Saturday, December 10, 2011

Extremely Important: More Fallout on Re-Hypothecation: physical gold/silver rehypothecated

Good morning Ladies and Gentlemen:

 I will spend more time on the huge re-hypothecation story that is gripping the nation as it has huge implications for all of us.  Yesterday, a lawsuit arose between HSBC  (with client Jason Fane) vs MFGlobal (trustee) on ownership of bars registered in the name of the client who had asked the storage operator, HSBC to ship the gold to another warehouse Brinks.  I have written to the CFTC on this issue and I hope I get a response. However before heading into that area I would like to report that the FDIC boys got another week off as their were no banks that entered the hallowed shrine of the banking Morgue.

Now let us now head over to the comex and see how trading fared, coupled with delivery notices, inventory changes and the weekly COT report. Gold finished the comex session up $2.50 to $1712.00 while silver had a better day finishing up 63 cents to $32.17.  The rise in the precious metals was tame compared to the Dow which rose by 168 points on news that there was no appreciable advance on how the Eurozone was going to finance their rescue.  The total gold OI  rose by 2150 contracts despite Thursday's huge wallop.  As I promised you the raids are having no appreciable effect on our stable longs as we obtain new entrants at lower prices.  What is shocking is the front delivery month of December.  Here the OI rose by 496 contracts despite 77 deliveries.  We therefore gained in ounces standing and lost nothing to cash settlements.  Generally we see increase deliveries to the dealers as they try and bail themselves out of problems in other jurisdictions as participants are anxious to get their hands on rapidly fleeing gold.
Late last night we got notice of intent to deliver on Monday and it was only 21 contracts.  Something is seriously happening at the gold comex as the numbers of OI are fluctuating like mad in the front delivery month.  The next delivery month is February and here the OI remained relatively constant at 262295 dropping only 2 contracts despite the raid.  That kind of shows you how resilient the longs are behaving.  Maybe they are witnessing action in December and  want physical metal today instead of  February .  The estimated volume at the gold comex yesterday was very tame at 113,229.  The confirmed volume on Thursday, the day of the ridiculous raid was 190,009 contracts.

The total silver comex OI rose slightly from 94,999 to 96,761 for a gain of 1,762 contracts.  This occurred with a huge loss in silver prices on Thursday.  The increase in OI with a huge drop in price is totally incomprehensible but what else is new when we are talking about the crooked comex casino.  The front delivery month of December behaved in a normal fashion by dropping 23 contracts from 414 to 391.  We had 24 deliveries so we gained one contract of silver standing.  The next big delivery month is March and here the OI rose from 53,683 to 54,100 as we witnessed that no silver leaves fell from the silver tree.  The estimated volume at the silver comex was a very tame 35,356.  The confirmed volume on Thursday was 56,186 and much of that was short selling.

Inventory Movements and Delivery Notices for Gold: Dec.  10 2011:

Withdrawals from Dealers Inventory in oz
Withdrawals from Customer Inventory in oz
326 (Manfra,Scotia)
Deposits to the Dealer Inventory in oz

1999 (Brinks)
Deposits to the Customer Inventory, in oz
1609 (Manfra)
No of oz served (contracts) today
276  (27,600)
No of oz to be served (notices)
1080  (108,000 oz)
Total monthly oz gold served (contracts) so far this month
18,178 (1,817,800)
Total accumulative withdrawal of gold from the Dealers inventory this month
Total accumulative withdrawal of gold from the Customer inventory this month

Today we finally had a deposit to the dealer although extremely tiny at 1999 oz to the dealer Brinks.
We had no dealer withdrawal of gold.

We had the following deposit to the customer:

1.  1607 oz into Manfra.

We had the follow withdrawal of gold from the customer:

1.  225 oz from Manfra
2.  101  oz form Scotia

total withdrawal by the customer;  326 oz

we had one adjustment whereby  a tiny 96 oz of gold was leased from the customer to a dealer.
The registered gold inventory remains at 3.34 million oz.

The CME notified us that we had 276 notices filed for 27600 oz of gold.  The total number of notices filed
so far this month total 18,178 for 1,817,800 oz of gold.  To obtain what is left to be served upon, I take the OI standing for December (1356) and subtract out Friday's deliveries (276) which leaves us with 1080 notices or 108000 oz left to be served upon.

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

1,817,000 (oz served)  +  108000 (oz to be served upon)  =  1,925,800 oz or 59.9 tonnes of gold.

and yet hardly any gold is deposited into the dealer and no gold is withdrawn.  Something is up!!

And now for silver 

First the chart: December 10th

Withdrawals from Dealers Inventory5278  (Scotia)
Withdrawals fromCustomer Inventory151,212(Delaware,Brinks,Scotia)
Deposits to theDealer Inventorynil
Deposits to the Customer Inventory598,434(Brinks,Delaware)
No of oz served (contracts)0 (zero)
No of oz to be served (notices)391  (1,955,000,)
Total monthly oz silver served (contracts)735 (3,675,000)
Total accumulative withdrawal of silver from the Dealersinventory this month86,937
Total accumulative withdrawal of silver from the Customer inventory this month

On Friday we had no silver deposited to the dealer but we did have a tiny withdrawal by the dealer at Scotia to the tune of 5278 oz.

The customer had the following deposit:

1. Into brinks:  595,435 oz
2. Into Delaware:  2999 oz

total deposit;  598,434 oz.

The customer had the following withdrawal:

1.  out of brinks:  13,704 oz
2.  out of Delaware:  12,833 oz
3.  out of Scotia:  124,675 oz

total withdrawal:  151,212 oz.
we had no adjustments.
The registered silver inventory rests at 34.2 million oz.
The total of all silver inventory rests at 110.415 million oz.

The CME notified us that we had zero notices filed.  Thus the total number of notices remain at 735 for 3675,000 oz.
To obtain what is left to be served, I take the OI standing for December (391) and subtract out today's deliveries (zero) which leaves us with 391 notices or 1,955,000 oz left to be served upon.

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

3,675,000 oz (served)  +  1,955,000 oz (to be served upon)  =  5,630,000 oz
we gained 5000 oz standing and lost nothing to cash settlements.


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.

Dec 10.2011:

Total Gold in Trust



Value US$:71,168,045,704.04

Dec 8.2011:




Value US$:71,418,793,239.99


And now for silver Dec 10.2011:

Ounces of Silver in Trust314,084,400.200
Tonnes of Silver in Trust Tonnes of Silver in Trust9,769.12
Dec 8.2011:

Ounces of Silver in Trust312,722,751.800
Tonnes of Silver in Trust Tonnes of Silver in Trust9,726.76

we gained: 1,362,000 oz of paper silver into the English vaults.


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

1. Central Fund of Canada: traded to a positive 3.0 percent to NAV in usa funds and a positive 2.9% to NAV for Cdn funds. ( Dec 10.2011).
2. Sprott silver fund (PSLV): Premium to NAV rose nicely to  17.75% to NAV  Dec 10/2011
3. Sprott gold fund (PHYS): premium to NAV rose to a 4.46% positive to NAV Dec 10.2011).

Our premiums to NAV are finally starting to look really good.  The NAV at central fund of Canada has remained in positive territory for the better part of the last 2 months.
The premium on Sprott's gold is well into the 4% handle.
The premium on Sprott's silver is back to its normally high premium with tonight's reading of 17.75%


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, December 06, 2011

Let us now head over to the Commitment of Traders report and let us see what we can glean from it:

Those large speculators that have been long in gold continued on the yellow brick road by buying additional long contracts to the tune of 6,721.  

Those large speculators that have been short in gold added another 1803 contracts to the short side.

Our Commercials:

Those commercials that have been long in gold and are close to the physical scene 
pitched a huge 9,486 contracts from their long side.  

Those commercials who have been perennially short in gold covered a smallish 1,531 contracts of their shorts.

Small specs:

The small specs that have been long in gold, followed in the footsteps of the larger spec cousins by adding a rather large 1,740 contracts to their long side.

The small specs that have been short in gold, did not like the lay of the land and covered a rather large 1297 contracts from their short side:

Conclusion:  more bullish as the commercials rein in their shortfalls.  

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, December 06, 2011

Those large specs in silver that have been long for quite some time pitched a tiny 605 contracts from their long side.  

Those large specs that have been short in silver covered a rather large 1,141 contracts.

Our commercials:

Those commercials that are long in silver and close to the physical scene pitched 3391 contracts from their long side/

Those commercials that are short in gold and subject to that ancient silver probe 3 and 1/2 years ago:  covered 1,560 contracts from their short side.

Our small specs:

Those small specs that have been long in silver added 760 contracts to their long side.
Those small specs that have been short in silver covered 535 contracts from their short side.

Conclusion:  slightly more bullish than last week.


Before leaving the physical scene, I would like to show you two graphs:

The first one on gold;

notice the huge wedge formation.  This signifies that a breakout will occur and it will be big.

The second is silver:  Again a big wedge formation and usually a big breakout occurs when this happens.

Ok.  Let us now see the big stories of  Friday.

The EU summit was a total bust and the "fiscal agreement" does not solve their
insolvency.  The pact does not allow for Eurobonds to be printed, nor does it call for a EU treasury which was badly needed.  England was booted out of the accord and certain countries like Sweden have not decided that they will affirm the proposal.  Here is Ambrose Evans Pritchard on what happened yesterday:

Europe's Blithering Idiots And Their Flim-Flam Treaty
By Ambrose Evans-Pritchard
Last updated: December 9th, 2011
Merkozy has bulldozed Britain out of the EU.
What remarkable petulance and stupidity.
The leaders of France and Germany have more or less bulldozed Britain out of the European Union for the sake of a treaty that offers absolutely no solution to the crisis at hand, or indeed any future crisis. It is EU institutional chair shuffling at its worst, with venom for good measure.
It is risky to reach instant conclusions on a fast-moving story but it looks as if the EU may soon be reduced to a shell, with a new union forming among the core.
Much has been said about whether David Cameron handled this well or badly. I leave that debate to my colleagues. What strikes me as a former EU correspondent is how threatening this is to the EU Project itself.
A country – and a large one – may start to disengage for the first time. The aura of historical inevitability that has swept Europe towards ever closer union for half a century has been punctured. Yes, Croatia will soon join, as Sarkozy chirped triumphantly, but that is not quite the same thing (no offence meant to the South Slavs).
Utter confusion will ensue over the legal structures of the EU. For whom will the European Commission work? For whom the European Court? It will be chaos for a while. This is the nightmare that fonctionnaires have always feared.
And what for? All this upheaval for a mess of potage, a flim-flam treaty? The deal is not a "lousy compromise", said Angela Merkel. Well, actually that is exactly what it is for eurozone politicians searching for a breakthrough.
It tarts up the old Stability Pact without changing the substance (although there will be prior vetting of budgets). This "fiscal compact" is not going to make to make the slightest impression on global markets, and they are the judges who matter in this trial by fire.
Yes, there is more discipline for fiscal sinners, but without any transforming help. Even the old "Marshall Plan" of the July summit has bitten the dust.
There is no shared debt issuance, no fiscal transfers, no move to an EU Treasury, no banking licence for the ESM rescue fund, and no change in the mandate of the European Central Bank.
In short, there is no breakthrough of any kind that will convince Asian investors that this monetary union has viable governance or even a future.
Germany has kept the focus exclusively on fiscal deficits even though everybody must understand by now that this crisis was not caused by fiscal deficits (except in the case of Greece). Spain and Ireland were in surplus, and Italy had a primary surplus.
As Sir Mervyn King said last week, the disaster was caused by current account imbalances (Spain's deficit, and Germany's surplus), and by capital flows setting off private sector credit booms.
The Treaty proposals evade the core issue.
Did France and Germany really have to cause this rift by throwing in an assault on the City that has precious little do with the EMU crisis? Yes, I suppose they did.
Given that Merkozy cannot bring themselves to accept that Europe's debacle stems from the euro itself, from a 30pc currency misalignment between from North and South, and from an over-leveraged €23 trillion banking bubble that German, French, Dutch, Belgian regulators allowed to happen… given that, yes, I suppose they have to find a scapegoat.
They have to whip up a witchhunt against somebody, so why not Anglo-Saxon bankers? Nasty reflexes are at work. German and French politicians in particular should be very careful about inciting populist hatred against a group that makes such easy prey. We have been there before.
No doubt these dramatic events will be uncomfortable for Britain, but this will all be swept away by bigger events before long. The Europols have not begun to work out a viable solution to their deformed and unworkable currency union, and perhaps no such solution exists. The system will lurch from crisis to crisis until it blows up in acrimony.
By then, a separate cluster will have emerged (not the 10 "outs" against the 17 "ins", always a ludicrous concept), but rather a loose Anglo-Nordic-Swiss grouping that may not do so badly on the fringes and may begin to solidify into a seductively comfortable outer tier.
The mere existence of such a constellation might change the calculus of isolation for Spain should it finally tire of Franco-German dictates and depression, or should the Portuguese at last conclude that enough is enough.
Does France, for that matter, really want to be locked into a clammy embrace with an ever stronger Germany? The whole purpose of monetary union for Paris was to tie down a reunited Germany with silken cords. France now finds its own hands tied because of EMU, reduced to a humiliating side-kick.
But the vain and hysterical little man now in the Elysée will soon be gone. A leader will emerge once more with a "certaine idée de la France".
As for Britain, let us seize the moment of liberation, and enjoy it.


Yesterday night, Moody's downgrades the 3 largest French banks, BNP Paribas, Societe Generale, and Credit Agricole, which no doubt will create turmoil on Monday.  Moody's states that these French banks have indigestion from their gorging of PIIGS debt.  Their sovereign holdings are greater than France's GDP.

(courtesy Moody's/ author Liz Alderman/ and Robert H for sending this to me)

Moody’s Downgrades Top French Banks


PARIS — In another sign of how Europe’s debt crisis is rippling through the banking system, Moody’s Investors Service on Friday downgraded the three largest banks in France, saying there was a “very high” probability that the French government would step in to support them if conditions worsened.

Moody’s cut various ratings for Société Générale, BNP Paribas and Crédit Agricole by one notch, citing the problems each had had recently in raising funds on the open market.

The ratings agency said the banks could face further losses on their holdings of Greek and Italian government bonds should the crisis deepen.

Just a day earlier, Europe’s main banking regulator said that all French banks had passed a test designed to see whether financial institutions had enough capital to weather unexpected shocks.

And on Friday, Goldman Sachs upgraded its recommendation for holding shares of European banks to neutral from underweight. It said a decision Thursday by the European Central Bank to lend troubled banks dollars for longer periods under eased terms would help the banks weather the effects of the crisis and an economic downturn.

But the Moody’s assessment includes more dire assumptions about the future of the euro than the European Banking Authority used. Moody’s also repeated a warning that Greece and several other countries could default on their debts and exit the euro zone if politicians failed to find a solution to their problems.

If Société Générale, BNP Paribas and Crédit Agricole continue to have trouble getting funding, Moody’s said, the French government will probably step in to provide them with financial support, raising the specter of at least a partial nationalization of the biggest French banks.

The French government has a long history of stepping in to support its banks, considering them integral to the economy. French officials have said they are ready to backstop the banks if the markets force their hand, but they insist the banks are sound.

The downgrades came as European leaders took their latest step Friday to keep the euro monetary union from breaking apart. All 17 members of the euro zone agreed to sign a treaty that would require them to enforce stricter fiscal and financial discipline in future budgets.

The leaders also agreed to provide €200 billion, or $266 billion, to the International Monetary Fund and to make changes to Europe’s own bailout funds to help keep the crisis from engulfing Italy and Spain.

Many banks in Europe have had trouble getting funding in recent months, and have had to turn to their national central banks and the E.C.B. instead.

Société Générale, BNP and Crédit Agricole had “materially” increased their borrowing from the French central bank in September, Moody’s said, adding that it was “unlikely that markets will return to normalcy soon.” 


Bill Gross of Pimco on the Euro summit:

Bill Gross Response to the Euro Summit/Hard to Trust/Risk Off

Tyler Durden's picture

Bill Gross with the logical response to today's action. We would however add "farcical" to the list of adjectives, as even Pimco is quite powerless to stop a central bank juggernaut which as Spain's PM indicated earlier, is hell bent on pushing the market higher to "confirm" that the market actually likes the results of the summit, after saying that the "results of the summit will be seen in the next 24 hours." In other words, it is all about theatrics and manipulation. This probably means that it is safe to reshort the Leaning Tower of Ponzi in 24 hours and 1 minute.


However the most important story of the day is a continuation of the HYPOTHECATION
RE-HYPOTHECATION STORY introduced to you on Thursday night.
If you will recall, the MFGlobal loss of customer segregated money was thought to be linked to the murky off balance shadow banking industry originating out of London.
London has no rules in place so the entire balances of customer money gets pledged over and over again until the daisy wheel stops (MFGlobal bankruptcy) and money just vanishes.  You can see that the brokers have learned the fractional money system and created money.  The bankers taught them and this feat continued to add more massive liquidity to the system with customers dollars to keep the fiat paper scheme going.  Lehman was the first to go and this necessitated trillions of dollars to be injected by the Fed to keep the shadow banking system alive in 2008.

I will now introduce to you the next chapter in the shadow banking mess where the banks are using physical metal and ReHYPOTHECATING this asset around the globe.

First the Bloomberg story:

HSBC Sues MF Global Brokerage Over 20 Bars of Gold, Silver on Deposit
By Linda Sandler and Tiffany Kary - Dec 9, 2011 11:47 AM CT

An HSBC Holdings Plc (HSBA) unit sued the MF Global Inc. brokerage trustee to establish whether he or another person is the rightful owner of gold bars worth about $850,000 and silver bars underlying contracts between the brokerage and a client.
Five gold bars and 15 silver bars underlie eight Comex contracts between the brokerage and its client Jason Fane of Ithaca, New York, the unit of London-based HSBC said in a court filing yesterday. Both parties have asserted claims to the bars, creating difficulties for HSBC, which is storing them, the bank said. HSBC asked a judge to decide who the rightful owner is.
“HSBC has received conflicting instructions regarding ownership and disposition of the property,” it said. “Accordingly, HSBC is exposed to multiple liabilities with respect to the disposition of the properties.” The unit is HSBC Bank USA National Association.
Bullion is selling for about $1,717 an ounce on the Comex in New York, up about 21 percent this year, as investors bought the metal to protect their wealth from Europe’s escalating debt crisis, and reached a record $1,923.70 in September. Treasuries returned 9.3 percent, a Bank of America Corp. index shows.

‘Bars Are Mine’

“These bars are mine,” Fane said in an e-mail today. “We had a letter from HSBC that they were on the loading dock to be shipped to our warehouse contractor when there was some action taken by a third party to stop or delay shipment.”
The trustee, James Giddens, expects this “relatively minor and not unusual dispute” to be successfully resolved, his spokesman, Kent Jarrell, said in an e-mail.
Fane wrote HSBC after the bankruptcy, asking the bank to transfer the bars to his account at Brink’s, according to a copy of his letter filed in court. The trustee wrote HSBC saying the gold and silver was “customer property,” and the bank shouldn’t turn it over to Fane, HSBC said in the filing. Brink’s provides vaults and other services for the safekeeping of valuables.
The judge handling the bankruptcy said today that in January he would address the matter of distributing physical goods, such as gold and silver bars, after lawyers for some customers said they couldn’t get their share of the payouts because bars can’t be broken into pieces.
According to Fane’s letter, the five Comex gold contracts are for an average of 99 ounces of each.

Account Transfers

Giddens, who is liquidating the brokerage, has transferred about 38,000 commodity accounts to other firms. Three transfers of collateral made and pending will give commodity customers more than $4 billion of their assets, according to court filings.
The parent company’s Oct. 31 bankruptcy filing, the eighth- largest in U.S. history, listed assets of $41 billion. Jon Corzine, the former co-chief executive officer of Goldman Sachs Group Inc., quit as MF Global’s CEO on Nov. 4.
The brokerage case is Securities Investor Protection Corp. v. MF Global Inc., 11-02790, U.S. District Court, Southern District of New York (Manhattan). The parent’s bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The HSBC case is HSBC Bank USA National Association v. Giddens et al., 11-02924-mg, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
To contact the reporters on this story: Linda Sandler in New York at; Tiffany Kary in New York at
To contact the editor responsible for this story: John Pickering at
A little background to the story:
The purchaser of the gold and silver, a Mr. Jason Fane of Ithica NY, bought 5 bars of gold and 15 bars of silver with a brokerage firm MFGlobal.  He took delivery just prior to the bankruptcy and stored his metal at a HSBC facility under the MFGlobal account. Upon hearing of the bankruptcy he ordered HSBC correctly to move the metal to Brinks.  The bars were on the shipping docks when the trustee in Bankruptcy, Mr Giddens ordered them back.  Immediately Mr Fane /HSBC sued MFGlobal and Mr Giddens claiming they are the rightful owner.
HSBC states that:

 “Accordingly, HSBC is exposed to multiple liabilities with respect to the disposition of the properties.” 

What does this mean?   Multiple liabilities?  If there was one firm who should know there will be problems will be HSBC, the custodian of the GLD.

What really happened?

MFGlobal in reality re-hypothecated Mr Fane's asset, the gold and silver while Mr Fane was settling his account by paying for the metal and turning it into allocated gold with bar numbers and actual weights.  Now the trustee claims that the bars were re-hypothecated and thus it becomes a general
unsecured claim.  The problem now is if those bars are re-hypothecated many times over how can you replicate the original bar number and weights?  They are specific and if replicated it is counterfeit

I sent this down to the CFTC last night:

I think I have a good handle on what happened at MF Global as Corzine re-hypothecated  1.2 billion dollars of investors assets to purchase 6.2 billion dollars of Euro bonds on a repo to maturity purchase.  MFGlobal collapsed because of the massive margin calls on the bonds as they had not matured yet.

The headquarters for re-hypothecation is London England and the BIS reports that leverage is around 4: 1
In MF Global case it is 5 to one.  And it certainly explains why the money is missing.  It simply evaporated into thin air as the collateral was multi-used.

Although this is bad enough, I feel that the CFTC has a real headache with respect to the case of HSBC vs MFGlobal where we are dealing with physical material that cannot be replicated 5 or 10 times over. HSBC is claiming that it is the owner due to the multiple re-hypothecation and that is impossible.
The replication of a bar using identical bar numbers and weights is of course criminal behaviour to the highest.

What is most concerning to me is the knowledge that Gary Gensler had as he was well aware of this practice of rehypothecation as Corzine was lobbying him on this issue.  The fact that he know recuses himself is very troubling.

If this is not corrected immediately the whole financial world will implode.  Paper gold will disappear from accounts. Even the GLD at the London vaults are probably hypothecated.

this is very dangerous.

Harvey Organ.


And now Zero hedge on  re-hypothecation of gold bars/silver bars :

The Gold "Rehypothecation" Unwind Begins: HSBC Sues MF Global Over Disputed Ownership Of Physical Gold
Submitted by Tyler Durden on 12/09/2011 15:05 -0500
That paper gold, in the form of electronic ones and zeros, typically used by various gold ETFs, or anything really that is a stock certificate owned by the ubiquitous Cede & Co (read about the DTCC here), is in a worst case scenario immediately null and void as it is, as noted, nothing but ones and zeros on some hard disk that can be formatted with a keystroke, has long been known, and has been the reason why the so called gold bugs have always advocated keeping ultimate wealth safeguards away from any form of counterparty risk. Which in our day and age of infinite monetary interconnections, means virtually every financial entity. After all, just ask Gerald Celente what happened to his so-called gold held at MF Global, or as it is better known now: "General Unsecured Claim", which may or may not receive a pennies on the dollar equitable treatment post liquidation. What, however, was less known is that physical gold in the hands of the very same insolvent financial syndicate of daisy-chained underfunded organizations, where the premature (or overdue) end of one now means the end of all, is also just as unsafe, if not more. Which is why we read with great distress a just broken story byBloomberg according to which HSBC, that other great gold "depository" after JP Morgan (and the custodian of none other than GLD) is suing MG Global "to establish whether he or another person is the rightful owner of gold worth about $850,000 and silver bars underlying contracts between the brokerage and a client." The notional amount is irrelevant: it could have been $0.01 or $1 trillion: what is very much relevant however, is whether or not MF Global was rehypothecating (there is that word again), or lending, or repoing, or whatever you want to call it, that one physical asset that it should not have been transferring ownership rights to under any circumstances. Essentially, this is at the heart of the whole commingling situation: was MF Global using rehypothecated client gold to satisfy liabilities?The thought alone should send shivers up the spine of all those gold "bugs" who have been warning about precisely this for years. Because the implications could be staggering.
Probably the core primary consequence of this discovery, which obviously has a factual basis, or else it would not lead to an actual lawsuit between two "reputable" firms (aka ponzi participants), is whether gold in the GLD warehouse, supervised by HSBC, is truly theirs, or has it all been hypothecated from some other broker who never really had the asset or the liquidity, and so on in what effectively can be an infinite chain of repledging one asset to countless counterparties. Because if there is on cockroach...
Suffice to say, expect either a prompt settlement in this lawsuit, or a fervent denial by all parties involved that any gold was misplaced. Because here is the punchline: each physical gold or silver bar has a unique deisgnator that should never be replicated, yet this is precisely what happened to lead to the lawsuit! In a non-banana world, there should never be any debate over who owns a given physical asset, as replicated ownership (note - not liens) effectively means someone stole the gold (or there was counterfeiting involved) and was never caught... until MF Global finally expired of course.
So in other words, is this the eureka moment when everyone realizes that any gold, be it paper or physical, is either a irrelevant electronic binary claim held in some semiconductor, or at best an asset in some vault, that the brokerage next door suddenly also has claims over?
The end result is that the biggest loser is Joe Sixpack who bought the gold, and decided to keep it in a bank warehouse for "safekeeping" only to realize said gold will never be seen or heard of again.
From Bloomberg:
Five gold bars and 15 silver bars underlie eight Comex contracts between the brokerage and client Jason Fane of Ithaca, New York, London-based HSBC said in a court filing yesterday. Both parties have asserted claims to the bars, creating difficulties for HSBC, which is storing them, the bank said, asking a judge to decide who the rightful owner is.
"HSBC has received conflicting instructions regarding ownership and disposition of the property," it said. "Accordingly, HSBC is exposed to multiple liabilities with respect to the disposition of the properties."
According to Fane’s letter, the five Comex gold contracts are for an average of 99 ounces of gold each.
Giddens, who is liquidating the brokerage, has transferred about 38,000 commodity accounts to other firms. Three transfers of collateral made and pending will give commodity customers more than $4 billion of their assets, according to court filings.
The punchline:
The judge handling the bankruptcy said today he would deal in January with issues about distributing physical goods, such as gold and silver bars, after lawyers for some customers said they couldn’t get their share of the payouts because bars can’t be broken into pieces.
...indeed there is a reason why people say gold can not be diluted.
As for our advice: move any gold out of the LBMA or CME warehouse system immediately. And only treat any GLD investment as a day trading vehicle that can and will be lost the second there is a global liquidity or solvency freeze, because that particular asset will be wiped out as easily as "C:\format C:"


I think on Monday we will have a "bank run" on GLD as everybody vacates this fraudulent vehicle for safer funds like Sprott and Central Fund of Canada.
I know that  many of you are questioning how on earth the gold and silver are settling at the comex without any metal arriving at the dealer's doorsteps.  I have been writing the CFTC and the SEC for quite some time explaining that the only way that I see settling occurring was through the GLD and SLV paper and that multiple owners have claims on the same asset.  The holders of gold and silver at registered comex vaults may have only unsecured paper claims on that same bar of gold that HSBC claims is theirs as well as the trustee of bankruptcy James Giddens and Mr Fane and.....

now you see the problem.

The Ultimate "All-In" Trade

Tyler Durden's picture
Tyler Durden

We have spent a great amount of time recently discussing both the re-hypothecation debacle and the 'odd' moves in CDS - most specifically basis (the difference between CDS and bonds) shifts and the local-sovereign-referencing protection writing. Peter Tchir, of TF Market Advisors, provides further color on the latter (as the 'Ultimate' trade) and in an unsurprising twist, how the former was much more critical during the Lehman 'moment' and will once again rear its ugly head. Exposing the underbelly of these two dark sides of the market must surely raise concerns at the fragility of the entire system - as we remarked earlier - but the lessons unlearned, on which Peter expounds, from the Lehman period are reflective of regulators so far behind the curve that it is no wonder the market's edge-of-a-cliff-like feeling persists.

Either: Basis Unwinds or the BSC trade?
[A Basis trade - as we have discussed here - is an arbitrage strategy that looks to profit/earn carry from the difference between CDS and Bond market pricing of credit risk. Typically it is created by buying bonds and simultaneously buying CDS protection (a hedge) to lock in a perceived valuation difference]
Is this the basis unwind we predicted after the October 27th summit where banks were going to be forced to restructure debt without triggering CDS?  (it has happened yet, but that's another story).  So if banks were selling bonds and selling hedges, then it would show up as reduced bond exposure but increased CDS exposure (they sell bonds, and sell CDS).

That is one possibility, the other is that they are running the "all-in" strategy at the expense of the taxpayers.  During the final days of BSC (before they were bought for $2 on a Sunday night and had their swap lines guaranteed) two distinct markets for CDS had developed, especially on indices and financials.  There was a price where BSC would sell CDS and the price where a counterparty that was likely to be around next week would sell protection.  On IG8 (I think that was the on the run index at the time), BSC was often offering it 3 to 4 bps tighter than anyone else.  You could buy IG at 176 from them, or 180 from a bank.  It made the market more confusing than ever.  Who would buy protection from them?
Well, if you had sold protection to them, then maybe you buy it from them to cover.  It was simpler to have offsetting trades, plus you could book that 4 bps.  If you had already bought from them, you were between a rock and a hard place.  Their "bid" for protection was low.  Selling to them meant a mark to market loss.  So you could either buy more index protection from somewhere else or you could buy protection on bear.  Many were comfortable doing that as they were in such trouble.   It was a real issue, anyone who had sold them protection was happy to cover, especially at below market prices.  Those who weren't long credit via them had a problem.
The same happened with clients, but they had an extra tool.  They could buy protection from them and try and "assign" another dealer.  That dealer didn't want to face bear, but some clients had a lot of influence, some salespeople had a lot of influence, some firms weren't well run, and there seemed to be pressure from the regulators to pretend it was business as usual.  So a firm that had managed their exposure well, had a potential problem because a big client came in, demanding that the protection they had purchased from bear, be "assigned" to you.  Legally you could say no, but there is always relationship pressure at times like that.
But why would BSC be so willing to sell protection?  Well, the markets were very wide because of the fear that they would default.  You sell as much protection as possible.  If you default what do you possibly care?  Your stock is wiped out, your job is gone, and your strategy is totallly explainable to future employees.  If you don't default all this massive amounts of protection screams tighter and you have your best year ever. No brainer for the firm, an issue for the market.
So, why are French banks selling protection on France like it is going out of style? Why are Italian banks doubling down on Italy?  Because if the bailouts work, it is free money.  Huge tightening on top of the spread income until the bailout finally wins.  If the sovereign defaults, is the bank really going to be around anyways?
It is the ultimate trade. 
If you make money, you get paid.  If you lose money you were screwed anyways.
Who would buy from them?  Banks with silly risk management departments, or those who had sold to them when they were in hedging mode, and now are unwinding.  That would create the bid for bank CDS that we see (as people need to hedge purchases of CDS).  Some of these banks may qualify for no collateral from banks they trade with.  Then they don't even need to come up with cash even if the market moves against them.  Not posting collateral would be a huge deal, and I'm not sure how true it is, but I would bet someone like BNP has very big lines with most other banks, before the mark to market loss gets bad enough that they have to post.
This may be the ultimate moral hazard trade.  Heads I win, tails, I don't care because I'm dead.  This couldn't happen if CDS was exchange traded (they could sell, but they would take mark to market margin call risk), but our regulators, have decided that putting CDS onto an exchange can wait.
On a slightly separate, yet related note, the "re-hypothecation" story done by Thomson-Reuters has been attracting some attention.  Maybe now is a good time to remind people about Lehman.  For all of the talk about Lehman and CDS, that actually settled pretty smoothly.  There were far more problems with simple repo agreements.  No one wanted to pay attention at the time. Whenever I mention it, people look at me as though I have lost it, how could super complex CDS have had less problems than repo trades in a Lehman bankruptcy?  Well, it did, and MF Global and this article show why.  Yet another example of regulators dropping the ball.  Many of these problems occurred with Lehman, but the Fed has been so busy QE'ing and talking about the "Lehman" moment, no one addressed the repo market, and cross border collateral, and custodial responsibilities, that were laid bare with Lehman.
It is far more fun to talk about the daisy chain risk of CDS, yet it was the problems in basic things like repo and custodial accounts and segregation, and adequate capital by entity, that froze liquidity in 2008.    If you can't find a copy of the article, zerohedge has it posted.  At the very least it is worth checking out as it could be another round forced deleveraging.  I have also heard that it is re-hypothecation that has slowed the transition of derivatives to exchanges as some people estimate banks would need to raise a trillion of money to make collateral calls that they either don't have right now (because of one-way collateral agreements) or because they meet them by re-hypothecating client collateral.

Goldman Raises European Banks From Underweight To Neutral

Tyler Durden's picture

Goldman has just started selling European bank stocks to its clients, whom it is telling to buy European bank stocks. Said otherwise, the stolpering of clients gullible enough to do what Goldman says and not does, has recommenced. Our advice, as always, do what Goldman's flow desk is doing as it begins to unload inventory of bank stocks. Translation: run from European bank exposure.
From Goldman
Raising banks from underweight to neutral

We are shifting our recommendation on banks from underweight to neutral. We shifted to an underweight position recently. This was based on our view that the economic environment was deteriorating. The combination of weaker growth and the need to shore up balance sheets was, we felt, likely to be a significant headwind and reduce demand for corporate loans while also increasing NPL’s. Furthermore, the sector is becoming more domestic as banks sell assets outside their main markets.

While all of these concerns remain, the new funding arrangements agreed by the ECB and other central banks should significantly help the banks offset the pressures of the economic downturn in our view. The coordinated action by central banks last week has brought a reduction both in the rate (down to OIS+50 bp; previously OIS+100 bp) and margin (down to 12%, previously 20%) while giving commercial banks access to US$ through this channel. In a further positive surprise, the ECB is also now offering banks 3-year liquidity (full allotment, fixed rate), on an expanded collateral pool (which now includes loans) and a lower reserve ratio. According to our banks analysts (see “Capital story is ending, funding receives a large ECB boost” December 9, 2011) the scope and structure of this facility directly addresses the banks’ key funding concerns.

The 3-year duration will address mismatching issues while an expanded collateral pool and lower reserve ratio increase the scope for banks to get access to liquidity. The interest rate structure meanwhile allows banks to detach their funding cost from that of sovereigns, which has been one of the key factors that has kept the risk premium on banks so elevated. As a result, our banks analysts expect a positive impact on margins, deposit pricing and loan availability resulting in a high take up of the facility. While these facilities help to reduce the risk premium to some degree they should be seen against the ongoing deterioration in fundamentals so that, on balance, we feel a neutral in the sector is appropriate.

In Preparation For Solyndra 2, A/K/A LightSquared: A Humiliated Phil Falcone Gets Wells Notice

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Just because Solyndra was not enough of a humiliation for the president, not to mention MF Global where inquiring minds are wondering when the president and vice-president will refund any and all campaign donations received by Jon Comminglerzine, here comes the next public fiasco for the administration, as the broader public shifts its attention to LightSquared by way of owner Harbinger capital, and its flamboyant head (and wife) - Phil Falcone. As has been just released in an SEC filing, Harbinger has received a Wells Notice from the SEC. Now in a time long, long ago, or about three years ago, before market criminality and manipulation became wholly endorsed by the US government, getting a Wells Notice was a death sentence for any hedge fund. Alas, it still is: "The Wells Notices state that the staff intends to recommend or is considering recommending that the Commission file civil injunctive actions against HCP, Harbinger Capital Partners Offshore Manager, LLC, Harbinger Capital Partners Special Situations GP, LLC, Mr. Falcone, Mr. Asali, and Ms. Roger alleging violations of the federal securities laws’ anti-fraud provisions in connection with matters previously disclosed and an additional matter regarding the circumstances and disclosure related to agreements with certain fund investors." And whether the Wells Notice is merely an inquiry into Falcone previous shady hedge fund-dipping practicesdescribed here, or a preamble to a full blown public spectacle-cum-humiliation on Harbinger's LightSquared remains to be seen. One thing is certain: Mrs Falcone will milk the newly found notoriety to its full extend, prenup firmly in gold-braceleted hand.
On December 8, 2011, Harbinger Capital Partners LLC ("HCP") and certain of its affiliates, including Philip A. Falcone, Omar Asali, and Robin Roger, received "Wells Notices" from the staff of the United States Securities and Exchange Commission.  Investment funds managed by HCP are our controlling stockholders.  Mr. Falcone is our Chief Executive Officer and Chairman of our Board of Directors.  Mr. Asali is our Acting President and a member of our Board of Directors and Ms. Roger is a member of our Board of Directors.

The Wells Notices were not addressed to the Company or any of its subsidiaries (including Spectrum Brands Holdings, Inc.) and the matters described in the Wells Notices do not include any conduct involving, by, or on behalf of the Company or any of its subsidiaries (including Spectrum Brands Holdings, Inc.).

The Wells Notices state that the staff intends to recommend or is considering recommending that the Commission file civil injunctive actions against HCP, Harbinger Capital Partners Offshore Manager, LLC, Harbinger Capital Partners Special Situations GP, LLC, Mr. Falcone, Mr. Asali, and Ms. Roger alleging violations of the federal securities laws’ anti-fraud provisions in connection with matters previously disclosed and an additional matter regarding the circumstances and disclosure related to agreements with certain fund investors.

A Wells Notice is an indication of the current views of the staff of the Division of Enforcement, prior to a decision by the Commission.  It does not constitute a determination that the recipients have violated any law.  Should the Commission accept the recommendations of the staff, the Commission could seek a range of possible remedies, including permanent injunctive relief, a cease-and-desist order, censure, a bar (as to the individuals) from association with an investment adviser, investment company, and/or broker-dealer, disgorgement, pre-judgment interest, and/or civil penalties.  It is not possible at this time to predict the outcome of these investigations, including whether or when any proceedings might be initiated or whether the matters will result in settlements on any or all of the issues involved.

HCP and its affiliates are disappointed that the staff issued Wells Notices in these matters.  Except with respect to certain previously disclosed matters regarding Rule 105 of Regulation M, they strongly disagree with the staff that any violation of federal securities laws occurred and, in accordance with SEC procedures, plan to submit responses explaining why they believe enforcement actions are unwarranted.  If the SEC decides to bring an enforcement action, HCP and its affiliates intend to vigorously defend against it.


BERNANKE’S OBFUSCATION CONTINUES: The Fed’s $29 Trillion Bail-out of Wall Street

Author: L. Randall Wray · December 9th, 2011 · Since the global financial crisis began in 2007, Chairman Bernanke has striven to save Wall Street’s biggest banks while concealing his actions from Congress by a thick veil of secrecy. It literally took an act of Congress plus a Freedom of Information Act lawsuit by Bloomberg to get him to finally release much of the information surrounding the Fed’s actions. Since that release, there have been several reports that tallied up the Fed’s largess. Most recently, Bloomberg provided an in-depth analysis of Fed lending to the biggest banks, reporting a sum of $7.77 trillion. On December 8, Bernanke struck back with a highly misleading and factually incorrect memo countering Bloomberg’s report. Bloomberg has—to my mind—completely vindicated its analysis; see here:
Any fair-minded reader would conclude that Bernanke’s memo to Senators Johnson and Shelby and Representatives Bachus and Frank is misleading. One could even conclude that it is not just a veil of secrecy, but rather a fog of deceit that the Fed is trying to throw over Congress.
He argues that the sum total of the Fed’s lending was a mere $1.2 trillion, and that it was spread across financial and nonfinancial institutions of all sizes. Further, he asserts that the Fed never tried to hide the bail-outs from Congress. Both of these assertions fly in the face of the facts available (as the Bloomberg response makes clear).
As Bernanke notes, highly credible analyses of the bail-out variously put the total at $7.77 trillion (Bloomberg) to $16 trillion (GAO) or even $24 trillion (I think this is Senator Bernie Sanders’ figure). He argues that these reports make “egregious errors”, in particular because they sum lending over-time. He also claims that these high figures likely include Fed facilities that were never utilized. Finally, he asserts that the Fed’s bail-out bears no relation to government spending, such as that undertaken by Treasury.
All of these assertions are at best misleading. If he really believes the last claim, then he apparently does not understand the true risks to which he exposed the Treasury as the Fed made the commitments.
There are a number of issues that must be understood. First, the Fed quibbles about the differences among lending, guarantees, and spending. For the purposes of this blog I will accept these differences and call the sum across the three “commitments”. In spite of what Bernanke claims, these do commit “Uncle Sam” since Fed losses will be absorbed by the Treasury. (The Fed pays profits to Treasury, so if its profits are hurt by losses, payments to Treasury are reduced. If the Fed should go insolvent, the Treasury will almost certainly be forced to recapitalize it.) I do, however, agree with the Chairman that a tally should not include facilities that were created but not utilized (there were several of them, and the tally I present below does not include any facilities that were not used).
Second, there are (at least) three different ways to measure the Fed’s bail-out. One way would be to find the day on which the maximum outstanding Fed commitments was reached. According to the Fed, that appears to have been about $1.5 trillion sometime in December 2008. I’m willing to take Bernanke at his word. Another way would be to take the total of commitments made over a short period of time—say, a week or a month. That would be a measure of systemic distress and would help to identify the worst periods of the GFC (global financial crisis). Obviously, this will be a bigger number and will depend on the rate of turn-over of Fed loans. For example, many of the loans were very short-term but were renewed. Bernanke argues that it is misleading to add up across revolving loans. Let us say that a bank borrows $1 million over night each day for a week. The total would be $7 million for the week. In a period of particular distress, the peak weekly or monthly lending would spike as many institutions would be forced to continually borrow from the Fed. Bernanke argues we should look only at the lending at a peak instant of time.
Think about it this way. A half dozen drunken sailors are at the bar, and the bartender refills their shot glasses with whiskey each time a drink is taken. At any instant, the bar-keep has committed only six ounces of booze. That is a useful measure of whiskey outstanding. But it is not useful for telling us how much the drunks drank. Bernanke would like us to believe that if the Fed newly lent a trillion bucks every day for 3 years to all our drunken bankers that we should total that as only a trillion greenbacks committed. Yes, that provides some useful information but it does not really measure the necessary intervention by the Fed into financial markets to save Wall Street.
And that leads to the final way to measure the Fed’s commitments to propping up our drunks on Wall Street: add up every single damned loan, guarantee and asset purchase the Fed made to benefit banks, banksters, real Housewives on Wall Street, fraudsters, and their cousins, aunts and uncles. This gives us the cumulative Fed commitments.
The final important consideration is to separate “normal” Fed actions from the “extraordinary” or “emergency” interventions undertaken because of the crisis. That is easier than it sounds. After the crisis began, the Fed created a large alphabet soup of special facilities designed to deal with the crisis. We can thus take each facility and calculate the three measures of the Fed’s commitments for each, then sum up for all the special facilities.
And that is precisely what Nicola Matthews and James Felkerson have done. They are PhD students at the University of Missouri-Kansas City, working on a Ford Foundation grant under my direction, titled “A Research And Policy Dialogue Project On Improving Governance Of The Government Safety Net In Financial Crisis”. To my knowledge it is the most complete and accurate accounting of the Fed’s bail-out. Their results will be reported in a series of Working Papers at the Levy Economics Institute ( The first one will be posted soon, and is titled $29,000,000,000,000: A Detailed Look at the Fed’s Bail-out by Funding Facility and Recipient. Watch for it!
Here’s the shocker. The Fed’s bail-out was not $1.2 trillion, $7.77 trillion, $16 trillion, or even $24 trillion. It was $29 trillion. That is, of course, the cumulative total. But even the peak outstanding numbers are bigger than previously reported. I do not want to take any of their fire away—interested readers must read the full account. However, I will use their study as the source for a brief summary of total Fed commitments.
Here I am only going to focus on the final measure of the size of the bail-out: the cumulative total. This is not directly comparable to the Fed’s $1.2 trillion estimate, which is peak lending. It is closest to the $24 trillion figure that I believe Senator Sanders is using. The difference from that number is probably attributable to choice of facilities to include.
I will post more on the important research done as part of this Ford Foundation grant; in coming blogs I will also explain why all Americans should be horrified at the Fed’s actions, and by Bernanke’s continued attempt to cover-up what the Fed has done.
Summary of Total Cumulative Fed Commitments
When all individual transactions are summed across all facilities created to deal with the crisis, the Fed committed a total of $29,616.4 billion dollars. This includes direct lending plus asset purchases. Table 1 depicts the cumulative amounts for all facilities; any amount outstanding as of November 10, 2011 is in parentheses below the total in Table 1. Three facilities—CBLS, PDCF, and TAF—overshadow all other facilities, and make up 71.1 percent ($22,826.8 billion) of all assistance.

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