Saturday, November 5, 2011

Greek problems continue/MF Global funds found at JPMorgan (commingling)/Problems with Erste bank in Austria

Good morning Ladies and Gentlemen;

I wrote the title of my commentary at around 6 pm Friday.  I am going to add another sub-title:
the nuclear button has been pressed. We are at DEFCON nuclear!!  You will see why.

Events are happening at lightening speed with respect to the European problems in Greece, in Italy as its 10 year bond yields surpass the 6.4% (and the spread between 10 yr German bonds and 10 yr Italian bonds exceed 4.55%), problems with the second largest banking system in Austria, Erste Group and problems at home with respect to MF Global, and  Jeffries. The CME just went nuclear Friday night by raising margin requirements on all commodities. We will see major stories on all of these fronts in the body of my commentary.  First I would like to report that we had two banks that entered the hallowed shrine of our banking morgue:

1.  Sun First Bank of St.George Utah
2.  Mid City Bank of Omaha Nebraska.

If I am not mistaken, this is the first time that we have seen a Nebraska bank enter the morgue this year.
We had a tiny bank from Lincoln enter around mid year last year.

The price of gold finished the comex session at $1755.30 down $8.90 from Thursday.  The price of silver fell by 41 cents to $34.07.  Let us head over to the comex and see how trading fared:

The total gold comex OI rose by 6599 contracts to 452,836 as the specs were certainly witnessing the continued deterioration in the global financial world.  The front options expiry month of November saw its OI fall by only 8 contracts from 91 to 83.  We had 55 delivery notices on Thursday so we gained 4700 oz of gold standing and lost nothing to cash settlements.  The big December delivery month saw its OI fall by 3510 contracts from 262,872 to 259,362.  The estimated volume on Friday was very weak at 93,561 contracts.
The confirmed volume on Thursday was much better at 169,802.

The total silver comex OI fell by less than 300 contracts to 107,361.  The front options delivery month of November saw its OI surprisingly rise from 37 to 47 for a gain of 10 contracts despite 3 delivery notices on Thursday.  Thus we gained 13 contracts of silver standing and lost nothing to cash settlements.  The big December delivery month saw its OI fall by less than 400 contracts to 54,066.  The estimated volume at the silver comex was very slow at 38,756 contracts as the weight of those high margin requirements are having its effect on trading.  The confirmed volume on Thursday was slightly better at 47,113.

Inventory Movements and Delivery Notices for Gold: Nov 5.2011:

Withdrawals from Dealers Inventory in oz
Withdrawals from Customer Inventory in oz
692 (Brinks,Scotia)
Deposits to the Dealer Inventory in oz

Deposits to the Customer Inventory, in oz
No of oz served (contracts) today
24 (2400 oz)
No of oz to be served (notices)
59 (5900)
Total monthly oz gold served (contracts) so far this month
396 (39,600)
Total accumulative withdrawal of gold from the Dealers inventory this month
Total accumulative withdrawal of gold from the Customer inventory this month

again we had no gold enter as a deposit to the dealer and we witnessed no withdrawals.

We had the following customer withdrawal:

1.  Out of Brinks:  499 oz
2.  Out of Scotia:  193 oz

total withdrawal by customer;  692 oz.
we had no adjustments and no customer deposit.

Thus the registered gold remains at 2.298 million oz.

The CME notified us that we had 24 notices for 2400 oz of gold.  The total number of notices filed so far this month total 396 for 39600 oz.  To obtain what is left to be served, I take the OI standing for Nov  (83) and subtract out Friday deliveries (24) which leaves us with 59 notices or 5900 oz left to be served upon.

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

39600 oz (served)  +  5900 (oz to be served) =  45,500 oz or 1.415 tonnes. we gained  4700 oz  from yesterday.

And now for silver 

First the chart: November 5th

Withdrawals from Dealers Inventorynil
Withdrawals fromCustomer Inventory31,029 (Scotia)
Deposits to theDealer Inventorynil
Deposits to the Customer Inventory1,824,127 (Brinks,Delaware,HSBC)
No of oz served (contracts)0 (nil)
No of oz to be served (notices)47  (235,000)
Total monthly oz silver served (contracts)39 (195,000)
Total accumulative withdrawal of silver from the Dealersinventory this month308,850
Total accumulative withdrawal of silver from the Customer inventory this month1,037,840

we had no silver enter as a deposit or as a withdrawal.  However we had a massive deposit into 3 vaults on Friday:

Deposit by customer:

1. Into Brinks:  595,391 oz
2. Into Delaware:  10,999
3. Into HSBC :  1,217,848 oz

total deposit;  1,824,127 oz

Let us see if this silver will be used in the delivery process.

We had only one withdrawal and that was 31,029 oz from Scotia.

we had two tiny adjustments of an addition of 45 oz and one oz subtraction.
The total registered silver remains at 31.163 million oz.
The total of all silver rises to 108.36 million oz.

The CME notified us that we had zero notices filed so the number of notices remain at 39 for 195,000 oz. To obtain what is left to be served upon, I take the OI standing (47) and subtract out Friday deliveries (zero)
which leaves us with 47 contracts or 235,000 oz to be served upon.

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

195,000 oz (served)  +  235,000 oz (to be served)  =  430,000 oz. (we gained 65000 of additional silver from Thursday)


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.

Nov 5.2011:

Total Gold in Trust



Value US$:69,986,144,888.43

Nov 3.2011:




Value US$:70,261,662,225.85

we gained a huge 1.51 tonnes of gold at the GLD. The boys at the Bank of England must have been very busy.


And now for the SLV for Nov 5;2011

Ounces of Silver in Trust314,115,724.100
Tonnes of Silver in Trust Tonnes of Silver in Trust9,770.09

Nov 3.2011:

Ounces of Silver in Trust314,310,338.100
Tonnes of Silver in Trust Tonnes of Silver in Trust9,776.14
we lost a tiny 195,000 oz of silver from the SLV.

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

1. Central Fund of Canada: traded to a positive 3.5 percent to NAV in usa funds and a positive  3.3% to NAV for Cdn funds. ( Nov5.2011).
2. Sprott silver fund (PSLV): Premium to NAV rose to a   positive 19.03%to NAV Nov 5/2011
3. Sprott gold fund (PHYS): premium to NAV lowered to a 2.81% to NAV Nov 5.2011).

the central fund is still trying to reassert its positive to NAV. The Silver sprott fund continues to exhibit strong positive to NAV.


On Friday afternoon we received the COT report:  First the Gold COT

Gold COT Report - Futures
Large Speculators
Change from Prior Reporting Period

Small Speculators

Open Interest



non reportable positions
Change from the previous reporting period

COT Gold Report - Positions as of
Tuesday, November 01, 2011

Those large specs that have been long in gold continued to pile into gold to the tune to 1003 contracts as they are witnessing continued financial turmoil surrounding the globe.

Those large specs that have been short in gold had enough and covered a huge 9,221 contracts from their short side.

In the commercial category:

those commercials that have been long in gold pitched a rather large 5,361 contracts from their long side.
Those commercials that have been short in gold from the beginning of time added a whopping 8925 contracts to their short side.

In the spec category:

Those specs that have been long in gold added 1156 contracts to their long side.
Those specs that have been short in gold covered 2906 of their shorts.

Conclusion:  bearish as the net commercial short position increased.  The bankers are getting ready for another monster raid.

and now for silver:

Silver COT Report - Futures
Large Speculators

Small Speculators

Open Interest



non reportable positions
Change from the previous reporting period

COT Silver Report - Positions as of
Tuesday, November 01, 2011

Those large specs that have been long in silver added a tiny 424 more positions to their long side.
Those large specs that have been short in silver covered 728 contracts from their short side.

In the commercial category:

Those commercials that have been long in silver added another 1,031 contracts to their long side.
Those commercials that have been short in silver from the beginning of time added only a tiny 357 contracts to their short side.

In the small specs category:

Those small specs that have been long in silver pitched a rather large 1878 contracts from their long side.
Those small specs that have been short in silver covered a tiny 52 contracts from their short side.

Conclusion:  neutral.  Certainly more bullish than gold.


Early today we received this from the CFTC regarding the silver investigation.  Emails were sent out to various insiders as to what on earth is happening.  First the CFTC statement on the silver investigation:

November 4, 2011

the CFTC Statement Regarding Enforcement Investigation of the Silver Markets

Washington, DC – The Commodity Futures Trading Commission today issued the following statement:
"In September of 2008, the Commission announced the existence of an enforcement investigation into the possibility of unlawful acts in silver markets. Since that time, the staff has analyzed over 100,000 documents and interviewed dozens of witnesses and obtained expert advice. It has been a long, detailed, and thorough investigation, and it continues in an appropriate and considered manner."

This statement  is nothing but motherhood. What on earth were they trying to communicate?

Early this morning Bart Chilton emailed me that he was going to be interviewed by KingWorld News on the silver manipulation.  Wow! He normally is interviewed by Fox or CNBC but on Friday, Eric King?

The audio of the tape will be ready later this morning.  GATA has commented with the courtesy of Eric King, the transcripts of the interview:

Silver smashdown predictions impressed him, CFTC's Chilton tells King World News

5:45p ET Friday, November 4, 2011
Dear Friend of GATA and Gold (and Silver):
U.S. Commodity Futures Trading Commissioner member Bart Chilton today tells King World News that he has been impressed by silver market observers who have accurately predicted smashdowns in the price. Chilton adds that the public is entitled to an accounting of the commission's seemingly interminable investigation of the silver market, which he believes has been criminally manipulated. An excerpt from the interview has been posted at the King World News blog here:

Silver smashdown predictions impressed him, CFTC's Chilton tells King World News

5:45p ET Friday, November 4, 2011
Dear Friend of GATA and Gold (and Silver):
U.S. Commodity Futures Trading Commissioner member Bart Chilton today tells King World News that he has been impressed by silver market observers who have accurately predicted smashdowns in the price. Chilton adds that the public is entitled to an accounting of the commission's seemingly interminable investigation of the silver market, which he believes has been criminally manipulated. An excerpt from the interview has been posted at the King World News blog here:
Audio of the full interview should be posted there shortly.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

For the written transcripts press on the following :

the audio portion will be ready this afternoon.

Then last night GATA's Chris Powell writes the following commentary as to the reasons for the CFTC statement and why Bart went for the interview with Eric King.  The answer: the USA Government is totally behind the gold and silver manipulation!!!


(courtesy GATA and Chris Powell)

CFTC's evasion after 3 years investigating silver is answer enough

9:50p ET Friday, November 4, 2011
Dear Friend of GATA and Gold (and Silver):
Under renewed pressure by Commissioner Bart Chilton to account for itself, the U.S. Commodity Futures Trading Commission today issued a statement about its 3-year-old investigation of manipulation of the silver market, asserting only that the investigation continues.
Those who have been taking the CFTC investigation seriously may wax indignant over the delay in resolution. But the delay speaks for itself, and eloquently: Thanks to the complaint about market rigging by London silver trader Andrew Maguire and GATA's publicizing it at the CFTC's March 25, 2010, hearing and agitating about it afterward, the CFTC has probably realized that the rigging of the silver market is, like the rigging of the gold market, a U.S. Government operation conducted through intermediaries, primary dealers in U.S. Government securities, and thus can't be examined in public without crashing the operation and impugning the whole government of which the CFTC is a part.

The CFTC well may expect that the silver business can be resolved by a confidential settlement of the class-action lawsuit brought against the main silver market manipulator, JPMorganChase, in U.S. District Court for the Southern District of New York. (See the lawsuit's consolidated complaint here:
If the lawsuit survives a summary judgment dismissal motion by JPMorganChase, which seems likely, insofar as such a motion must presume that everything alleged in the complaint is true, the lawsuit may be worth a few hundred million dollars to the investment bank just to prevent any hostile law firms from inspecting its books and interrogating its traders and managers in court-ordered discovery and deposition. Such a settlement will make the plaintiffs' lawyers very rich and let the CFTC off the hook even as it leaves the public with no formal finding of what actually happened.
Will it end the manipulation of the silver market, or will that manipulation be ended by whatever futures market position limits the CFTC eventually decides to enforce? Maybe -- or maybe JPMorganChase will find intermediaries through which it can continue to enter the market in disproportionate size and thus continue to control it.
In any case silver investors probably should be thankful enough that the CFTC held that hearing a year ago in March and thankful particularly to Commissioner Chilton for insuring that GATA Chairman Bill Murphy and GATA Board of Directors member Adrian Douglas were allowed to speak and introduce Maguire's complaint in detail. On the day of the hearing silver was hovering around $15 per ounce and had been going nowhere in particular. By the end of the year it had doubled and this week it closed above $34, and there are many signs of its physical shortage as the paper hangers of the fractional-reserve precious metal banking system thrash around desperately to regain control of the market.
Anything beyond this would require one agency of the U.S. Government to execute other agencies of the government, agencies much bigger and more sinister. Most likely the CFTC would be executed first. Indeed, GATA often worries for Chilton's safety and is sometimes surprised that he hasn't already been found in circumstances making it appear that he had been struck by lightning, a meteorite, or a freight train.
So thanks, CFTC, but we don't need your silver investigation anymore. You've already told us all we need to know.
The CFTC's statement is appended.
Additional comments made by Chilton today to King World News, regarding the collapse of the trading firm MF Global, can be found here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
CFTC Statement Regarding Enforcement Investigation of the Silver Markets
Press Release
U.S. Commodity Futures Trading Commission
Friday, November 4, 2011
WASHINGTON -- The Commodity Future


Last Friday night, the CME went nuclear as they increased the maintenance margins on all commodities at the Comex.  This means that investors must deposit huge dollars on every commodity or receive a margin call and be forced out.  This is nothing but a margin call on all products as inter-bank liquidity is non existent:

courtesy zero hedge) 

CME Goes To Margin DefCon 1: Makes Maintenance Margin Equal To Initial For... Everything!?

Tyler Durden's picture

The most important news announcement of the day was not anything to came out of Cannes  (as nothing did), nor from Greece (the merry go round farce there continues unabated). No, it was a brief paragraph distributed by the CME long after everyone had gone home, and was already on their 3rd drink. It is critical, because not only is this announcement a direct consequence of what happened with MF Global several days ago, but because also it confirms one of our biggest concerns: systemic liquidity is non-existanet. We confirmed interbank liquidity in Europe was at an all time low earlier today, and can only assume the same is true for US banks. But what is very disturbing is that this is just as true at the exchange level, where it appears the aftermath of the MF collapse is just now being felt. What exactly was the announcement. Unless we are completely reading it incorrectly, it is nothing short of a margin call for tens if not hundreds of billions worth of product. Because as of close of business on November 4, today, the CME just made the maintenance margin, traditionally about 26% lower than the initial margin for specs, equal. For everything. Which means that by close of business Monday, millions of options and futures holders will be forced to deposit billions in additional capital to the CME just so they are not found to be margin deficient, and thus receive a margin call. Naturally, since it is very unlikely that this incremental amount of liquidity can be easily procured in one business day, we anticipate the issuance of hundreds of thousands of margin calls Monday, followed by forced liquidations of margin accounts across America... and the world. Just like when Lehman blew up, it took 5 days for Money Markets to break. Is this unprecedented elimination in the distinction between initial and maintenance margin the post-MF equivalent of the first domino to fall this time around?
From the CME (source):
And for those asking, here is a complete breakdown of all CME products and associated margins:

(see zero hedge for the complete CME products:


I then sent this email to Bart Chilton of the CFTC:

From: Harvey Organ []
Sent: Friday, November 04, 2011 10:52 PM
To: Chilton, Bart
Subject: raising maintence at COMEX

the raising of maintence fees is a call on all products. we are going to see massive
margin calls on Monday?

Bart: this is awful. 

investors are going to be wiped out.

am I reading this right?

CME Goes To Margin DefCon 1: Makes Maintenance Margin Equal To Initial For... Everything!?


The MFG Global scandal continued throughout Friday where we learned that the powers to be found the commingled investor money in the hands of JPMorgan:

04 November 2011

MF Global: $658 Million in Missing Customer Funds Found in Account at JP Morgan

According to Bloomberg, $658.8 Million in what could be the 'missing customer funds' were found today in an account at JP Morgan.

I know how it is. Sometimes I forget to check my coat pockets and bank statements too. Sloppy bookkeeping. Tsk tsk. Oh well, just an honest mistake, right? And of course JPM had NO idea it was customer money they were holding.

JP Morgan is one of the largest holders and agents of MF Global debt and Deutsche Bank. Jefferies Group underwrote MF's bond offering late this year.

MF Global’s commodity customer funds are reported to have a shortfall of $633 million, or about 11.6 percent, out of a segregated fund requirement of about $5.4 billion, according to the CFTC.

And in related news: 
SEC Investigates Insider Trading of MF Bonds


Here is what happened on the MF Global front.  This futures commodities company got it's start by purchasing the remnants of Refco.  The originating company was Man and with the Refco purchase, the new operation called MF Global became a giant in the field. Jon Corzine after leaving office was asked to run the company. He was the former co CEO at Goldman Sachs but was pushed out by Hank Paulsen.  Gary Gensler was also at Goldman at the time running the fixed income scene over there.  The two became very close (Gensler and Corzine). 

It seems that Corzine made a huge sovereign bet on Greece, Italy and other PIIGS nations covering his bets with credit default swaps.  Margin was required to maintain his positions.
When the credit default swaps were not interpreted as a credit event, he basically lost of both ends. Corzine used the investor margin accounts to hypothecate his bets.  When they failed, JPMorgan drew on those funds and that is the reason they are sitting with JPMorgan this morning.
And this is the reason that Grassely wants  Gensler's head.

Dave from Denver describes this beautifully in his commentary at the Golden Truth:

Friday, November 4, 2011

Could MF Global Be The Lehman/AIG Event Trigger?

Segregated reserve bank accounts under SEC Rule 15c3-3: The SEC Act of 1934 requires broker dealers to maintain "special reserve bank accounts" strictly for customers which are separated from the broker dealer's own accounts.
First off, I just want to say that if Jon Corzine does not see jail time over this then our system is seriously corrupt and fraudulent and we're all a bunch of lifeless serfs if we don't join the Occupy movement to protest the raping and pillaging our country by a select few. That's the bottom line.

The brokerage accounts of MF are being moved to several different brokers who are presumably on sound financial footing. Here's the problem: it looks like there must be some missing collateral associated with those customer accounts to the tune of about $1 billion:
Call it the mother of all margin calls: Up to 50,000 former customers of bankrupt broker MF Global must post some $1 billion in additional collateral to new brokers almost overnight, or be forced out of their trades.
In other words, a large portion of the collateral that should be attached to each and every one of those accounts is not accounted for and the customer will have to pony up the funds to cover the margin requirements or have their accounts liquidated. Here's the story: LINK Tragically, if the markets for the various commodities and metals associated with those accounts experience some downside volatility during the transfer process, the account could be wiped out. I know of at least one fund that is closing down because of this. The ONLY failure on this guy's part is that he trusted the firm being run by Jon Corzine, former Goldman CEO and former Governor of New Jersey. I guess if you lie down with dogs you wake up with fleas. In this case, if you lie down with someone who is BOTH a Wall Street executive AND a politician, you wake up with a combination of late-stage pancreas cancer and hep-C.

The bigger problem, at least for the rest of us, is what the hell happened to the collateral. The missing collateral should be cash - readily liquid - and futures contracts and securities - mostly liquid. Where is it? Why are these customer accounts not being transferred intact? According to the SEC Act of 1934, these funds and securities should have been in a separate account - not one penny of money should be unaccounted for.

I have said a few times that when one big financial firm starts doing something and gets away with it, they all start doing it. Remember the repo game Lehman was doing to dress up its quarterly balance sheet for regulators and investors? It turns out every big Wall Street firm does this, everyone knows it now and the regulators are doing nothing about it. Well it turns out that MF was doing this too, among other things. But they were also likely illegally rehypothecating the customer collateral and misappropriating the funds obtained by rehypothecating customer collateral. Now the collateral and the funds are gone.

Once people understand what hypothecation/rehypothecation is - if they care about their money they will, that is - the MF situation could lead to a confidence crisis in the brokerage industry. Almost everyone who opens a margineable brokerage account, from little guys to sophisticated hedge funds, knowingly or typically unknowingly also signs a hypothecation agreement, which enables the brokerage firm to take the securities in your margin account and re-pledge them as collateral to obtain bank financing for your margin account. It looks like MF was taking this collateral and obtaining financing but using that money for other purposes - like investing in short term Greek sovereign paper paying 50% now that pays 100%, which means MF's investment was wiped out and now the bank that provided the funds for those investments has the customer securities as collateral for the MF trade and the customer is screwed. Please note, I don't know for sure that is exactly what happened, but I'm 90% certain that is generically what was going at MF and why at least $700 million in customer cash and $1 billion in collateral is missing and possibly more.

You know, if we were on a gold standard and did not have an extreme fractional banking system, this couldn't happen. But I digress. I will say that based on the most recent news flowing out of Jeffries securities, if you have an account there I would move it. Jeffries was downgraded by Egan-Jones recently to BBB-. S&P has not budged. Usually the ratings agencies are way behind the curve in downgrading financial firms. Moodys usually keeps a high rating intact until the day before a firm goes under. Egan-Jones is typically a bit more ethical and forthright with putting out the truth. The fact that questions are being raised about Jeffries should raise the hair on the back of your neck if you have an account there. Jeffries has an unsavory history and culture. The current CEO originally worked as a junk bond trader directly for Michael Milken at Drexel Burnham. Remember that saga? A lot of ex-Drexel guys who didn't get thrown in jail ended up at Jeffries. If you keep your brokerage account there just remember that "when you lie down with dogs..."


Friday saw the Italian bonds reach 6.4% and the spread over German bonds hit 450% as turmoil in Europe heightens. Liquidity is non existent!!

(courtesy zero hedge)

Italy-Bund Spread Passes 450 bps

Tyler Durden's picture

While we have commented on the technical minutia of the LCH's margining rules and their blended AA benchmark, 450bps over Bunds remains a clear line in the sand in the market's mind. With Italy ever so graciously accepting (and if we believe the headlines - requesting!!) IMF's observation/supervision, it seems real money continues to leave the country's bonds in droves. With 10Y BTP yields breaking 6.3% today, the spread over Bunds just passed 450bps once again - will Draghi step up to the plate?
Chart: Bloomberg

and this a few minutes later in the day:

BTP Stick-Save Fail!

Tyler Durden's picture

All it took was 30 minutes of reality-soaked headlines from Cannes and Draghi's heroic efforts to hold 10Y BTPs below 450bps have failed. BTPs have reached almost 456bps over Bunds now - only 6bps tight of all-time intraday record wides.
And with a h/t to @AndrewYorks we note the interesting dislocation between ES and BTPs today:
UPDATE: 88 handle up for BTPs (6.37% yield and Bunds +457bps)


Over in Austria we had Moody's contemplating downgrading the huge Austrian banking giant: Erste due to huge losses on sovereign debt and the huge credit default swaps underwritten by them!!!

(courtesy zero hedge)

Back To European Sov Exposure: Moody's Will Downgrade Austria's Erste Over Attempt To Hide Billions In Sovereign CDS

Tyler Durden's picture

Before MF Global went bankrupt due to European sovereign exposure, the smart money was that Austria's Erste would be "it." After all, recall from our October 10 post "that Erste disclosed some major losses on its €5.2 billion CDS portfolio, consisting of "EUR 2.4 billion related to financial institution exposures, and EUR 2.8 billion related sovereign exposures". Why is this a surprise? UK-based financial advisoryAutonomous explains: "The fact that Erste had a sovereign CDS portfolio which was not marked-to-market has left many investors scratching their heads. As a reminder the EBA stress test data showed Erste to have zero sovereign CDS exposure within its sovereign mix compared to the €2.8bn it now appears to have ‘fessed up’ to (taking a cumulative €460m hit). They also have €2.4bn exposure to banks via writing of CDS. The bulk is non-PIIGS but banks spreads have moved in the same manner as sovereigns (albeit wider and more volatile)." And there you have it: the bogeyman that everyone has been warning about, yet nobody has seen, CDS written (as in sold) in bulk against other sovereigns and other banks which up until now were only mythical, as they, to quote the EBA (which had Dexia as its safest bank) simply did not exist. Oh, they exist all right, and what they do is create a toxic spiral of accentuating losses whenever the risk situation deteriorates, creating positive feedback loops of ever increasing losses until the next Dexia appears... and then the next... and the next. Expect the market to latch on to this dramatic revelation like a rabid pitbull once the hopium high from today's EURUSD short covering squeeze wears off." Of course, the market ignored this loud warning bell, and next hting you know MF was under. This time it won't be so easy, especially since Moody's just announced it is about to downgrade Erste precisely for this reason. This move also explains why the market is suddenly rife with rumors of a broad Austria downgrade.
Frankfurt am Main, November 04, 2011 -- Moody's Investors Service has today placed on review for downgrade Erste Group Bank AG's (Erste) standalone bank financial strength rating (BFSR) of C- (mapping to Baa1 on the long-term scale) and the A1 long-term debt and deposit ratings. Consequently, several subordinated and junior subordinated debt ratings were placed on review for downgrade. The P-1 short-term rating was affirmed. A full list of affected ratings is listed at the end of this press release.
The review for downgrade on the BFSR follows the bank's report of a major loss that partly stems from previously undisclosed credit default swap (CDS) exposures. Accordingly, the review will focus on Erste's risk management, internal controls and financial transparency as well as the risk-adjusted profit generating capacity of its business model. The review for downgrade of the A1 long-term ratings follows the review on the BFSR.
As part of the re-assessment of the C- BFSR, a lower mapping of the standalone credit strength to Baa2 from Baa1 is likely, while a move of the BFSR below the C- range cannot be ruled out entirely. Consequently, the rating agency notes that a one-notch downgrade of the long-term debt and deposit ratings is the most likely outcome of the rating review.

The decision to review Erste's C- BFSR for downgrade was prompted by Moody's concerns about the bank's risk appetite as well as its related risk-management policies, internal controls and financial transparency following an announcement on 10 October 2011 of extraordinary charges leading to a net loss of EUR1.5 billion in Q3 2011. Particularly relevant is the disclosure of a EUR5.2 billion net CDS portfolio (protection sold), which appears to be unrelated to Erste's core business operations and had previously been recognised at cost, rather than at fair value. Erste also announced the harmonisation of IT tools requiring the restatement of certain income-recognition accounting, raising questions about the uniform application of appropriate risk-management tools as well as financial transparency on a group-wide basis.
Both changes may mean that earlier qualitative assumptions that Moody's had assumed are no longer consistent with the C- BFSR and the Baa1 standalone credit assessment.
At the same time, Moody's acknowledges the bank's announcement -- during its Q3 2011 earnings call -- that it has reduced its net CDS exposure to EUR300 million as of 27 October 2011 through various measures such as novation, close-outs and -- to a much lesser extent -- hedges. It is Moody's understanding that these actions have effectively reduced the contingent liability relating to these derivatives contracts and related earnings volatility. However, the restatement of the CDS exposures had a negative impact of approximately EUR460 million after tax. This, combined with the other extraordinary charges (predominantly goodwill write-offs for its Hungarian and Romanian businesses), required the bank to postpone the planned repayment of EUR1.2 billion in government-provided participation capital. This could limit the bank's strategic and financial flexibility for a longer period than Moody's previously expected. In the absence of previously anticipated meaningful profit generation for the full-year 2011, Erste's 7.4% core Tier 1 capital ratio (excluding government participation capital) as per 30 September 2011 is weak compared with other banks' capital ratios rated at the C- BFSR level. In Moody's view, the comparative weakness increases the pressure on Erste to make a rapid return to its earlier earnings-generation capacity to bolster its regulatory capital levels.
Erste's A1 long-term ratings currently benefit from the very high support assumptions as a systemically relevant bank in Austria which results in three notches of uplift from the bank's Baa1 standalone credit strength. Accordingly, the long-term rating is expected to move in tandem with Erste's standalone risk assessment.
There is currently no upward rating pressure as expressed by the review for downgrade.
In addition to the factors described above, the bank's BFSR could come under downward rating pressure due to (1) a stalled economic recovery in Eastern Europe resulting in additional substantial credit charges, beyond levels anticipated by Moody's, (2) an extended period of weak earnings and hence lower internal capital generation, and (3) weakened capitalisation levels as a result of strong asset growth in Eastern Europe.
The bank's long-term ratings could come under downward pressure in case of a weakening in its intrinsic financial strength, as well as adverse changes in the systemic support assumptions currently factored into Erste's ratings. However, Moody's does not consider this likely at present.


The liquidity between European banks, USA banks and between European-USA banks have dried up because of the fear that each are insolvent.  All funds at the end of the day are sent to either the ECB or the Fed.  This is why the nuclear button has been pressed:

(courtesy zero hedge)

Behind The Scenes European Panic As Interbank Liquidity At Worst Level Ever

Tyler Durden's picture

Yesterday we reported that in the aftermath of MF Global, and concurrent with Greece nearly allowing democracy for one brief second, European banks had scrambled to put a record amount of cash with the Federal Reserve. Next we get confirmation from the ECB that like in the US, so in Europe, in the absence of any confidence in one another (ignore Liebor, which while up again is and has always been a collusive joke intended to convey bank strength), the only place banks have left to dump money is the ECB. As of this morning, a 16 month high of €275 billion in cash had been parked with Mario Draghi, an amount which is promptly removed from the Keynesian money multiplier myth, and which confirms that there is a behind the scenes liquidity panic unlike anything we have seen since Lehman, and in fact, as the second chart from Sean Corrigan showing ECB fixed and deposit usage as well as Fed reverse repo and overall foreign bank cash parking, the liquidity in the market now from a European point of view, contrary to what broken indicators may show, is the worst it has ever been with nearly $1.6 trillion in liquidity removed from broad circulation and parked with either just the Fed or the ECB. Translated: as goes democracy, so goes confidence.
ECB Deposit Facility Usage:
Combined European liquidity placed with "safe" institutions, ECB and Fed, and removed from broad circulation:

The following article written by Wolf Richter explains in detail the last 7 days on the Greek problems and how they are going to kick the can down the street again to keep fiat alive:

(courtesy Wolf Richter)

Greece's Extortion Racket Jumps To The Next Level

testosteronepit's picture

By Wolf Richter
At the beginning of the week, participants in the G-20 meeting in Cannes were still thinking that their sojourn in the ritzy town on the Côte d'Azur would be a relaxed affair of photo ops, handshakes (air kisses between Merkel and Sarkozy), and fancy dinners, interrupted by rubber stamping the previously negotiated Grand Plan of bailing out Greece, bondholders, and banks. And in between, they’d put Italy back on some kind of unspecified track.
Then, on Wednesday, Giorgios Papandreou, prime minister of Greece, who isn’t even in the G-20, fired his bazooka: with a sentence about a referendum at home, he single-handedly knocked the world’s financial markets down by vertigo inducing percentages.
“I want more,” he said in between the lines, “and if I don't get more, just watch what will happen to the financial markets and even to the world economy, including China and the US, if I say a whole paragraph.”
Partiers were stunned. Their beautifully constructed Grand Plan was scattered in little shards on the Greek marble floor. The Euro plummeted. Stocks tanked. Italian and French yields spiked. Things got ugly. Suddenly, it seemed that Cannes would go down in history as the place where the Euro came unglued. And a new word was coined: papandemonium.
Whatever chaos this caused in the Greek political scene, it did accomplish exactly what Papandreou wanted: total worldwide attention refocused on him.
To get him to back off, German chancellor, Angela Merkel, and French President, Nicolas Sarkozy summoned Papandreou to ... a finely crafted multi-course French dinner. Afterwards, a dour-faced Merkel and a grimacing Sarkozy stepped up to the podium and officially gave Greece a Bushian choice: either you're with us, or you're against us.
Well, being Europeans, they were more nuanced.
Merkel, by now the unquestioned boss in the house of Europe, was the first to speak. The referendum has reintroduced fear into the markets, she said, but we’re steeled against any contagion, and our defenses are in place.
"We want Greece to stay in the eurozone, but"—the word elicited gasps—“there is this one-sided decision by Greece, and that has changed the situation." She went on to dictate the questions Greece should put on the referendum—stay in or exit the Eurozone—and the timing—have it wrapped up by early December. Of course, the sixth bailout installment would be put on hold until Greece accepts all previously negotiated provisions. Period.
Then Sarkozy spoke, and his love-us-or-leave-us speech mirrored Merkel’s. Not a cent of the agreed upon sixth installment would be made unless Greece fully accepts the conditions of the bailout package.
"Now the Greeks have to decide if they want to continue in this adventure with us or not." Unlike Merkel, he didn't say that France was "steeled" against Greece’s exit from the Eurozone, given the state of France’s tottering mega-banks and its shaky triple-A rating. Six months before an election that is getting increasingly difficult for him, he fretted that an unraveling of Greece would trigger a downdraft in the French economy, an uptick in unemployment, and a further collapse of the French stock market—the CAC 40 is already down 53% from its March 2000 high and hovers at levels first seen in July 1997.
They’d responded to Papandreou’s shot from the bazooka with a barrage from their howitzers. And the officially unspeakable idea of Greece’s exit from the Eurozone had coagulated into French and German words.
Papandreou's party rebelled. Parliamentary chaos ensued. He backed off the referendum. A caretaker government was being discussed. A vote of confidence would be held.
Greece, which for a decade rode the euro-debt gravy train to wealth and sent huge profits north to German exporters, has been tearing itself apart over the social costs of returning to a life within its means. Its political system is a corrupt vote-buying machine. The tax system encourages fraud. The state-dominated economy isn’t competitive. And whenever there’s a problem, there’s a strike. What they absolutely must have to solve all these problems is more money.
“€80 billion by the end of February,” announced the Greek finance minister Evangelos Venizelos in a statement yesterday. Turns out, before the dust has even settled on the papandemonium, the Greeks are back in Brussels negotiating with the Eurozone (Figaro, article in French).
Based on the framework agreed upon on 27 October in Brussels, the amount includes the guarantees made to Greek banks in exchange for their accepting a 50% haircut on their holdings of Greek public debt and the amounts needed to recapitalize them. It would "save the Greek economy," the ministerial statement said.
Greece would "offer the necessary political guarantees" during the meeting of the Eurogroup in Brussels on Monday "for the timely transfer of the sixth installment of €8 billion.” The very installment that Merkel and Sarkozy vowed not to pay a cent of. Alas, if Greece doesn’t receive this money by 15 December, it will go bankrupt, Venizelos explained, thus pushing the extortion racket up to the next level. And Papandreou won the vote of confidence by a wide margin. 
"Tax fraud is a national plague," said Venizelos after he found that Greeks owed $50 billion in back taxes. But it's complicated.... Greece's Extortion Game.
Wolf Richter


Papandreou survived a confidence vote and will now form a new government:

(zero hedge)

G-Pap To Begin Formation Of New Government Tomorrow

Tyler Durden's picture

Update: Greek Parliament Begins Voting on Papandreou Confidence Motion
The latest out of the Greek parliament, where G-Pap is proving he is not a man of few words, is that he will commence with the formation of a new government tomorrow, and in which he hopes to have a leadership position.
And more such can kicking. In essence the prime minister, whose family has ruled Greece for generations will do anything to pass the vote of confidence, and then will most certainly usurp power once again, saying that it is for the country's stability that he be in charge at least until the 7th bailout tranche is paid, then 8th, then 9th, and so forth.

Former Bundesbank President Weber Warns Germany Will Be On The European Bail Out Hook For Up To 314% Of Its GDP

Tyler Durden's picture

Anyone wondering why Axel Weber was passed over when picking the next ECB head in exchange for Goldman plant Mario Draghi, only needs to read a piece from Sueddeutsche Zeitung in which the former German central bank head, and future UBS head, confirms he actually does math. As has been said on Zero Hedge since back in July 21, when we actually did the math and realized the EFSF will not work as it will leave Germany footing the bill for all of Europe, Weber in essence said precisely that... but did not stop there. As quoted by Bloomberg, "Former Bundesbank President Axel Weber said the plan to leverage the European Financial Stability Facility increases the likelihood that tax payers have to step in, Sueddeutsche Zeitung reported.Germany’s public debt would rise to 135 percent of gross domestic product if Italy and Spain were to tap the EFSF financial backstop, the newspaper cited Weber as saying in a speech in Frankfurt. As the sole guarantor to the EFSF, Germany could end up with a debt of 314 percent of GDP in an extreme case, Weber said." This in turn brings us back to our own conclusion from 5 months ago: "What happens when an already mortally wounded in the polls Angela Merkel finds herself in the next general election and experiences an epic electoral loss? We will find out very, very shortly." We are happy that finally the Germans are realizing that the opportunity cost to propping up their export sector (the Euro, hence a "weak" DEM) can potentially be the bankruptcy of their country. We wonder how long until someone bypasses that despotic regime in Greece and actually proposes a referendum in Germany, asking the people if they are truly willing to subsidize their corporations in exchange for drowning in debt for millennia? America has already done this and, trust us, it is not pleasant.

How Can You Raise One Trillion When Even 5 Billion Auctions Fail!?!

Phoenix Capital Research's picture

One of the items few investors seem to be focusing on is the fact that while the system is awash with liquidity, there is very little capital available. Indeed, the great irony of central bank policies in the post-2008 era is that despite flooding the system with cheap easy money, they’ve not actually done anything to lower leverage or raise capital.

Case in point, the European Financial Stability Facility (EFSF) which is supposed to be the ultimate backstop for the European banking system, is in fact nothing more than a super-leveraged investment vehicle backstopped by bankrupt nations.

In plain terms, certain less insolvent nations (Germany and France) are supposed to bailout more insolvent nations such as Greece and Ireland. Common sense tells us this can’t possibly work.

So do the markets.

            EFSF bond may see weak demand

Bankers have warned that the eurozone rescue fund might face lacklustre demand this week for a planned bond issue designed to finance Ireland’s bail-out.

The offering will provide a key test of investor sentiment after the announcement last week of new plans to tackle the eurozone debt crisis.

The bond from the European financial stability facility will seek to raise €3bn ($4bn) and will be in 10-year bonds rather than a 15-year maturity because of worries over demand, say bankers. A 10-year bond is more likely to attract interest from Asian central banks than a longer maturity.

Bankers familiar with the issue said the EFSF had been considering a €5bn issue. However, the EFSF has denied this, saying it had always sought a €3bn issue.

EFSF Delays 3 Billion-Euro Bond Sale

Europe’s bailout fund is delaying a 3 billion-euro ($4.1 billion) bond sale after Greek Prime Minister George Papandreou’s request for a referendum on the rescue pact for his country roiled markets.

The European Financial Stability Facility is putting off the 10-year issue “due to market conditions,” according to Luxembourg-based spokesman Christof Roche. The fund may wait for the outcome of the Nov. 3-4 Group of 20 summit in Cannes, France before selling the bonds, according to a person with knowledge of the matter.

So the EFSF is supposedly going to raise 1 trillion Euros… in an environment in which it struggles to even stage a five billion Euro bond offering?  Give me a break.

Again, while the system is flooded with liquidity, actual capital that can be put to use is virtually non-existent. The entire financial system is built up on leverage and easy credit, NOT capital.

This is why the bailouts cannot work. You cannot solve a leverage problem with more cheap debt. Just look at Greece. That whole mess started in January 2010…
two bailouts and a number of write-downs later the country is still broke.

And somehow this policy is going to work for other countries such as Italy or Spain? Give me a break. The Euro in its current form is finished. The credit markets are already pricing in more Greek defaults. And Italy’s now lurching towards its own default.

Ignore stocks, they’re ALWAYS the last to “get it.” The credit markets are jamming up just like they did in 2008. The banking system is flashing all the same signals as well.

So if you have not already taken steps to prepare for systemic failure, you NEED to do so NOW. We're literally at most a few months, and very likely just a few weeks from Europe's banks imploding.
On that note, if you’re looking for specific ideas to profit from this mess, my Surviving a Crisis Four Times Worse Than 2008report can show you how to turn the unfolding disaster into a time of gains and profits for any investor.

Within its nine pages I explain precisely how the Second Round of the Crisis will unfold, where it will hit hardest, and the best means of profiting from it (the very investments my clients used to make triple digit returns in 2008).

Best of all, this report is 100% FREE. To pick up your copy today simply go to: and click on theOUR FREE REPORTS tab.

Good Investing!

Graham Summers


This is the next big banking problem: Commerzbank.
How will the French banks respond to this writedown?

(courtesy Bloomberg) and special thanks to Robert H. for sending this to me:

Commerzbank Posts $949 Million Third-Quarter Loss on Greek Debt Writedowns

By Nicholas Comfort and Aaron Kirchfeld - Nov 4, 2011 4:46 AM ET

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