brinks)
Deposits to the Dealer Inventory in oz
nil
Deposits to the Customer Inventory, in oz
nil
No of oz served (contracts) today
3700  (37)
No of oz to be served (notices)
63,400  (634)
Total monthly oz gold served (contracts) so far this month
595,100 (5951)
Total accumulative withdrawal of gold from the Dealers inventory this month
4629
Total accumulative withdrawal of gold from the Customer inventory this month
190,015




Again, no gold entered the dealer as a deposit and no gold was withdrawn.

We had another of our famous exact round deposit of 1700.0000 oz into the customer
and you guessed correctly the vault:  Brinks. Gold as a deposit is generally odd numbered.
We should see something like 1702 oz or 1699.  When I see an exact round number enter
I immediately think this is a paper gold deposit.

It gets better....

This same deposit of 1700 oz gets adjusted out of the customer and enters the dealer as a lease
Our comex officials again are blind to this phony situation.

We had another adjustment of 13,849 oz whereby a dealer repaid a customer from a prior lease.
The registered gold lowers to 2.27 million oz.

The CME notified us that we had 37 notices filed for delivery on Monday for 3700 oz.
The total number of notices filed so far this month total 5951 for 595100 oz.  To obtain what is left to be served, I take the OI standing (671) and subtract out Friday's deliveries (37) which leaves us with 634 or 63400 oz left to be served upon.

Thus the total number of gold oz standing in this delivery month advances again:

595,100 oz (served)  +  63,400 oz (to be served) =   658,500 oz or 20.48 tonnes. We gained 1300 oz standing and lost nothing to cash settlements.

And now for silver 


First the chart:


Silver
Ounces
Withdrawals from Dealers Inventorynil
Withdrawals fromCustomer Inventory262,251 (HSBC))
Deposits to theDealer Inventorynil
Deposits to the Customer Inventory595,958 Brinks
No of oz served (contracts)  75,000 (15)
No of oz to be served (notices)15,000 (3)
Total monthly oz silver served (contracts)3,665,000 (733)
Total accumulative withdrawal of silver from the Dealersinventory this month120,533
Total accumulative withdrawal of silver from the Customer inventory this month7,855,048



again, no silver entered as a deposit to the dealer and no silver was withdrawn.
The entire action was with the customer:


On the deposit side of things:

1.  595,958 oz enter Brinks.

total deposits to the customer:  595, 958 oz

On the withdrawal side of things:

1.  One withdrawal of 262,251 oz from HSBC

we had one adjustment whereby 4965 oz leaves the dealer and reenters the customer as a prior loan was repaid.

The registered silver remains at 31.584 million oz.
The total of all silver rises to 106.3 million oz.

The CME notified us that we had 15 notices filed for 75,000 oz.  The total number of notices filed so far this month total 733 for 3,665,000 oz.  To obtain what is left to be served, I take the OI standing (18) and subtract out Friday deliveries (15) which leaves us with only 3 delivery notices left to be filed or 15000 oz.

Thus the total number of silver oz standing in this non delivery month advances again:

3,665,000 oz served +  15,000 oz to be served  =  3,680,000 oz.  We gained another 35,000 of silver standing and lost nothing to cash settlements.


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.

Oct 22.2011:



Total Gold in Trust

Tonnes:1,227.51

Ounces:39,465,715.88

Value US$:64,806,455,490.34





Oct 20.2011


TOTAL GOLD IN TRUST

Tonnes:1,227.51

Ounces:39,465,715.88

Value US$:63,919,185,158.02





Oct 19.2011:


TOTAL GOLD IN TRUST

Tonnes:1,227.51

Ounces:39,465,715.88

Value US$:65,202,519,502.12












we neither gained nor lost any gold oz from the GLD.




And now for the SLV for Oct 22.2011:



Ounces of Silver in Trust316,387,527.000
Tonnes of Silver in Trust Tonnes of Silver in Trust9,840.75

Oct 20;2011:

Ounces of Silver in Trust318,090,684.600
Tonnes of Silver in Trust Tonnes of Silver in Trust9,893.73

Oct 19.2011:

Ounces of Silver in Trust318,090,684.600
Tonnes of Silver in Trust Tonnes of Silver in Trust9,893.73
We lost a huge 1.703 million oz of silver from the SLV.
This silver is being withdrawn as investors around the world flock to the London physical center and demand the two major metals, silver and gold.  It seems that
silver is sold out around the world.

see this report from KingWorldNews/GATA: (interview with a London England metals trader)


Long wait for silver delivery in manipulated market, trader tells King World News

 Section: 
3p ET Friday, October 21, 2011
Dear Friend of GATA and Gold (and Silver):
Silver supplies are tight, there are long waits for delivery, and market participants increasingly realize that the silver futures market is manipulated and has little bearing on the price of real metal, the King World News London trader source reports today:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

end



And now for our premiums to NAV for the funds I follow:

1. Central Fund of Canada: traded to a positive 2.3 percent to NAV in usa funds and a positive 2.4% to NAV for Cdn funds. ( Oct 22.2011).
2. Sprott silver fund (PSLV): Premium to NAV fell to a   positive 19.51%to NAV Oct 22/2011
3. Sprott gold fund (PHYS): premium to NAV fell  to a 2.44% to NAV Oct 22.2011).

 The Sprott funds still command a great premium to NAV in silver and a positive to NAV in gold.
The are still shorting Central Fund of Canada which will explain its low positive to NAV.
 


 end



At 3:30 pm Friday, the CME released the COT on trading positions. They are quite revealing and heading in the right direction for us.


First the gold COT report:



Gold COT Report - Futures
Large Speculators
Commercial
Total
Long
Short
Spreading
Long
Short
Long
Short
175,224
48,246
23,258
182,341
341,494
380,823
412,998
Change from Prior Reporting Period
-3,901
3,623
881
2,592
-6,733
-428
-2,229
Traders
170
74
84
53
49
262
173


Small Speculators




Long
Short
Open Interest



56,916
24,741
437,739



77
1,878
-351



non reportable positions
Change from the previous reporting period

COT Gold Report - Positions as of
Tuesday, October 18, 2011



Those large speculators that have been long in gold lightened up quite a bit on their long positions to the tune of 3,901 contracts.


Those large speculators that have been short in gold, added to their shorts another 3623 contracts and this weekend they are not feeling too well.


And now for our commercials:


Those commercials who have been long in gold and are close to the physical scene, added 2592 contracts to their longs.  This is a very good development.


Those commercials who have been perennially short in gold covered a rather large 6,733 contracts.


Those small specs that have been long in gold added a tiny77 contracts to their longs.
And those small specs that have been short in gold  added 1878 contracts to their shorts.


This again is a very very bullish gold report as the commercials continue to cover their short positions.  The small specs generally get it wrong and they will be blown out again on their new additional shorts.


Let us now see the COT report for silver:





Silver COT Report - Futures
Large Speculators
Commercial
Total
Long
Short
Spreading
Long
Short
Long
Short
23,005
12,653
20,205
40,121
58,895
83,331
91,753
-566
1,030
1,377
2,531
477
3,342
2,884
Traders
58
36
42
38
41
123
100

Small Speculators




Long
Short
Open Interest



20,026
11,604
103,357



317
775
3,659



non reportable positions
Change from the previous reporting period

COT Silver Report - Positions as of
Tuesday, October 18, 2011



A little different that gold.


Those large speculators that have been long in silver,covered only a very tiny 566 contracts from their long side.


Those large speculators that have been short in silver, added another 1,030 contracts to their short side.  These guys will be burnt to a crisp.


And now for our commercials:


Those commercials who have been long in silver added another 2581 contracts to their longs.
This side sees the shortage in real physical metal.


Those commercials that have been short in silver from the beginning of time like JPMorgan and cohorts, added a tiny 477 contracts to their short side
The bankers needed to supply some contracts when they raid.  The problem of course is that the silver longs are in very strong hands and refuse to budge when attacked.


Forget about the small specs.  They continue to nurse their wounds from the "drive by shooting" in May and the huge margin requirement increases.


On the whole, the silver COT is somewhat bullish but not as good as gold.  This is probably due to the fact that all the silver leaves that were weak to start with have already bitten the dust.  There are no more leaves to fall.






end


I would like to announce to you that the new commissioner has been confirmed  (Mark Wetjen)
He is a lawyer and wrote much of the banking legislation in the Dodd's Frank bill.
He will be very important in the interpretation of the new rules:









Statement of Chairman Gary Gensler on Mark Wetjen’s Confirmation as CFTC Commissioner

October 21, 2011
Washington, DC – Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler today congratulated Mark Wetjen on his unanimous Senate confirmation to be a CFTC commissioner.
“Working as a senior advisor for Majority Leader Harry Reid for many years, Mark was the Majority Leader’s point person in bringing the Dodd-Frank Act through the Senate. His experience and dedication to public service will be valuable to the Commission as we continue to finalize the critical reforms to bring transparency to markets and to lower risk. I look forward to working with him.
“I also want to thank Commissioner Mike Dunn, who has served the Federal Government for more than 25 years, including six years as a CFTC commissioner and Acting Chairman. He has been confirmed by the Senate an astonishing six times. Mike is a trusted colleague who works incredibly hard in service to the American public at the CFTC. He has helped frame and improve all of the rules that the Commission proposed to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act. He is a trusted friend and an honorable public servant.
Last Updated: October 21, 2011


From Bix Weir





The CFTC just announced that Mark Wetjen's nomination was confirmed and he has now taken Commissioner Dunn's spot.
Statement of Chairman Gary Gensler on Mark Wetjen's Confirmation as CFTC Commissioner
 
The timing of this couldn't be more perfect. Dunn cast the deciding vote on Position Limits and now he is out! Dunn was a joke of a Commissioner but Wetjen is the REAL DEAL! Along with Gensler he wrote the commodity law portion of the Dodd-Frank Law.
Looks like everything is in place.
Buckle up!!!!
Bix Weir







end






Let us now see some of the major stories of yesterday and this morning which will affect the price of gold and silver.  The first big story is from Wolf Richter of www.testosteronepit.com who writes a major piece on Dexia and how the regulators knew last year that there were problems but they decided to bury the report. In the report you will see a false recapitalization whereby two large institutionalized shareholders borrowed 1.5 billion euros from Dexia and then bought shares.  The 1.5 billion euros showed an increase in bank capital which is clearly a deceit by management.  This is a publicly traded bank and to hide this stuff will surely create some class action lawsuits.


(courtesy Wolf Richter)


ps.  I have put his site on the blogsite for those wishing to see other articles written by Wolf.
This gentleman is very accurate in all of his commentaries.







Regulators Knew of Dexia's Problems But Were Silenced

testosteronepit's picture




By Wolf Richter   www.testosteronepit.com
When a bank is allowed to collapse, the lies behind its financial statements come out of the woodwork—and Dexia, the French-Belgian mega-bank that was bailed out in 2008 and collapsed in early October, is no exception: a report by the French banking regulator surfaced. It contains the results of an investigation concluded in the summer of 2010. And it threatened to put the bank "under special supervision."
And then? Nothing. The report was buried. Until the French newspaper, Libération, obtained a copy of it.
Dexia is a big deal in Belgium where it employs 10,000 people—of a population of 11 million (in the U.S., that ratio would translate into 290,000 employees). It has over 21 million Belgian bank accounts, and its assets of $715 billion dwarf Belgium's $395 billion economy. This craziness started years ago when the community bank embarked on an acquisition spree that turned it into an outsized, overleveraged hedge fund—that paid out huge bonuses, and as we now know, lied to investors, regulators, and the public. At taxpayer's expense.
But the report shows that the regulators weren't stupid. Inspectors of the Authorité de Contrôle Prudentiel, the French banking regulator, investigated Dexia Crédit Local (DCL), the French part of Dexia, during the summer of 2010. By then, DCL had fallen below the required liquidity levels and had difficulty raising cash to cover its monthly expenses.
The report lists a number of infractions committed by both, DCL's pre-bailout management and post-bailout management. Among them:
- DCL gave false financial information to the public.
- DCL managed its portfolio of derivatives in a manner that violated regulatory provisions.
- DCL omitted or lied about important information concerning the acquisition of a portfolio of bonds and speculative holdings.
- DCL overvalued a portfolio of investments by an estimated €2 billion ($2.7 billion).
- DCL's CEO understated transaction volumes.
And this gem:
"From 2007 to 2008, financial communications of Dexia Crédit Local were evasive about the rising risks, though the CEO and other administrators knew about them. They covered the infractions and the consequent liquidity risks with silence."
The regulators also accused DCL's audit firms, Deloitte and Mazars, of closing their eyes.
The report was sent to DCL, along with a threat that the bank would be put "under special supervision." And then the hatchet was buried for some reason. It remains to be seen if the wrongdoing at the bank will ever lead to legal actions against the perpetrators.
And just how deceitful can bank management get? The Financial Times added another wrinkle: a false recapitalization! Dexia lent €1.5 billion to its two largest institutional shareholders before 2008, so that they would invest it in Dexia common stock. As a result, Dexia showed a capital increase of €1.5 billion. Inexplicably, the practice wasn't illegal at the time, though Belgian regulators noticed it.
After all this, we welcome comforting words.
"Belgian banks don't need to be recapitalized, according to the EBA," said Yves Leterme, the caretaker prime minister of the country that is still without government. The EBA, of course, is the European Banking Authority, the very same entity whose "stress test" Dexia had passed in July with flying colors.
Europe's banking and debt crisis is pitting France against Germany. And now, we finally know the real issue: German taxpayers might have to subsidize a French company. Via Greece.... German-French Fight Breaks Out Over Frigates
Wolf Richter   www.testosteronepit.com
Europe on edge as rescue talks stall: The FT discussed the latest developments surrounding the debt crisis. In terms of the areas of agreement, the article noted that diplomats said that there was growing consensus that Greek bondholders would be pushed to accept a 50% haircut, while there was also a general acceptance with an EBA analysis that banks would need to raise about €80B in fresh capital. However, the paper added that differences over the EFSF have widened in recent days as some officials have warned that a first-loss guarantee plan might not be effective. One EU official told the FT that the plan began unraveling due to fears it would cost France its triple-A rating. The article pointed out that bonds issued by the EFSF for bailouts in Ireland and Portugal have seen heavy selling this week amid concerns that the fund could be compromised. The paper went on to discuss how France has made a renewed push for a proposal that would give the EFSF access to the ECB, a move that Germany and the central bank have resisted.
EU to consider wielding $1.3T to break impasse: Bloomberg also had an article discussing some of the latest developments in the debt crisis. It noted that in an attempt to break a deadlock between France and Germany over increasing the firepower of the EFSF to help prevent contagion, sources said that the bailout fund may be combined with its permanent successor, the ESM, to unleash as much as €940B to help fight the debt crisis (recall that a combination of the funds has been discussed before). A ceiling on bailouts would also be scrapped as part of the plan. The article also said that EU officials considering deeper losses for Greek bondholders are concerned that any further investor involvement risks another round of market turmoil. It added that Greece has accumulated at least €20B in additional financing needs since a €159B bailout package was set in July. According to the report, the EU is now considering five scenarios, ranging from sticking with July's voluntary swap to a hard restructuring.
France likely to lose top rating in stressed economic scenario: Bloomberg noted that a report out today from S&P said that France is among the countries likely to be downgraded in a stressed economic scenario. The sovereign ratings of Spain, Italy, Ireland and Portugal would also be reduced by another one or two levels in either of the ratings firm's two stress scenarios. Low economic growth and a double-dip recession were assumed in the first set of circumstances, while an interest rate shock to the recession was factored into the second scenario.

Federal Reserve Vice Chairman Lends Support to QE3

Dear Jim,
This sure sounds like a “trial balloon” for another round of Quantitative Easing.
The gold market will explode if they go for it in my opinion.
David D
Fed’s Yellen: QE3 May Be Warranted
By Scott Lanman and Jennifer Oldham – Oct 21, 2011 11:57 AM PT
Federal Reserve Vice Chairman Janet Yellen said a third round of large-scale securities purchases might become warranted if necessary to boost a U.S. economy challenged by unemployment and financial turmoil.
The central bank should also give “careful consideration” to Chicago Fed President Charles Evans’s proposal to tie the near-zero interest-rate pledge to specific levels of unemployment and inflation, Yellen said today in a speech in Denver.
The remarks signal Fed officials may be prepared to delve further into unprecedented monetary territory and take criticism inside and outside the central bank for expanding the balance sheet. Fed policy makers are struggling to lower unemployment that’s been stuck near 9 percent or higher for 30 months without boosting inflation that’s already close to the central bank’s long-run goal.
Since yesterday was the 20th of the month, The Central Bank of the Russian Federation updated their website for September showing their gold purchases for that month. They reported buying another 200,000 ounces, bringing their gold reserves up to 27.4 million ounces. Here's Nick Laird's graph of the banks purchases going back six years.
(Click on image to enlarge)


Russia cbank says will raise gold share in reserves


Oct 20 (Reuters) - The Russian central bank will continue raising the share of gold in its gold and foreign exchange reserves, the central bank First Deputy Chairman Alexei Ulyukayev said on Thursday.
"We are not planning to step away from this path. We are acquiring huge volumes (of gold)," Ulyukayev told the parliament.
Earlier on Thursday, the central bank data showed that Russia's gold and forex reserves, the world's third largest, rose to $517.7 billion in the week to Oct. 14. (Reporting by Oksana Kobzeva; Writing by Andrey Ostroukh; Editing by Lidia Kelly)



end

Here is a piece from Michael Snyder who comments on how the up and coming derivative crisis will destroy the global financial system similar to what I have been telling you over the years.

(courtesy, Ilene from zero hedge/Michael Snyder, market-ticker.org)



The Coming Derivatives Crisis That Could Destroy The Entire Global Financial System

ilene's picture




Michael summarizes the situation with derivatives. I've gotten several questions about derivatives and how they affect the world's financial well-being - and as I've mentioned in comments  - finance is not my field - but I think this article is very helpful.  Please add any input you may have about this big tangled web that seems destined to eventually collapse (minus heroic efforts on the part of governments to keep it alive). ~ Ilene 
The Coming Derivatives Crisis That Could Destroy The Entire Global Financial System
Most people have no idea that Wall Street has become a gigantic financial casino. The big Wall Street banks are making tens of billions of dollars a year in the derivatives market, and nobody in the financial community wants the party to end. 
The word "derivatives" sounds complicated and technical, but understanding them is really not that hard.  A derivative is essentially a fancy way of saying that a bet has been made.  Originally, these bets were designed to hedge risk, but today the derivatives market has mushroomed into a mountain of speculation unlike anything the world has ever seen before.  Estimates of the notional value of the worldwide derivatives market go from $600 trillion all the way up to $1.5 quadrillion. 
Keep in mind that the GDP of the entire world is only somewhere in the neighborhood of $65 trillion.  The danger to the global financial system posed by derivatives is so great that Warren Buffet once called them "financial weapons of mass destruction".  For now, the financial powers that be are trying to keep the casino rolling, but it is inevitable that at some point this entire mess is going to come crashing down.  When it does, we are going to be facing a derivatives crisis that really could destroy the entire global financial system.
Most people don't talk much about derivatives because they simply do not understand them.
Perhaps a couple of definitions would be helpful.
The following is how a recent Bloomberg article defined derivatives....
Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates.
The key word there is "speculation".  Today the folks down on Wall Street are speculating on just about anything that you can imagine.
The following is how Investopedia defines derivatives....
A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.
A derivative has no underlying value of its own.  A derivative is essentially a side bet.  Usually these side bets are highly leveraged.
At this point, making side bets has totally gotten out of control in the financial world.  Side bets are being made on just about anything you can possibly imagine, and the major Wall Street banks are making a ton of money from it.  This system is almost entirely unregulated and it is totally dominated by the big international banks.
Over the past couple of decades, the derivatives market has multiplied in size.  Everything is going to be fine as long as the system stays in balance.  But once it gets out of balance we could witness a string of financial crashes that no government on earth will be able to fix.
The amount of money that we are talking about is absolutely staggering. Graham Summers of Phoenix Capital Research estimates that the notional value of the global derivatives market is $1.4 quadrillion, and in an article for Seeking Alpha he tried to put that number into perspective....
If you add up the value of every stock on the planet, the entire market capitalization would be about $36 trillion. If you do the same process for bonds, you’d get a market capitalization of roughly $72 trillion.
The notional value of the derivative market is roughly $1.4 QUADRILLION.
I realize that number sounds like something out of Looney tunes, so I’ll try to put it into perspective.
$1.4 Quadrillion is roughly:
-40 TIMES THE WORLD’S STOCK MARKET.
-10 TIMES the value of EVERY STOCK & EVERY BOND ON THE PLANET.
-23 TIMES WORLD GDP.
It is hard to fathom how much money a quadrillion is.
If you started counting right now at one dollar per second, it would take 32 million years to count to one quadrillion dollars.
Yes, the boys and girls down on Wall Street have gotten completely and totally out of control.
In an excellent article that he did on derivatives, Webster Tarpley described the pivotal role that derivatives now play in the global financial system....
Far from being some arcane or marginal activity, financial derivatives have come to represent the principal business of the financier oligarchy in Wall Street, the City of London, Frankfurt, and other money centers. A concerted effort has been made by politicians and the news media to hide and camouflage the central role played by derivative speculation in the economic disasters of recent years. Journalists and public relations types have done everything possible to avoid even mentioning derivatives, coining phrases like “toxic assets,” “exotic instruments,” and – most notably – “troubled assets,” as in Troubled Assets Relief Program or TARP, aka the monstrous $800 billion bailout of Wall Street speculators which was enacted in October 2008 with the support of Bush, Henry Paulson, John McCain, Sarah Palin, and the Obama Democrats.
Most people do not realize this, but derivatives were at the center of the financial crisis of 2008.
They will almost certainly be at the center of the next financial crisis as well.
For many, alarm bells went off the other day when it was revealed that Bank of America has moved a big chunk of derivatives from its failing Merrill Lynch investment banking unit to its depository arm.
So what does that mean?
An article posted on The Daily Bail the other day explained that it means that U.S. taxpayers could end up holding the bag....
This means that the investment bank's European derivatives exposure is now backstopped by U.S. taxpayers. Bank of America didn't get regulatory approval to do this, they just did it at the request of frightened counterparties. Now the Fed and the FDIC are fighting as to whether this was sound. The Fed wants to "give relief" to the bank holding company, which is under heavy pressure.
This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input.
So did you hear about this on the news?
Probably not.
Today, the notional value of all the derivatives held by Bank of America comes to approximately $75 trillion.
JPMorgan Chase is holding derivatives with a notional value of about $79 trillion.
It is hard to even conceive of such figures.
Right now, the banks with the most exposure to derivatives are JPMorgan Chase, Bank of America, Goldman Sachs, Citigroup, Wells Fargo and HSBC Bank USA.
Morgan Stanley also has tremendous exposure to derivatives.
You may have noticed that these are some of the "too big to fail" banks.
The biggest U.S. banks continue to grow and they continue to get even more power.
Back in 2002, the top 10 U.S. banks controlled 55 percent of all U.S. banking assets.  Today, the top 10 U.S. banks control 77 percent of all U.S. banking assets.
These banks have gotten so big and so powerful that if they collapsed our entire financial system would implode.
You would have thought that we would have learned our lesson back in 2008 and would have done something about this, but instead we have allowed the "too big to bail" banks to become bigger than ever.
And they pretty much do whatever they want.
A while back, the New York Times published an article entitled "A Secretive Banking Elite Rules Trading in Derivatives".  That article exposed the steel-fisted control that the "too big to fail" banks exert over the trading of derivatives.  Just consider the following excerpt from the article....
On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.
The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.
So what institutions are represented at these meetings?
Well, according to the New York Times, the following banks are involved: JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup.
Why do those same five names seem to keep popping up time after time?
Sadly, these five banks keep pouring money into the campaigns of politicians that supported the bailouts in 2008 and that they know will bail them out again when the next financial crisis strikes.
Those that defend the wild derivatives trading that is going on today claim that Wall Street has accounted for all of the risks and they assume that the issuing banks will always be able to cover all of the derivative contracts that they write.
But that is a faulty assumption.  Just look at AIG back in 2008.  When the housing market collapsed AIG was on the wrong end of a massive number of derivative contracts and it would have gone "bust" without gigantic bailouts from the federal government.  If the bailouts of AIG had not happened, Goldman Sachs and a whole lot of other people would have been left standing there with a whole bunch of worthless paper.
It is inevitable that the same thing is going to happen again.  Except next time it may be on a much grander scale.
When "the house" goes "bust", everybody loses.  The governments of the world could step in and try to bail everyone out, but the reality is that when the derivatives market comes totally crashing down there won't be any government on earth with enough money to put it back together again.
A horrible derivatives crisis is coming.
It is only a matter of time.
Stay alert for any mention of the word "derivatives" or the term "derivatives crisis" in the news.  When the derivatives crisis arrives, things will start falling apart very rapidly. 

p.s. See also: Karl Denninger's take on the 2008 meltdown.




end

In the following story a French regulator urges all French banks to finally write down their Greek debt.
The problem with writing off some of the debt ( and not reported on) is the massive credit default swaps written on the Greek debt which may give the globe a Lehman moment:

(courtesy zero hedge)


French Regulator Urges Banks To Write Down Greek Debt To Realistic Levels

Tyler Durden's picture




Slowly even those staunchest critics of reality, namely undercapitalized and insolvent French banks, are coming to grips with the truth that they are going to see massive losses on their tens of billions of French debt exposure. The FT reports that the French stock market regulator has told French banks to apply realistic assumptions to their Greek debt haircuts. Because through today, French banks only used the 21% agreed upon haircut at the July 21 (and even that number is likely greatly overstated). So where are Greek bonds trading now? Oh about 30 cents on the dollar (70% haircut) , which means at the end of the day French banks will see about three time more losses on Greek holdings than provisioned. And the market, which is not all that stupid, knows this and has been punishing French banks. This is precisely what regulators are trying to avoid. The problem, as is well known courtesy of daily fruitless discussions between Sarkozy and Merkel, is that "French banks have more cross-border exposure to Greece than any other country, mainly through subsidiaries owned by Crédit Agricole and Société Générale. BNP Paribas holds the most Greek sovereign bonds among private sector investors, with €4bn of exposure...French banks argued that limiting themselves to 21 per cent was justified because trading in Greek government debt was so subdued, making market prices unreliable." Uh, what? Those billions in Greek bond volumes, where the 1 year yields 184% in dozens of daily trades, are "subdued" and "unreliable?" Why not just buy the bonds then and take advantage of the illiquid arb then? What's that? Crickets? Oh ok. In the meantime, what is certain is that after the ECB, France is the country most exposed to a Greek admission of reality (even truncated, assuming a 60% haircut which is still generous). Which of course confirms, once again, our thesis that the only source of EURUSD stability in the past two weeks have been French banks liquidating assets, and using the feedback loop of rising asset prices from FX EUR repatriation to sell even more to a willing market.
Per the FT:
Controversially, the 21 per cent “haircut” envisaged for private sector bondholders as part of the rescue package had been used as a benchmark for losses by various French banks and some insurers when they reported their results for the first half of 2011.

In sharp contrast, some rivals in other countries – such as the UK and Germany – had recognised much heavier losses of about 50 per cent on their “available for sale” Greek government bonds, in line with distressed market prices.

The AMF confirmed that it had sent the letters, without releasing a copy. It said the letters had argued that the July bail-out was “jeopardised” and that the 21 per cent haircut was “now perceived as insufficient”.

...

Following their less aggressive approach to Greek sovereign debt writedowns, shares in French banks suffered in August when fears about eurozone debt contagion among peripheral countries escalated.

Many analysts expect the banks to take a bigger haircut when they report their third-quarter earnings next month. BNP Paribas has already said that a 55 per cent impairment would lead to a provisioning of €1.7bn, on top of the €534m taken at the end of the first half.
Sorry, if it was only €1.7 billion, BNP and be extension, Sarkozy, would not bring the Eurozone to the brink of disaster every single time a haircut of more than 21% was demanded to enact the EFSF and the Greek PIP. After all, it is these banks' own survival tha demand the free recap money (however insufficient) that the EFSF would provide. Banks know this, and thus it makes no sense that the amount in question is so de minimis.
Or, if it is, then things are truly scary in Europe, where massive financial corporations apparently have absolutely no way to raise an amount of capital that is a fraction of a percent of their total "assets."



end

The following will have repercussions as Berlusconi, the Italian Prime Minister screwed the French President
Sarkozy. In the end however, both countries are insolvent:

(courtesy zero hedge/Tyler Durden)


Berlusconi Screws Over The Wrong Person: ECB Shake Up Imminent Following Big French-Italian Relations SNAFU?

Tyler Durden's picture




Just when one thought the Italian PM could not possibly come up with yet another massive SNAFU, he does it once again. This time however he may have screwed over the wrong (non-underage) person. Last night, after the FT had previously leaked (incorrectly once again) that the Italian head would pick ECB executive Lorenzo Bini Smaghi to head the Bank of Italy following Mario Draghi's departure to head the ECB, Berlusconi instead chose a relatively unknown Ignazio Visco to head the Italian Central Bank. The move, while largely symbolic as it hardly matters who is in charge of the Italian bank but is of great import from a "national pride" perspective, managed to infuriate French leader Nicholas Sarkozy, who had previously made it clear he would advance his support of incoming ECB head, former Goldmanite and current Bank of Italy head, Mario Draghi, only if Bini Smaghi would be pulled and his seat would be vacated to allow a Frenchman to enter the ECB. That did not happen. So with the latest faux pas out of Berlusconi, he is now poised to destabilize not only Italian-French relations, but the percevied stability of the ECB if the Frenchman decides to make it an issue vis-a-vis his support of the incoming President. All in all, this is yet another reminder of the total and utter chaos that dominates Europe every single day. And somehow the broad public is supposed to believe that Europe can come up with a solution to an insolvable math problem...
The Telegraph explains in detail:
Silvio Berlusconi can expect an awkward encounter with Nicholas Sarkozy, the French president, on Sunday after snubbing him with a surprise choice over who will be the next head of the Bank of Italy.

The looming spat will only heighten tensions between eurozone leaders as they meet in Brussels for a crucial summit on the debt crisis.

Italy's embattled prime minister had been expected to nominate Lorenzo Bini Smaghi, an Italian who sits on the executive board of the European Central Bank, as the next head of the Bank of Italy.

Mr Smaghi's appointment would have freed up a place on the ECB board and made way for a Frenchman to take the post.

Mr Sarkozy had made that a key condition of his support for Mario Draghi, the former head of the Bank of Italy, to replace Jean-Claude Trichet as president of the ECB at the end of this month.
But instead Mr Berlusconi on Thursday night unexpectedly chose Ignazio Visco, a 30-year veteran of the Bank of Italy, to lead the institution, to the fury of the French. 

That means that Italy will have two members on the ECB's board but France will have none. Mr Bini Smaghi's refusal to resign from the board of the ECB until the end of
his term in 2013 leaves almost no wriggle room on the issue for Mr
Berlusconi.
This also means that we can now expect a firestorm of media-based outrage in France which will now perceive itself as snubbed by a country that it is risking its sarcosanct AAA rating to bail out. Alternatively, the Italian is also stuck:
While Mr Berlusconi's decision will anger president Sarkozy, in Italy it was broadly welcomed by the media, the banking sector and employers' federations, who had said that appointing Mr Bini Smaghi would have been a humiliating concession to France.

With his approval rating at a record low and daily predictions that his government will not see out its term to 2013, Mr Berlusconi seems to have calculated that keeping domestic critics sweet was more important than fostering good relations with Paris.
Alas only a complete idiot would make that conclusion at a time when it is of paramount importance to at least retain the perception that things in Europe are calm, cool and collected. Instead, we get... this.
The fall out of this comedy, as Europe's two biggest drama queen engage head on will be one for the ages.


end

Remember last week, the discussion centered on the need for 3 trillion dollars to rescue Europe.
Now the German Budget Committee has capped the EFSF guarantees at 211 billion euros.
Germany is the only country capable of rescuing Europe:

(courtesy zero hedge)


German Budget Committee Caps EFSF Guarantees At €211 Billion

Tyler Durden's picture




Bloomberg has just disclosed a statement from the German Budgetary Committee which is critical to the future shape of the EFSF:
  • GERMAN CDU/CSU PARLIAMENTARY SPOKESMAN SCHARLACK SPEAKS ON EFSF
  • GERMAN BUDGET COMMITTEE SETS CONDITIONS FOR EFSF LEVERAGING
  • GERMAN BUDGET COMMITTE GUIDELINES VOTE EXCLUDES LEVERAGING
  • BUDGET COMMITTEE SAYS EFSF REPOS MUSTN'T RAISE GUARANTEES
  • GERMAN BUDGET COMMITTEE SAYS EFSF LEVERAGING MUST EXCLUDE ECB
  • GERMAN BUDGET COMMITTEE BACKS EFSF DRAFT GUIDELINES
So far so good... But this...
  • BUDGET COMMITTEE SAYS EFSF GUARANTEES MUSTN'T EXCEED EU211 BLN
...Is not good. If this is the core guarantees that can be levered up to 5x assuming a 20% first loss guarantee, it means barely $1 trillion can be insured. This is nowhere near enough to backstop the just noted €1.7 trillion in future debt rolls, not to mention the €X billion in bank recaps. It also means that a French downgrade, with S&P noted earlier is contingent on the country not falling into recession, an event which even Goldman has said previously is assured, would put the full weight of the European rescue squarely on the shoulders of Germany.

Bank of America Lynch[ing this] CountryWide's Equity Is Likely Worthess and It Will Rape FDIC Insured Accounts Going Bust

Reggie Middleton's picture




Warning! This is going to be a highly, highly
controversial post. It is long, it is thick with information, and it
hits HARD! Thus if you are easily offended by pretty women,
intellectually aggressive brothers in cognitive war garb, your
government regulators selling you out to the highest European bidder, or
the cold hard facts borne from world class research that you can't find
from the sell side or the mainstream media, I strongly suggest you stop
reading here and move on. There is nothing further for you to see. As
for all others, please keep in mind that I warned of Bank of America Lynch[ing this] CountryWide's swap exposure through a subscriber document on Thursday, 01 October 2009, then went public with it shortly thereafter.
There
has been a lot of feedback and emails emanating from the last
RT/Capital Accounts interview that I did earlier this week, as well as
it should be. The dilemma is that I don't think the viewership is taking
the topic seriously enough. I explicitly said, on air, that the Federal
Reserve endorsed this country's most dangerous bank in shifting its
most toxic assets directly onto the back of the US taxpayer through
their most sacrosanct liquid assets, their bank accounts. In addition,
when the shit hits the fan, those very same assets will be second in
line for recovery, for the derivative counterparties will get first
grabs.
Now, maybe its due to the fact that the interviewer was a
cutie, or my voice was too deep, or because I didn't appear in my
superhero garb, but I really don' think the message was driven home by
the interview that I gave on Russian TV's Capital Account introductory
show last week. So, let's try this again, but this time instead of
donning that suit and tie, I go as that most unlikely of financial
superheroes...
To begin with, for those who did not see the Capital Accounts interview on Russian Television, here it is...
Next, we need to see just how pertinent being 2nd in line is in the
liquidation of an insolvent investment bank. I do mean insolvent. Yes, I
know the big name brand investors who don't look like that rather
unconventional superhero standing in front of the Squid headquarters
above may believe that BAC has value, but I have told you since 2008,
and I'll tell you now - the equity of Bank of America Lynch[ing this] CountryWide
is effectively worth less than zero! Yeah, I know, many of those name
brand analysts espoused in the mainstream media disagree, and to each
their own, but several of Bank of America Lynch[ing this] CountryWide's latest acquisitions, ex. Countrywide, Merrill Lynch, etc. were enough to make it insolvent. Add several negative numbers together and do you think a little financial engineering is going to give you a positive number??? A little common damn sense is all that is needed to fill the bill here.
That
$6 you see quoted on your equity screens is a freebie, a giveaway, and
not indicative of economic book value in my opinion. Then again, I could
be wrong, but I was correct on practically every major bank, insurance
and real estate co. failure in the US over the last 4 years, as well as
predicting many of the European ones. See Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

If Bank of America Lynch[ing this] CountryWide Goes Bust, How Much Can Bank Depositors Expect To Lose?

Now, back to the point, how much can US depositors (you) expect to get when (notice I didn't say if) Bank of America Lynch[ing this] CountryWide goes bust? Well, here's a snippet from the WSJ.com:
The
group of more than a dozen investors who hold debt in Lehman’s
so-called operating subsidiaries today lobbed a proposal that would pay
some creditors up to 60.4 cents for each dollar of their claims, while
offering senior Lehman bondholders a 16% recovery, reported Deal Journal
colleague Eric Morath.
(Click HERE to read the rival plan to reorganize Lehman Brothers.)
At
stake is how to repay nearly $300 billion in money owed from the
collapse of Lehman Brothers, which filed for bankruptcy protection in
September 2008. A judge now may be forced to decide among three
different proposals to repay Lehman creditors.
Lehman’s
own proposal to pay back debt holders calls for just a 21.4% recovery
for unsecured creditors. Under Lehman’s plan unveiled in January, the
operating company creditors would receive less than 60.4 cents on the
dollar.
Lehman is also facing an additional rival plan
from another group led by hedge-fund manager John Paulson. Those
creditors are pushing for a 24% recovery for senior unsecured creditors
at the expense of subsidiary creditors.
Whoa, a recovery of
between 21 and 60%??? That doesn't sound to promising! You know why it
doesn't? Because it's not accurate. The derivative counterparties of the
bank get first shot at that 21 cents to 60 cents on the dollar, not the
FDIC insured bank depositors. After the counterparties finish feasting
at the trough, what would you think is left over for the Aunt Mabels of
the US with their lifetime savings tied up in CDs paying .23%, which
your aunt was perfectly willing to accept in exchange for the safety and
protection of her US government and the FDIC (please excuse me as the
taste of bile interferes with my ability to type this).
Let's revisit the story that Bloomberg broke on this topic.
Bank of America Corp. (BAC)hit
by a credit downgrade last month, has moved derivatives from its
Merrill Lynch unit to a subsidiary flush with insured deposits
, according to people with direct knowledge of the situation.
The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren't authorized to speak publicly. The Fed
has signaled that it favors moving the derivatives to give relief to
the bank holding company, while the FDIC, which would have to pay off
depositors in the event of a bank failure, is objecting
, said the people. The bank doesn't believe regulatory approval is needed, said people with knowledge of its position.
Three
years after taxpayers rescued some of the biggest U.S. lenders,
regulators are grappling with how to protect FDIC- insured bank accounts
from risks generated by investment-banking operations. Bank of America,
which got a $45 billion bailout during the financial crisis, had $1.04
trillion in deposits as of midyear, ranking it second among U.S. firms.
...
Keeping such deals separate from FDIC-insured savings has been a
cornerstone of U.S. regulation for decades, including last year’s
Dodd-Frank overhaul of Wall Street regulation.
The
legislation gave the FDIC, which liquidates failing banks, expanded
powers to dismantle large financial institutions in danger of failing.
The agency can borrow from the Treasury Department to finance the
biggest lenders’ operations to stem bank runs. It’s required to recoup
taxpayer money used during the resolution process through fees on the
largest firms.
Bank of America benefited from two injections of U.S. bailout funds during the financial crisis. The first,
in 2008, included $15 billion for the bank and $10 billion for Merrill,
which the bank had agreed to buy. The second round of $20 billion came
in January 2009 after Merrill’s losses in its final quarter as an
independent firm surpassed $15 billion
, raising doubts about the bank’s stability if the takeover proceeded. The U.S. also offered to guarantee $118 billion of assets held by the combined company, mostly at Merrill. The company repaid federal bailout funds in 2009 with interest.
Bank
of America’s holding company -- the parent of both the retail bank and
the Merrill Lynch securities unit -- held almost $75 trillion of
derivatives at the end of June, according to data compiled
by the OCC. About $53 trillion, or 71 percent, were within Bank of
America NA, according to the data, which represent the notional values
of the trades.
That compares with JPMorgan’s
deposit-taking entity, JPMorgan Chase Bank NA, which contained 99
percent of the New York-based firm’s $79 trillion of notional
derivatives, the OCC data show.
Moving derivatives contracts between units of a bank holding company
is limited under Section 23A of the Federal Reserve Act, which is
designed to prevent a lender’s affiliates from benefiting from its
federal subsidy and to protect the bank from excessive risk originating
at the non-bank affiliate, said Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.
“Congress
doesn’t want a bank’s FDIC insurance and access to the Fed discount
window to somehow benefit an affiliate, so they created a firewall,”
Omarova said. The discount window has been open to banks as the lender
of last resort since 1914.
Hmmmm! As excerpted from a recent post on Naked Capitalism:
Remember
the effect of the 2005 bankruptcy law revisions: derivatives
counterparties are first in line, they get to grab assets first and
leave everyone else to scramble for crumbs. So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC,
which would have to make depositors whole after derivatives
counterparties grabbed collateral. It’s well nigh impossible to have an
orderly wind down in this scenario. You have a derivatives counterparty
land grab and an abrupt insolvency. Lehman failed over a weekend after
JP Morgan grabbed collateral.
But it’s even worse than
that. During the savings & loan crisis, the FDIC did not have enough
in deposit insurance receipts to pay for the Resolution Trust
Corporation wind-down vehicle. It had to get more funding from Congress.
This move paves the way for another TARP-style shakedown of taxpayers,
this time to save depositors. No Congressman would dare vote against
that. This move is Machiavellian, and just plain evil.
And back to the Bloomberg article...
As
a general rule, as long as transactions involve high- quality assets
and don’t exceed certain quantitative limitations, they should be
allowed under the Federal Reserve Act, Omarova said.
In 2009, the Fed granted Section 23A exemptions
to the banking arms of Ally Financial Inc., HSBC Holdings Plc, Fifth
Third Bancorp, ING Groep NV, General Electric Co., Northern Trust Corp.,
CIT Group Inc., Morgan Stanley and Goldman Sachs Group Inc., among
others, according to letters posted on the Fed’s website.
This is a very, very, very important point to BoomBustBlog paying susbscribers (see research excerpts below).
The
central bank terminated exemptions last year for retail-banking units
of JPMorgan, Citigroup, Barclays Plc, Royal Bank of Scotland Plc and
Deutsche Bank AG. The Fed also ended an exemption for Bank of America in
March 2010 and in September of that year approved a new one.
Section
23A “is among the most important tools that U.S. bank regulators have
to protect the safety and soundness of U.S. banks,” Scott Alvarez, the Fed’s general counsel, told Congress in March 2008.

BoomBustBlog
Subscribers, Feel Free to Indulge In Research That Will Likely Prove To
Be Most Prophetic Given The Information Above

Colossal Derivative exposure

According
to the latest quarterly report from the Office Of the Currency
Comptroller the top 4 banks in the US now account for a massively
disproportionate amount of the derivative risk in the financial system.
Although the [subject bank] with the xth largest derivative exposure
stands a significant distance behind JPM, Citi, Bank of America and
Goldman Sachs (the four largest players); the exposure quoted in OCC
report is only for the US entity. Overall, [subject bank]’s group
derivative exposure in its balance sheet is 220% of its tangible equity,
far higher in both absolute and relative terms when compared to its peers. [Subject
bank]’s on balance sheet derivative exposure is higher than the
combined share of Goldman Sachs ($74bn, or 115% of TEC), JP Morgan
($78bn, or 62% of TEC) and Morgan Stanley ($46bn, or 114% of TEC).  
What
is more worrying is the quality of these derivative assets. Of the
total notional value of credit derivatives (over half trillion $US bn),
nearly 60% are non-investment grade. [Subject bank] has the highest
proportion of non-investment grade credit derivatives followed by Citi
Group (55%), GS (52%), Bank of America (37%) and JP Morgan (32%). The
tables below as well as on the following page compare [subject bank]’s
on-balance sheet derivative exposure. This is the bank, apparently
unrecognized by the markets, media and sell side, that will literally go
boom when the match is put to the dry gunpowder (subscribersonly): Haircuts, Derivative Risks and Valuation
This
is the US bank that will SHOCK everybody with a most violent reaction
when the excrement hits those cooling machine blades (subscribers only): US Bank Derivative Exposure
This is the European bank that either will set off the global chain reaction or end up being a very significant part of it (subscribersonly): 
For those who don't follow BoomBustBlog regularly, I warned ofBank of America Lynch[ing this] CountryWide'srisks
and related issues many times in the past, but this expose and research
on their swap risk was most prophetic, and was dated Thursday, 01 October 2009, over two full years ago!
As excerpted, and aptly named:

And the next AIG is... (Public Edition)...

I
have posted this warning of Bank of America's naked swap writing to my
subscribers a few weeks ago. Since BAC is reporting this week, I have
decided to make my suspicions public. I have found evidence that this
bank has $32 billion of naked (as in apparently unhedged) swaps on its
books - just like AIG. The difference is this bank is bigger, probably
has more exposure, and has already been bailed out - several times. Oh,
did I mention the insured collateral is nearly half BBB rated or
lower??? How about extreme management issues at the top, and I mean all
the way to the top (the CEO may actually bring down the ex-treasury
secretary and maybe even the Fed Chairman. A trunk full of junk,
surrounded by drama! It should be an interesting conference call
tomorrow when they report, that is if anybody decides to ask the right
questions...
As many of my subscribers 
and readers know, I have caught many companies on the short side as
they imploded. One company that I did not get was American International
Group. The reason it escaped me? I was too close to it. I have met
Frank Tizzio (then president), Maurice Greenburg (then CEO and
Chairman), and a several of their upper management to collaborate on
deals, and was impressed with the way they ran their shop. Because of
this, I didn't apply the same critical, skeptical eye that I used with
the other prospects. Alas, because of such, I overlooked the inevitable,
and in retrospect, the blatantly obvious. Well, I have learned my
lesson. The lesson learned from AIG was not wasted on me, but does seem
to have been wasted on many others. With this thought in mind, let's
review the net, unhedged swap exposure of a few of our analysis
subjects. I think a few of my readers may
have their eyebrows raised. Some things are actually hiding in plain
sight. I have made this short description of what I see as Bank of
America, the naked swap dealer, available for free download, but you
must register (I made the process very quick) to get it. I know it is a
pain in the ass, but I want to be sure that the disclaimer is
acknowledged by all who access the document. Thank our litigious
society. See (subscribers only)BAC Swap exposure_011009 BAC Swap exposure_011009 2009-10-01 10:44:45 1.02 Mb.
I need for all to know that, in my opinion, bank reporting is quite
opaque, so it is not very easy to get granular information out of it.
The conclusions drawn from this post and the accompanying downloads are
derived from BAC's publicly available documents and are the result of my
best efforts to piece the information together. For those who do not
know of me, you can reference the "who am I"section below to see how
well this process has worked in the past.
For the sake of nostalgia, here is an old post of Bank of America's estimated ABS inventory (subscribers only): BAC ABS Inventory ABS Inventory 2008-02-25 06:48:09 0 bytes. I will be releasing similar analysis of other banks and insurers to subscribers over the next day or two, and then to the public a day or two before their respective earnings announcement.
The following is the bailout AIG story as excerpted from Wikipedia and annotated the BAC way by your friendly neighborhood blogger, Reggie Middleton, in bold, italic font:

Chronology of September 2008 liquidity crisis

On September 16, 2008, AIG suffered a liquidity crisis following the downgrade of its credit rating. Industry practice permits firms with the highest credit ratings to enter swaps
without depositing collateral with its trading counter-parties. When
its credit rating was downgraded, the company was required to post
additional collateral with its trading counter-parties, and this led to
an AIG liquidity crisis. [Here's a quick glance at Bank of
America's current rating as compared to AIG's, both before and after
their "incident". Be aware that this is not my proprietary rating (which
would be substantially lower), but that of the oh so accurate major
rating agencies
I doubt if they have taken this naked and unhedged exposure into consideration!
]
Click graphics to enlarge
aig_credit_rating.jpgaig_credit_rating.jpgaig_credit_rating.jpg
bac_credit_rating.jpgbac_credit_rating.jpgbac_credit_rating.jpg
AIG's London unit sold credit protection in the form of credit default swaps (CDSs) on collateralized debt obligations (CDOs) that had by that time declined in value.[18] [The
lower quality assets are the most likely to decrease in value
dramatically. One should keep this in mind, for BAC has written $116
billion on non-investment grade (junk) credit derivatives and $3 billion
in junk total return swaps. They have hedged, but not completely. My
calculations and estimates have BAC with a carrying value of unhedged
exposure of around $32 billion and a notional unhdeged exposure of $348
billion
]. The United States Federal Reserve Bank announced the creation of a secured credit facility of up to US$85
billion, to prevent the company's collapse by enabling AIG to meet its
obligations to deliver additional collateral to its credit default swap
trading partners. [Keep in mind that BAC just gave up its
government guarantee on the JUNKY assets acquired with the Merrill Lynch
acquisition. Merrill Lynch was one of the, if not the LARGEST writer of
CDS on Wall Street! BAC also bought Countrywide, arguably the most
wretched pool of subprime and under-performing mortgage assets in this
country.
] The credit facility provided a structure to loan as much as US$85 billion, secured by the stock in AIG-owned subsidiaries, in exchange for warrants for a 79.9% equity stake, and the right to suspend dividends to previously issued commonand preferred stock.[16][19][20]
AIG announced the same day that its board accepted the terms of the
Federal Reserve Bank's rescue package and secured credit facility.[21] This was the largest government bailout of a private company in U.S. history, though smaller than the bailout of Fannie Mae and Freddie Mac a week earlier.[22][23] [Well, we shall see, since Bank of America is currently the largest bank in America. We still have time to set a new record.]
AIG's
share prices had fallen over 95% to just $1.25 by September 16, 2008,
from a 52-week high of $70.13. The company reported over $13.2 billion
in losses in the first six months of the year.[24][25] [Well,
green shoots is a sproutin'! AIG is currently trading at $44.33. I am
at a loss as to how anyone can justify such, but hey, people are still
buying Bank of America stock as well...
] The AIG Financial Products division headed by Joseph Cassano, in London, had entered into credit default swaps to insure $441 billion worth of securities originally rated AAA. [Hmmm!!!
BAC has written protection $2.6 trillion notional, with $348 billion
unhedged (at least according to my calculations). For those "not to use
notional nitwits", that translates to $198 billion carrying value with
$32 billion apparently unhedged or written naked - just like AIG, with
one big exception. It appears as if BAC has one the machismo contest of
"mine is bigger than yours" with AIG - congrats fellas!
] Of those securities, $57.8 billion were structured debt securities backed by subprime loans.[26] CNN named Cassano as one of the "Ten Most Wanted: Culprits" of the 2008 financial collapse in the United States.[27][Well,
Ken Lewis, the BAC CEO, is not to popular around these parts either. I
am sure the upcoming Cuomo/congress investigations will be juiced when
they find out that BAC is doing the AIG thing, just on a much larger
scale!!!
 Just remember who you heard it from first!
]
As Lehman Brothers (the largest bankruptcy in U.S. history at that time) [Hey, I warned you guys about Lehman and Bear WAY in advance, just as I am doing ow with Bank of America - "Is Lehman really a lemming in disguise?" (Thursday, 21 February 2008) - Is this the Breaking of the Bear? January 2008 - Lehman rumors may be more founded than some may have us believe Tuesday, 01 April 2008 (be sure to read through the comments, its like deja vu, all over again!) - Lehman stock, rumors and anti-rumors that support the rumors Friday, 28 March 2008 - Funny CLO business at Lehman Friday, 04 April 2008]
suffered a catastrophic decline in share price, investors began
comparing the types of securities held by AIG and Lehman, and found that
AIG had valued its Alt-A and sub-prime mortgage-backed securities at 1.7 to 2 times the values used by Lehman which weakened investors' confidence in AIG.[24] [If
BAC is not careful, the market may have similar misgivings on how BAC
values its credit card receivables and mortgages held in off balance
sheet trusts. See our my findings on what may lay off balance sheet - If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - BAC (the bank
] On September 14, 2008, AIG announced it was considering selling its aircraft leasing division, International Lease Finance Corporation, to raise cash.[24] The Federal Reserve hired Morgan Stanley to determine if there are systemic risks to a financial failure of AIG, and asked private entities to supply short-term bridge loans to the company. In the meantime, New York regulators allowed AIG to borrow $20 billion from its subsidiaries.[28][29] [Why ask Morgan Stanley? In 2008, they were "The Riskiest Bank on the Street".
I guess it takes one to know one! I ask my readers, is one of the
biggest banks in the country that then swallows the biggest brokerage
and at the time the sickest brokerage in the country right after
swallowing the biggest and sickest mortgage lender in the country a
systemic risk if it fails? I bet a lot of you guys and gals can answer
that question for a whole lot more than the government paid Morgan
Stanley. I wonder, why don't these guys ask me my opinion? NY bloggers
don't get enough respect :-)
]
At the stock market's opening on September 16, 2008, AIG's stock dropped 60 percent.[30]
The Federal Reserve continued to meet that day with major Wall Street
investment firms, hoping to broker a deal for a non-governmental $75
billion line of credit to the company.[31] Rating agencies Moody'sand Standard and Poor downgraded AIG's credit ratings on concerns over likely continuing losses on mortgage-backed securities. [Now,
this is just simply hilarious. With friends like the credit rating
agencies, who needs enemies? Think about the fire alarm that starts to
go off just when the smoldering embers of what use to be your house
begin to cool... How much money has AIG paid the credit ratign agencies
over the last 10 years or so?
] The credit rating downgrade forced
the company to deliver collateral of over $10 billion to certain
creditors and CDS counter-parties.[32] [Well, we shall see what will happen with that "other" bankThe New York Times later reported that talks on Wall Street had broken down and AIG may file for bankruptcy protection on Wednesday, September 17.[33]
Just before the bailout by the US Federal Reserve, AIG former CEO
Maurice (Hank) Greenberg sent an impassioned letter to AIG CEO Robert B.
Willumstad offering his assistance in any way possible, ccing the Board of Directors. His offer was rebuffed.[34] [And why wasn't this man's assistance accepted???]

Federal Reserve bailout

On the evening of September 16, 2008, the Federal Reserve Bank's Board of Governors announced that the Federal Reserve Bank of New York had been authorized to create a 24-month credit-liquidity facility from which AIG could draw up to $85 billion. The loan was collateralized
by the assets of AIG, including its non-regulated subsidiaries and the
stock of "substantially all" of its regulated subsidiaries, and with an
interest rate of 850 basis points over the three-month London Interbank Offered Rate
(LIBOR) (i.e., LIBOR plus 8.5%). In exchange for the credit facility,
the U.S. government received warrants for a 79.9 percent equity stake in
AIG, with the right to suspend the payment of dividends to AIG common
and preferred shareholders.[16][20] The credit facility was created under the auspices of Section 13(3) of the Federal Reserve Act.[20][35][36]
AIG's board of directors announced approval of the loan transaction in a
press release the same day. The announcement did not comment on the
issuance of a warrant for 79.9% of AIG's equity, but the AIG 8-K filing
of September 18, 2008, reporting the transaction to theSecurities and Exchange Commission stated that a warrant for 79.9% of AIG shares had been issued to the Board of Governors of the Federal Reserve.[16][21][37] AIG drew down US$ 28 billion of the credit-liquidity facility on September 17, 2008.[38] On September 22, 2008, AIG was removed from the Dow Jones Industrial Average.[39]
An additional $37.8 billion credit facility was established in October.
As of October 24, AIG had drawn a total of $90.3 billion from the
emergency loan, of a total $122.8 billion.[40]
Maurice Greenberg, former CEO of AIG, on September 17, 2008, characterized the bailout as a nationalization of AIG. He also stated that he was bewildered by the situation and was at a loss over how the entire situation got out of control as it did.[41]On September 17, 2008, Federal Reserve Bank chair Ben Bernanke asked Treasury Secretary Henry Paulson
join him, to call on members of Congress, to describe the need for a
congressionally authorized bailout of the nation's banking system. Weeks
later, Congress approved the Emergency Economic Stabilization Act of 2008. Bernanke said to Paulson on September 17:[42]
[Oh,
this soap opera gets worse. Bank of America's bailouts have totaled
$168 billions so thus far, and we haven't even addressed the naked swap
writing issue as of yet. Then again, BAC did buyout the Merrill Lynch
loss guarantee from the government after much wrangling. I don't think
this was the wisest idea, for they very well may still need it. Again
excerpted from Wikipedia
]
:
Bank of America received US $20 billion in federal bailout from the US government through theTroubled Asset Relief Program (TARP) on 16 January 2009 and also got guarantee of US $118 billion in potential losses at the company.[45]
This was in addition to the $25 billion given to them in the Fall of
2008 through TARP. The additional payment was part of a deal with the US
government to preserve Bank of America's merger with the troubled
investment firm Merrill Lynch.[46]
Since then, members of the US Congress have expressed considerable
concern about how this money has been spent, especially since some of
the recipients have been accused of mis-using the bailout money.[47] The Bank's CEO, Ken Lewis,
was quoted as claiming "We are still lending, and we are lending far
more because of the TARP program." Members of the US House of
Representatives, however, were skeptical and quoted many anecdotes about
loan applicants (particularly small business owners) being denied loans
and credit card holders facing stiffer terms on the debt in their card
accounts.
According to a March 15, 2009 article in The New York Times, Bank of America received an additional $5.2 billion in government bailout money which was channeled through American International Group.[48]
As a result of its federal bailout and management problems, The Wall Street Journal
reported that the Bank of America is operating under a secret
“memorandum of understanding” (MOU) from the US government that requires
it to ”overhaul its board and address perceived problems with risk and
liquidity management.” With the federal action, the institution has
taken several steps, including arranging for six of itsdirectors
to resign and forming a Regulatory Impact Office. Bank of America faces
several deadlines in July and August and if not met, could face harsher
penalties by federal regulators. Bank of America did not respond to The Wall Street Journal story.[49]
This
is exactly what I am talking about when I say these institutions CANNOT
hedge their large risks. The number 2 derivative holder in the country
(Bank of America) and the number 3 derivative holder in the country
(Goldman Sachs) had to be bailed out by the government through AIG
(another large derivative holder) when AIG had just $10 billion dollars
in collateral calls that it could not pay. AIG was the largest insurer
in the world!!! The number 1 derivative holder in the country (JP
Morgan) needed $90 billion or so in bailout monies when its major
counterparty failed - Bear Stearns. See 
Is this the Breaking of the Bear? January
2008 for how easy that was to see coming at least 3 months in advance!
That circle of concentrated risk is even smaller now then it was back
then. Now 5 institutions hold 97% of the notional vale and 88% of the
market value in derivatives, and they are all basically in the same
business and all basically hedge with each other. It is not a true hedge
when the other side can't pay, and history has clearly proven how easy
it is for the other side not to be able to pay. See a sampling of my
many posts on this topic:
    1. The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets
    2. Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?
    3. As the markets climb on top of one big, incestuous pool of concentrated risk...
    4. Any objective review shows that the big banks are simply too big for the safety of this country
    5. Why hasn't anybody questioned those rosy stress test results now that the facts have played out?

    6. An Independent Look into JP Morgan | Reggie ...

      1. image001.png
        Cute
        graphic above, eh? There is plenty of this in the public preview. When
        considering the staggering level of derivatives employed by JPM, it is
        frightening to even consider the fact that the quality of JPM's
        derivative exposure is even worse than Bear Stearns and Lehman‘s
        derivative portfolio just prior to their fall.
        Total net
        derivative exposure rated below BBB and below for JP Morgan currently
        stands at 35.4% while the same stood at 17.0% for Bear Stearns (February
        2008) and 9.2% for Lehman (May 2008). We all know what happened to Bear
        Stearns and Lehman Brothers, don't we??? I warned all about Bear
        Stearns (Is this the Breaking of the Bear?: On Sunday, 27 January 2008) and Lehman ("Is Lehman really a lemming in disguise?":
        On February 20th, 2008) months before their collapse by taking a close,
        unbiased look at their balance sheet. Both of these companies were
        rated investment grade at the time, just like "you know who". Now, I am
        not saying JPM is about to collapse, since it is one of the anointed
        ones chosen by the government and guaranteed not to fail - unlike Bear
        Stearns and Lehman Brothers, and it is (after all) investment grade
        rated. Who would you put your faith in, the big ratings agencies or your
        favorite blogger? Then again, if it acts like a duck, walks like a
        duck, and quacks like a duck, is it a chicken??? I'll leave the rest up
        for my readers to decide.
        This public preview is the culmination
        of several investigative posts that I have made that have led me to look
        more closely into the big money center banks. It all started with a
        hunch that JPM wasn't marking their WaMu portfolio acquisition
        accurately to market prices (see Is JP Morgan Taking Realistic Marks on its WaMu Portfolio Purchase? Doubtful! 
        ), which would very well have rendered them insolvent - particularly if
        that was the practice for the balance of their portfolio as well (see Re: JP Morgan, when I say insolvent, I really mean insolvent).
        You can download the public preview here. If you find it to be of
        interest or insightful, feel free to distribute it (intact) as you wish -JPM Public Excerpt of Forensic Analysis Subscription JPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb

         

Additional Bailouts of 2008

On
October 9, 2008, the company borrowed an additional $37.8 billion via a
second secured asset credit facility created by the Federal Reserve
Bank of New York (FRBNY).[43]
From mid September till early November, AIG's credit-default spreads
were steadily rising, implying the company was heading for default.[44]
On November 10, 2008, the U.S. Treasury announced it would purchase $40
billion in newly issued AIG senior preferred stock, under the authority
of the Emergency Economic Stabilization Act's Troubled Asset Relief Program.[45][46][47]
The FRBNY announced that it would modify the September 16th secured
credit facility; the Treasury investment would permit a reduction in its
size from $85 billion to $60 billion, and that the FRBNY would extend
the life of the facility from three to five years, and change the
interest rate from 8.5% plus the three-month London interbank offered rate (LIBOR)
for the total credit facility, to 3% plus LIBOR for funds drawn down,
and 0.75% plus LIBOR for funds not drawn, and that AIG would create two
off- balance-sheet Limited Liability Companies (LLC) to hold AIG assets:
one will act as an AIG Residential Mortgage-Backed Securities Facility
and the second to act as an AIG Collateralized Debt Obligations
Facility.[45][47]
Federal officials said the $40 billion investment would ultimately
permit the government to reduce the total exposure to AIG to $112
billion from $152 billion.[45] On December 15, 2008, the Thomas More Law Center
filed suit to challenge the Emergency Economic Stabilization Act of
2008, alleging that it unconstitutionally promotes Islamic law (Sharia)
and religion. The lawsuit was filed because AIG provides Takaful
Insurance Plans, which, according to the company, avoid investments and
transactions that are"un-Islamic".[48][49]

Counterparty Controversy

AIG
was required to post additional collateral with many creditors and
counter-parties, touching off controversy when over $100 billion was
paid out to major global financial institutions that had previously
received TARP money. While this money was legally owed to the banks by AIG (under agreements made via credit default swaps
purchased from AIG by the institutions), a number of Congressmen and
media members expressed outrage that taxpayer money was going to these
banks through AIG.[50]
Had
AIG been allowed to fail in a controlled manner through bankruptcy,
bondholders and derivative counterparties (major banks) would have
suffered significant losses, limiting the amount of taxpayer funds
directly used. Fed Chairman Ben Bernanke argued: "If a federal agency
had [appropriate authority] on September 16 [2008], they could have been
used to put AIG into conservatorship or receivership, unwind it slowly,
protect policyholders, and impose haircuts on creditors and
counterparties as appropriate. That outcome would have been far
preferable to the situation we find ourselves in now."[51]
The "situation" to which he is referring is that the claims of
bondholders and counterparties were paid at 100 cents on the dollar by
taxpayers, without giving taxpayers the rights to the future profits of
these institutions. In other words, the benefits went to the banks while
the taxpayers suffered the costs.
Well, Bank of
America may very well give Ben Bernanke and the American taxpayer an
opportunity to find out if we have learned our collective lessons. With
the S&P pushing 1100 while practically all of the problems from the
period illustrated above remain extant, and if anything exacerbated (ex.
counterparty and concentration risk, credit risk and asset quality
concerns, and above all, government sanctioned opacity in reporting), I
doubt so very seriously.
This is what the US banks, and now you Mr. and Mrs. US taxpayer and bank depositor, have been backstopping all along...
You've been BAMBOOZLED! HOODWINKED! LED ASTRAY RUN AMOK!
5

Search This Blog

Loading...