Saturday, March 3, 2012

ECB record deposits/Moody's lowers Greek debt to C/Spanish unemployment rises as GDP contracts

Good morning Ladies and Gentlemen:

Gold closed lower by 10 dollars to $1710.  The object of the exercise is no doubt silver as this metal
was lowered by 90 cents to $34.60. Yesterday  Moody's lowered the debt rating on Greece to C.
We witnessed unemployment rise in Spain as well as another contraction in their GDP. The EU decided to give Greece only 58 billion euros out of 130 billion in the bailout rescue and most of the LTRO euros landed back into the coffers of the ECB instead of being used in the carry trade.  We will go over all of these details but first we announce one more bank failure as this bank joins the ranks of fellow morgue players:

Global Commerce Bank of Doraville GA.

Now let us head over to the comex and assess trading:



The total gold comex OI fell by 4797 contracts with today's reading of 456,944 compared to yesterday's level of 461,741. Gold and silver had  quite a recovery yesterday but it seems that many players are just disgusted at the obvious manipulation in these precious metals markets so they just abandoned the arena altogether.  The front non delivery month of March saw its OI fall by 41 contracts to 230. We had 81 delivery notices yesterday so again we gained in gold oz standing.  It looks like March will turn out to have a decent amount of gold ounces standing in a traditionally weak delivery month.  The next delivery month for gold is April and here the OI fell by a whopping 11,815 contracts as some rolled to the big June contract and some just exited altogether.  The OI for April rests Friday night at 240,377 compared to Thursday's level of 252,192.  The estimated volume was more subdued today coming in at 144,843 compared to the confirmed volume of 259,866.

The total silver comex OI refused to buckle like gold and that has the bankers in a tizzy.  They need more silver leaves to fall and again this was the reason for another raid on Friday.  The total OI  fell by only 1l58 contracts to 113,669 form Thursday's level of 114,827.  The front delivery month OI fell from 2181 to 1723 for a loss of 454 contracts.  We had 160 delivery notices on Thursday so we lost 298 contracts to cash settlements. The next delivery month for silver is May and here the OI fell by 2107 contracts from 64,280 to 62,173.  It seems that May took the brunt of the fall in OI for silver.  The estimated volume today was an extremely anemic 33,974 contracts.  The confirmed volume on Thursday was much better at 67,181 contracts.  It seems that the silver OI's are resolute and firm in their conviction and refuse the play the stupid paper game. Hence the raid and the war between the bankers and long holders.

Let us begin with March inventory movements  in Gold


 gold ounces standing in March 2 :















Gold
Ounces
Withdrawals from Dealers Inventory in oz
nil
Withdrawals from Customer Inventory in oz
nil
Deposits to the Dealer Inventory in oz

nil
Deposits to the Customer Inventory, in oz
nil
No of oz served (contracts) today
(44) 4400
No of oz to be served (notices)
(186) 18,600
Total monthly oz gold served (contracts) so far this month
(460)46,000
Total accumulative withdrawal of gold from the Dealers inventory this month
  nil
Total accumulative withdrawal of gold from the Customer inventory this month

356


Most unusual.  We just completed big delivery month in February and yet
we see zero transactions in all categories:

no gold deposits in both customer and dealer
no gold withdrawals in both customer and dealer.
We only had a tiny adjustment of 100 oz as this brick was leased from a customer to a dealer
who needed the metal.
The registered gold remains at 2.467 million oz or 76.7 tonnes of gold.
The CME filed a total of 44 contracts or 4400 oz of gold.  The total number of
notices filed so far this month total 460 for 46,000 oz.  To obtain what is left to be served,
I take the OI standing (230) and subtract out Friday's deliveries (44) which leaves us with 186 notices or 18600 oz left to be served upon.

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

46,000 oz  (served)   +  18,600 (oz to be served)  =  64,600 oz or 2.01 tonnes.

end

the silver chart for March:    March 2/2012:








Silver
Ounces
Withdrawals from Dealers Inventorynil
Withdrawals from Customer Inventory575,795 (Scotia, Brinks,Delaware))
Deposits to the Dealer Inventory596,582 (Brinks)
Deposits to the Customer Inventory971 (Delaware)
No of oz served (contracts)137 (685,000 oz)
No of oz to be served (notices) 1786  (7,930,000)
Total monthly oz silver served (contracts)810  (4,050,000 )
Total accumulative withdrawal of silver from the Dealers inventory this month3,231,423
Total accumulative withdrawal of silver from the Customer inventory this month 8,604,495
Again we add considerable activity inside the silver vaults.
The dealer Brinks took in a rather large 596,582 oz.
The dealer did not have any withdrawal of silver.

The customer had a tiny 971 oz enter the vaults of Delaware.

The customer had the following withdrawal of silver:

1.  Out of Brinks:  410,211 oz
2.  Out of Delaware:  14,859 oz
3.  Out of Scotia:  150,725 oz

total withdrawal by customer;  575,795 oz
we had no adjustments.

The registered silver rests this weekend at 36.214 million oz
The total of all silver rests at 130.439 million oz.

It is surprising that with all of the registered silver we get minor delivery notices.
Strange indeed.

The CME reported that we had another tiny 137 notices filed for 685,000 oz.
The total number of notices filed so far this month total 810 for 4,050,000 oz.
To obtain what is left to be served upon, I take the OI standing for March (1723) and
subtract out Friday's deliveries (137) which leaves us with 1586 notices left to be served upon.

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

4,050,000 oz (served)  +  7,930,000 (oz to be served upon)  =  11,980,000 oz

we lost another 1.5 million oz to cash settlements yesterday.
The month of March in silver will have a higher number of oz standing than did the big delivery month of December.

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.



March 3.2012







Total Gold in Trust

Tonnes:1,293.68

Ounces:41,592,971.14

Value US$:70,970,312,153.97







March 1.2012



Total Gold in Trust

Tonnes:1,293.68

Ounces:41,592,971.14

Value US$:71,262,238,592.28








we had no changes in the gold inventory at the GLD yesterday.







end






And now for silver March 3. 2012:





Ounces of Silver in Trust313,895,623.200
Tonnes of Silver in Trust Tonnes of Silver in Trust9,763.25


March 1.2012:



Ounces of Silver in Trust313,141,810.300
Tonnes of Silver in Trust Tonnes of Silver in Trust9,739.80


Feb 29.2012:
Ounces of Silver in Trust313,141,810.300
Tonnes of Silver in Trust Tonnes of Silver in Trust9,739.80


Feb 28.2012:

Ounces of Silver in Trust312,364,575.100
Tonnes of Silver in Trust Tonnes of Silver in Trust9,715.62



Late Thursday night, they added another 754,000 oz of silver into the SLV vaults.
Strange that they whack silver and instead of this depository liquidating its silver
it adds to it. In the  4 days, they have added 1,531,000 oz of silver.


end



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



1. Central Fund of Canada: traded to a positive 3.6 percent to NAV in usa funds and a positive 3.9% to NAV for Cdn funds. ( March 3.2012)

2. Sprott silver fund (PSLV): Premium to NAV  rose slightly today  to  9.1% to NAV  March 3.2012 :
3. Sprott gold fund (PHYS): premium to NAV rose slightly to  3.45% positive to NAV March 3. 2012). 



end.

The COT report was released at 3:30 pm Friday. These include the results from Feb 21 through to the 28th.

Let us head over to the gold COT first:



Gold COT Report - Futures
Large Speculators
Commercial
Total
Long
Short
Spreading
Long
Short
Long
Short
231,050
37,830
32,561
145,061
390,412
408,672
460,803
Change from Prior Reporting Period
16,707
4,448
2,655
-943
15,106
18,419
22,209
Traders
200
61
71
45
52
277
157


Small Speculators




Long
Short
Open Interest



70,372
18,241
479,044



3,949
159
22,368



non reportable positions
Change from the previous reporting period

COT Gold Report - Positions as of
Tuesday, February 28, 2012






Those large speculators that are long in gold increased their long positions by a whopping 16,707 contracts.

Those large speculators that have been short in gold added another 4448 contracts to those short positions.

Our commercials:

Those commercials that are long in gold and are close to the physical scene
pitched a tiny 943 contracts form their long side.

Those commercials who have been perennially short in gold and manipulate this market on a daily basis, added another whopping 15,106 contracts to their short side.  This is two weeks in a row that we have seen massive increase in commercial short positions.  

Our commercials;

Those small specs that have been long in gold added a rather large 3949 contracts to their long side.

Those small specs that have been short in gold added a tiny 159 contracts to their shorts.


Conclusions:  for two straight weeks the commercials supplied massive quantities of non backed paper.  No wonder the massive attack on the  29th of February, one day following
the end day readings on the COT report. It seems that the official sector is behind all of the gold (and silver) trades.

end

 The silver COT report:









Silver COT Report - Futures
Large Speculators
Commercial
Total
Long
Short
Spreading
Long
Short
Long
Short
38,012
8,009
19,872
33,802
78,395
91,686
106,276
3,193
-145
-1,673
2,067
7,472
3,587
5,654
Traders
80
31
33
31
48
131
93

Small Speculators




Long
Short
Open Interest



24,180
9,590
115,866



1,696
-371
5,283



non reportable positions
Change from the previous reporting period

COT Silver Report - Positions as of
Tuesday, February 28, 2012



Those large speculators that have been long in silver added a large 3,193 contracts to their long side.


Those large speculators that have been short in silver covered a tiny 145 contracts from their shorts.


Our commercials;


Those commercials that are close to the physical scene and are long in silver
added a very large 2067 contracts to their long side.


But those commercials that have been short in silver from the beginning of time
and subject to the criminal probe on silver manipulation added a whopping 7,472 contracts to their short side.  


Our small specs:


Those small specs that are long in silver added a rather large 1696 contracts to their long side.


Those small specs that are short in silver covered a smallish 396 contracts from their short side.


Conclusion:  there is no question that the object of interest for the bankers was silver. The bankers certainly used their firepower to supply massive non backed paper trying to remove as many silver leaves as they could. Although the raid knocked the price of silver
down, they failed in the attempt to lower the playing field. They will try again  until they succeed, with the knowledge that the regulators are looking busy looking in other directions ( such affairs as the M.F. Global scandal).      
                       
end




Gene Arensberg does a great job analyzing the data on the silver smash:


COMEX Large Commercials Step Up Opposition Ahead of Wednesday Silver Plunge



SOUTH TEXAS -- A quick look at the positioning of the large commercial traders on the COMEX for silver futures reveals that the combined commercial traders (in the legacy COT report) increased their net short positions (LCNS) by 5,405 contracts or 13.8% from Tuesday to Tuesday to show 44,593 contracts net short as the silver price increased a big $2.62 or 7.7% from $34.27 to $36.89.  The COT report data cut off one day prior to the large $2.25 selloff on Wednesday, February 29.
The LCNS is the highest since September 13, 2011 when silver closed at $40.96, a few days before plunging in a vertical cascade to a $28 handle then. (Shown in the graph below.)
20120302-silver-lcns

Silver combined commercial net short position (LCNS), source CFTC for COT, Cash Market for silver.

From December 27, 2011, when silver closed at $28.67, to Tuesday, February 28, the combined commercial traders’ net short position increased from an extremely low 14,132 to 44,593 contracts net short, according to data supplied by the CFTC (70.7 million to 223 million ounces).*  That is an increase of 30,641 lots or about 215%, but the increase is measured from a 10-year low in commercial net short positioning. 
A majority of the increase in LCNS (15,864 lots or 79.3 million ounces) occurred ABOVE $33 USD and after January 31, 2012 when silver closed then at $33.12. 
For comparison, during that same December 27 to February 28 nine-reporting week period, very large traders the CFTC classes as Producer, Merchant, Processor or User, the category which includes the largest dealers and bullion banks,  increased their net short positioning by 16,510 contracts (82.6 million ounces) or only 50%, from 32,919 to 49,429 COMEX contracts net short. 
20120302-silver-lcns-PM
Net silver futures positioning by traders the CFTC classes as Producer, Merchant... in the weekly disaggregated COT report. In this graph the position shows as a negative number, so as the net short position increases the blue line falls and vice versa.   
Interestingly, 12,748 contracts (77%) of that increase occurred with or after the January 31 disaggregated COT report, when silver closed then at $33.12.  So much of the "increased opposition" from the Producer-Merchants also occured at or above $33.   
As of 15:30 ET Friday, silver looks like it will close near $34.75 on the Globex aftermarket, down about six bits ($0.75 or 2%) for the calendar week, but off more than $2.60 from its Wednesday breakout high of $37.43.  Very volatile silver is up just under $7 so far in 2012, an advance of about 25%. 
Silver closed out 2011 at $27.78 on the Cash Market.     
We will have more about the COT in our linked charts for subscribers by the usual time on Sunday evening (by 18:00 ET). 
*A significant portion of the LCNS increase was actually a decrease in net long positioning by traders the CFTC classes as Swap Dealers.  Swap Dealers recorded a record net long position on December 27, 2011 of 18,787 contracts (93.9 million ounces).  As of Tuesday, February 28 they had reduced that net long position by 13,951 lots ( 69.8 million ounces or 74%) to show 4,836 COMEX contracts net long.    


end




JSKim discusses the raid that we had on Feb 29.2012:

(courtesy smartknowledgeu)




SmartKnowledgeU Discusses Gold & Silver Manipulation on the Keiser Report

smartknowledgeu's picture



Here's the video of my original interview, recorded on Monday, February 27, 2012, about gold and silver price manipulation on the Keiser Report with Max Keiser. Regarding my comment on gold-shorts being "trapped", I do believe that there will be times in the future when gold and silver shorts will be squeezed and that this action will force prices higher. However, data I had uncovered about Central Bank movements in the gold and silver market led me to disagree that they were trapped at the current time, and thus two days after this interview was recorded, my suspicions regarding a take down in gold and silver that I had raised were certainly verified as the cartel hit gold for more than $87 an ounce and silver for a whopping $2.20 an ounce on the last trading day of February. Still, I believe that it is highly unlikely that the bullion banks perpetually short gold and silver in the fraudulent markets will ever be subjected to a short squeeze in the manner that Goldman Sachs et al allegedly used insider trading information to squeeze hedge fund SemGroup's oil shorts in 2008 to drive oil prices to $150 a barrel in a very condensed period of time.

If bullion banks were taking the opposite side of the bet and were net long gold and silver and were trying to squeeze speculators that were short gold and silver for their own benefit, then I would agree that the shorts could be run over and stampeded over, as happened to SemGroup in 2008. However, because the bullion banks perpetually maintain positions that suppress the price of gold and silver, I don't ever foresee them getting run over in a manner comparable to what happened to Semgroup. And if, oh joy, the bullion banks' shorts against gold and silver were run over, I'm not necessarily sure that they would choose to add longs to counter the losses of their shorts. Given the precedent we have from the MF Global fiasco, I could even foresee the bullion banks just defaulting on their short obligations and turning to regulators to wipe their debt clean. I sure hope that this would not be the case, but no future criminal act of the banking cartel will astound or surprise me anymore.

Despite the transparent Bullion Bank and Global Banking Cartel attacks executed against gold and silver futures and spot prices, always remember the following: Gold is Sound Money. Silver is Sound Money. The money Central Banks tell us is "money" is not. Sorry for the funny angle of my webcam during this interview!


About the author: JS Kim is the Chief Investment Strategist ofSmartKnowledgeU, a fiercely independent investment research and consulting firm. To learn more about his flagship Crisis Investment Opportunities newsletter, a newsletter that has returned a cumulative 202.22% from inception in 2007 until Jan 30, 2012, please click here.


Dear Friend of GATA and Gold (and Silver):
Hugo Salinas Price, president of the Mexican Civic Association for Silver, tells King World News tonight that yesterday's smashing of the gold price was a central bank operation that should not deter anyone from continuing to acquire the monetary metals.
Salinas Price says: "If I saw the price declining little by little, day after day, that would be a worrisome signal. That would mean the market is not eager to acquire more gold or silver, but that's not the case. ... When I see that kind of collapse in gold, I know it's not the natural market doing that. Nobody getting rid of their gold and silver is going to dispose of it in that manner. They are going to do it little by little. This seller was definitely not interested in losses. What they were interested in was suppressing the price."
The interview is excerpted at the King World News blog here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.


end.


It seems that the new Pan Asian Gold Exchange has been shelved:

(courtesy GATA/KingWorld News/Andrew Maguire)


Market riggers got China to kill PAGE, Maguire tells King World News
Submitted by cpowell on 08:47AM ET Friday, March 2, 2012. Section: Daily Dispatches
11:40a ET Friday, March 2, 2012
Dear Friend of GATA and Gold:
London silver market rigging whistleblower Andrew Maguire today tells King World News that manipulation of the gold market this week "couldn't have been more blatant" and that a New York financial institution with influence in China has succeeded in killing plans for the Pan-Asia Gold Exchange there. But, Maguire adds, the originators of that exchange are engineering another one whose development will be announced soon. Maguire's interview is posted at the King World News blog here:
http://kingworldnews.com/kingwor
ldnews/KWN_DailyWeb/Entries/2012/3/2_Whi...



end



then this from Ned Naylor Leyland of TFMetalsreport:

as to reasons why PAGE was squashed and how new players are attempting to have the first
100% allocated gold and silver exchange.  In a few months we will get a silver exchange which no doubt will create havoc for our comex and LBMA friends:


(courtesy Ned Naylor Leyland of TFMetalsReport and GATA)


Ned Naylor-Leyland: PAGE squashed ... and now for something completely different
Submitted by cpowell on 10:04AM ET Friday, March 2, 2012. Section: Daily Dispatches
1p ET Friday, March 2, 2012
Dear Friend of GATA and Gold:
Ned Naylor-Leyland, investment director at Cheviot Asset Management in London and an organizer of the Pan-Asia Gold Exchange, today distributed a commentary explaining the interruption in the exchange's planning and the departure of some of its organizers to form another exchange, which will begin with a silver contract, silver seeming to be the most vulnerable spot of the market manipulators. Naylor-Leyland's commentary is titled "PAGE Squashed ... And Now for Something Completely Different" and it's posted at GATA's Internet site here:
http://www.gata.org/files/PAGESquashed.pdf
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
The full read:
copied from Tfmetals site (Turd Ferguson) after their pod cast link (that what u did on the site)
http://www.tfmetalsreport.com/podcast/3468/tfmr-podcast-14-ned-naylor-leyland-
discusses-page-silver-and-true-price-discovery

Ned Naylor-Leyland, Cheviot Asset ManagementLast year at the GATA Goldrush 2011 conference I presented about the Pan Asia Gold Exchange (PAGE) and the likelihood of the ‘Spot Dog’ shaking off its ‘futures handlers’. This was to happen thanks to this new game-changing Chinese Exchange driving a return to a more acceptable form of price discovery. Much water has passed under the bridge since the ‘soft’ opening of PAGE in the early summer of last year, and everyone is well overdue an update. Meanwhile,thanks in no small measure to the debacle at MFGlobal, the spot dog has indeed thrown off its handlers (hence the emergence of backwardation in Silver) – but, as can be inferred from the title above, PAGE has also been squashed, Monty Python-style.
Fortunately, however, this is far from the full story, as the players behind the 1:1 allocated market concept are determined to make it run come hell and/or high water. The market is begging for this return to real price discovery and in spite of the interference so far, the change IS coming. It is disappointing to have to report that PAGE has not rolled out the way we anticipated, however everything that I presented at the GATA Goldrush conference was accurate at the time. The fact that a major Chinese regional development program was stalled appears, at least in part, to have been due to the publicity generated by Andrew Maguire and I. Too much is very evidently at stake in the world of Ponzi Bullion banking for the status quo not to fight its corner. Soon after the noise was made about PAGE and its forthcoming 1:1 allocated Gold contract, the shenanigans started. Just after the publicized ‘soft launch’ (with Central government mandarins in attendance) and the noise made on the internet about its implications, the one shareholder in PAGE that had a foreign listing (in the US) suddenly and stealthily increased its share-holding from 10% to 25%, acquiring additional board directors along the way. The rationale for this sudden change in the weighting of shareholders is shrouded in mystery, however what we do know is that this entity then insisted that they be allowed to build the trading platforms for PAGE from the ground up, rather than buying a working platform off the shelf to get PAGE operational in a timely manner.
This blocking tactic at board level effectively stopped the progress of the fully-allocated spot contract in its tracks, and it was immediately clear to the international-facing people that something fundamental had changed internally. Interestingly, the key Independent Director of this small listed entity that blocked the timely roll-out of PAGE is a well-known Western banker within China, whose CV includes work for the Federal Trade Commission, the Sloan Foundation (related to MIT) and his wife is a member of the Council on Foreign Relations. Whether this intervention respect of the platform was nefarious or not, it was understandable that the people behind the international-facing fully-allocated contract decided to step aside from PAGE and set up their own dedicated exchange. More on that in a moment. Following on from this removal of the 1:1 international contract, the domestic and leveraged PAGE Gold contract (via the Agricultural Bank) also subsequently went the way of the dodo, thanks to the well- publicized People’s Bank of China (PBoC) announcement about control over domestic Gold trading outside of Shanghai. It appears that the shiny Gold building constructed in Kunming City for PAGE will sadly remain (as elsewhere in China) a ‘see- through’, at least until the new Communist Party Politburo are voted in and the new political culture is embedded later this year when who knows, the rules on Gold trading again may be relaxed. Ostensibly these new PBoC rules about Gold trading were brought in to ‘protect the public’, but it is interesting to me that such a U-turn in policy appears to have been driven by pressure exerted somewhere within the People’s Bank, rather than it being typically characteristic of the long-term planning of the Chinese.
As disappointing as this all appears, there is a very substantial Silver lining to what has happened, both respect of the international allocated contracts and the indeed the domestic leveraged ones. By freeing themselves of the other shareholders within PAGE, the international-facing contracts are now being developed independently and under a new name. After the shenanigans of last year Andrew and I will not be giving the name of this new exchange until it is properly ‘live’ in a few months time, as it seems obvious that too much is at stake within the existing Bullion Banking system for this to be allowed to launch without some attempt at interference.
The aforementioned change in domestic Chinese rules mean that along with every other regional Precious Metals exchange, the new unnamed 1:1 allocated exchange is launching with Silver initially, which of course is the Achilles Heel of the Bullion banking system. This in my opinion is far more bullish and exciting short and medium-term than the Gold contract would have been, as the physical Silver market is so tight. Furthermore, all the regional exchanges mothballed by the PBoC rule change can switch, and are switching to Silver trading which is not covered by the change in rules. The contract itself will be, as before, an international rolling 90 day spot one, denominated in RMB, and the new entity is supported by the same serious players within the Chinese political and military establishment as before. The physical will be acquired ahead of closing each monthly tranche and will be vaulted entirely outside of the Bullion Banks (i.e. private vaulting facilities). From there the allocated receipts will be recorded on an electronic register and the issue will be tradeable in the secondary market with the register adjusted real-time. This is extremely good news for holders of real Silver and extremely bad news for holders of fake paper Silver who rely on the 350:1 leverage being maintained as the world’s sole price discovery mechanism for large purchases of the white metal. This effectively will be like dealing in an RMB-denominated and fully allocated version of some of the popular Silver Bullion Trusts, but rather than trading at a premium, the premium will price the issue ahead of purchase, affecting global price discovery, as previously mooted.
The guts of this new exchange that is rising Phoenix-like from the ashes of PAGE, are agreed and under construction. The international conduit for the new exchange has also been established and is ready to receive business once the legal framework (well down the road) is given final sign off by their Chinese legal team. Unlike PAGE, which was primarily established by domestic Chinese interests, the new entity is much more streamlined, better funded and the problems encountered last year by PAGE have helped to clarify the route going forwards. All in all, the squashing of the Pan Asia Gold Exchange has in truth only served to accelerate the move to real price discovery, and the control over domestic Gold trading is in my opinion yet another reason to be bullish about the prospects for the Silver price. Once the new exchange is ‘live’ in the summer we will be back with the all- important details about where and how to gain access for those interested in buying physical in size rather than paper illusions. Many serious physical Silver buyers, who are desperate to leave the farce of the Loco London system are ready to jump ship once the final sign off takes place.
Ned Naylor-Leyland
February 2012


end


I would like to thank Ross Pellegrino for sending this down for us:

(courtesy Reuters).

It is self explanatory!



Insight: Wall Street, Fed face off over physical commodities

The U.S. Federal Reserve Building is pictured in Washington, January 26, 2010.   REUTERS/Jason Reed

NEW YORK | Fri Mar 2, 2012 1:27pm EST
(Reuters) - Wall Street's biggest banks are locked in an increasingly frantic struggle with the Federal Reserve over the right to retain the jewels of their commodity trading empires: warehouses, storage tanks and other hard assets worth billions of dollars.
While the battle over proprietary trading and new derivatives regulations has taken place largely in public view since the 2008 financial crisis, the fight by JPMorgan Chase, Morgan Stanley and Goldman Sachs to retain or expand their prized physical commodity operations - most acquired in only the past six years - has remained hidden.
The debate is nearing an inflection point: Within 18 months, the Fed will likely either allow banks more freedom to invest in the physical commodity world than ever; or force them to sell off the assets that many banks are counting on to buttress their trading books at a time when they are already vulnerable because of intensifying competition and new trading curbs.
The banks are now locked in deep debate with the Fed, multiple sources involved in the discussions told Reuters. Goldman and Morgan Stanley argue the right to own such assets is 'grandfathered' in from their lightly-regulated investment banking days, or that at least they should be allowed to retain them as "merchant banking" investments, kept segregated from the trading desks.
But regulators and lawmakers may not be in the mood to give way. Banks are under pressure to reduce risk on their balance sheet; as commodity prices rise again, they may face more allegations that they could use these assets to drive prices higher or lower, squeezing them for trading profits.
"The Fed's not going to be terribly accommodating," said Oliver Ireland, a former associate counsel to the U.S. Federal Reserve and a partner with law firm Morrison Foerster in Washington, D.C. "There doesn't seem to be a lot of sentiment in this town for people doing new things and taking new risk."
Should these banks lose the debate, the result may be the biggest shake-up in commodity markets since the early 1980s, when Wall Street first discovered the potential profits to be made by wading deep into the murky world of crude oil cargoes, copper stockpiles and power plants.
"Adding large-scale, complex commodity market activities to "too-big-to-fail" bank portfolios, with dangerous potential ramifications to the real economy - as demonstrated in California by Enron - is not comforting," says John Fullerton, who ran JPMorgan's commodity business in the 1990s, and is now a markets activist at the Capital Institute in Connecticut.
The loss of their coveted assets would be a blow for the banks at the worst possible moment, with their proprietary trading desks shut down, commodity merchants trying to poach their top traders and new Basel III capital regulations requiring them to further build capital reserves.
Morgan Stanley's commodity trading revenues have fallen by some 60 percent over the past three years. Goldman Sachs' commodities business revenues fell from $4.6 billion in 2009 to $1.6 billion in each of the past two years.
The Fed declined to discuss specific companies directly or the likely final outcome of the talks. Spokespeople for Morgan Stanley, Goldman Sachs and JPMorgan declined to comment on detailed questions put to them by Reuters.
A CHANGE OF HEART
To a degree, it is a story that has been hiding in plain sight. In last year's second-quarter Securities and Exchange Commission filing, Morgan Stanley added the following new text to its lengthy Supervision and Regulation disclaimer:
"The company is engaged in discussions with the Federal Reserve regarding its commodities activities. If the Federal Reserve were to determine that any of the company's commodities activities did not qualify for the BHC (Bank Holding Company) Act grandfather exemption, then the company would likely be required to divest any such activities."
That disclosure was made at about the same time the bank began to have second thoughts about a new $430 million storage tank investment undertaken by its publicly listed oil transport and logistics subsidiary TransMontaigne, according to two people familiar with the transaction. In October, TransMontaigne reduced its stake in the project to 50 percent; it sold the rest in January.
The bank's abrupt change of stance last year is the clearest sign yet that the Federal Reserve may be taking a harder line.
Yet it may be JPMorgan, which has eclipsed long-time market leaders Goldman and Morgan under commodities chief Blythe Masters, that will be first to feel its effects.
The bank has begun sounding out possible buyers for its small operation trading metal concentrates, according to one source who examined the business late last year. It acquired that business when it bought most of RBS Sempra in mid-2010, but because metal concentrates aren't traded on any exchange they were not covered by a 2008 Federal Reserve order that allowed RBS to begin trading physical commodities.
More importantly, the sale has also raised questions about JPMorgan's ownership of its global metals warehousing business Henry Bath, which had also been excluded from the RBS waiver. The Fed's rules give banks a two-year grace period in which to divest any non-compliant businesses they acquire; sources say it's not clear why JPMorgan would be exempt from this rule.
Goldman too faces scrutiny of its ownership of Detroit-based metal warehousing firm Metro International. Goldman has come under fierce criticism from companies such as Coca-Cola, which has accused it of inflating metal prices.
Since buying the privately held firm in early 2010, the bank has taken great pains to avoid any direct involvement in its business to minimize regulatory scrutiny, according to two industry sources. But questions remain.
The warehouses are lucrative on their own: As surplus metal stocks accumulated during the recession, profits at the UK-based Henry Bath surged to more than $110 million in 2009 and near $80 million in 2010, about $1 million per employee per year, according to annual reports filed to UK Companies House in November. These units could, in theory, be run as "merchant banking" investments, as with Metro, but that requires they be kept at arm's length and divested within 10 years.
But for trading firms, that's only half the benefit.
"The truth of it is that having access to the physical markets is about optimization and knowledge - it gives you the visibility of the market to make far more successful proprietary trading decisions in both physical and financial markets," said Jason Schenker, President and Chief Economist at Prestige Economics in Austin, Texas.
"That's why for many years the most successful traders had access to both markets, and why we've seen little sign they're moving quickly to divest these assets now. It's trading with material non-public information - the difference compared with equity markets is that it's perfectly legal."
Based on past precedent, financial holding companies would still be allowed to be involved in trading physical commodities like oil or metals, even if they are not allowed to outright own the physical infrastructure which supports their operations.
Between 2003 and 2008, the Federal Reserve granted permission for nearly a dozen banks to engage in such trading, which it deemed "complementary" to financial operations within certain limits. Citigroup was the first in, seeking approval on behalf of its aggressive trading unit Phibro.
But there are signs that the Fed may be reassessing. The permit to form RBS Sempra in March 2008 is one of the last it has granted, according to the Fed's quarterly bulletins. That took eight months to negotiate, and covered a range of activities including third-party refining that the Fed had not previously approved.
In 2009, Bank of America told the Fed of its plans to trade a broad range of commodities following its acquisition of Merrill Lynch, which had not been subject to Fed regulations, a source familiar with the discussion said. BoA secured its own approval from the Fed to engage in physical trading in 2007, but Merrill's operation was much larger -- although still within the scope of what the Fed had approved for other banks such as RBS.
That request is still pending, the source said, even though BoA has not sought permission to own or operate physical assets.
"Beginning in 2009, we have been working with regulators to ensure that we will continue to service our clients in the physical commodity market with products and services on which they have relied," a BoA spokeswoman told Reuters in response to questions.
On the other hand, if the Fed allows Goldman, Morgan Stanley and JPMorgan to retain all their assets, it may open up a Pandora's Box. Rivals are already up in arms about the potential for a competitive disadvantage.
"It's a space we'd love to be in, but have had to limit our investments to Europe and Asia due to the Financial Holding Company regulations," one lawyer with a rival European bank said.
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

 end


Let us now see some of the big  stories of yesterday that will shape the physical price of gold and silver
next week

The big story released early Friday morning came from Louise Armistead of the UKTelegraph.
Here she reports that the EU is releasing a little less than 50% of the bailout  (58 billion euros instead of the 130 billion).  Why? Greece still has not lived up to the austere conditions promised.  Its economy is spiraling down a vortex and they want to contract its GDP more? They are delaying the euros promised which would put the country perilously close to bankruptcy. The real reason, of course, is that the EU are waiting for the results of the PSI.

(courtesy UK Telegraph/Louise Armistead)

EU finance chiefs give Greece $58bn but stoke fears of default after delaying bail-out decision

European powers approved the release of funds for Greece's international creditors but delayed the decision to bail out Athens until March 12 - perilously close to the country's default deadline. 

 

by Louise Armistead

Ministers released €58bn (£48bn) of cash designated to smooth the €206bn bond restructuring but withheld the remaining €71.5bn allocated to help the Greek government.
Eurozone finance ministers, who met in Brussels ahead of European Union leaders summit on Thursday night, said they would hold a conference call on Friday, March 9 - a day after the bond swap deadline - and postpone a decision until a eurogroup meeting on Monday, March 12.
The delay will push Greece to within eight days of bankruptcy - a move likely to rattle global markets and put eurozone leaders on a collision course with America and China.
World leaders have demanded immediate action to stem the crisis but Athens faces a €14.5bn bond repayment on March 20.
Jean Claude Juncker, head of the group of 17 finance ministers, said in a statement that a "high participation" in the bond swap and a "positive assessment" of the Greek austerity reforms were "necessary conditions" for the disbursement of the rescue package. He added that ministers would also withhold permission for the eurozone bail-out fund, the European Financial Stability Facility (EFSF), to issue bonds to help Greece until the conditions were met. Dutch Finance Minister Jan Kees De Jager said: "We have to wait for PSI [bond swap] before final conclusions"
The bondholder agreement was given a boost when the International Swaps and Derivatives Association (ISDA) said there had not been a "credit event" in Greece, despite the deal. The body rejected demands that it declare a default, in a move that prevented billions of dollars in credit default insurance being triggered. But ISDA added that its position could change at any time.
Greece's finance minister, Evangelos Venizelos, agreed a raft of commitments with European paymasters designed to "convey a message to the private sector, to the markets and the international community that the official sector supports Greece".
Jose Manuel Barroso, President of the European Commission, said that the leaders did not discuss easing deficit reduction targets within the EU.
Officials in Brussels also insisted that Spain must present a budget based on its 4.4pc target and that there will be no room for discussions on relaxing it until May.
German Chancellor Angela Merkel bowed to G20 demands and signalled her intention to boost the firepower of the EFSF and the European Stability Mechanism (ESM), saying: "In the long run we cannot resist this pressure."
However Mrs Merkel, who is battling stiff domestic opposition to increasing Berlin's exposure to Greece, said the plans would not be discussed until the end of March.
Stockmarkets rose, flushed from the European Central Bank's second liquidity boost unleashed via cheap loans on Wednesday. Spain managed three successful bond auctions at lower costs, though Portugal's yields rose amid fears it could follow Greece.

end.

Greek Credit Default Swaps hit a record yesterday as war of words were exchanged between
Greece and Germany.

(courtesy zero hedge)

As Greek CDS Hit Record, German Economy Minister Accuses Greece Of Reneging

Tyler Durden's picture




Remember Greece, where everything is supposedly fixed, except that nothing is until Greek bondholders all agree to get nothing for something? Or in other words, where Germany is hoping it can assign blame to hedge funds for not allowing the 75% PSI trigger threshold to be reached so there is a faceless monster that can be accused to achieving Germany's political goals? No? As the following reminder from Germany's Economy Minister Roseler shows, whose report has been acquired by Bloomberg, if not German anger then certainly confusion, is seething: "For the Greek government, the programs “obviously have no priority,” the ministry said. “This is unacceptable from the German standpoint." Wait, you mean a record February collapse in the Greek economy is inadmissable? Sure enough, Greek CDS, contrary to expectations for a no trigger event, just hit an all time high earlier at 76 points up front (i.e., more buyers than sellers), as basis player are loading up on protection and preparing for the March 8 PSI deadline.
From Bloomberg:
Greece is reneging on programs to spur its economic competitiveness that it signed with Germany since July, calling into question its willingness and capacity to revitalize its economy, the Economy Ministry in Berlin said.

Economy Minister Philipp Roesler and other German officials started bilateral projects with Greece from creating a development bank to advising on the construction of the Trans Adriatic Pipeline and on improving tax collection, the ministry said in a report, a copy of which was obtained by Bloomberg News. Greece has failed to fulfill its pledges in most cases, it said.

Greece’s implementation of project targets “remains insufficient,” the ministry said in the report. Revamping Greece’s economy at the same time as cutting its debt “is decisive -- that’s why Germany agreed to its support for the programs.”

For the Greek government, the programs “obviously have no priority,” the ministry said. “This is unacceptable from the German standpoint.”

Greece’s economy may shrink by 4.4 percent this year, the European Commission forecast on Feb. 23.
Cue Venizelos with pleadings that all Greeks have to do is "work, work, work." Oh, and also that Greece just said a Commissioner, or as he is better known in Germany, a Kommissar, is unacceptable, even though this is now the key gating factor to Greece receiving more aid.
Luckily, a CDS trigger event is now not only expected but welcome, in stark contrast to a year ago. Because just like with Lehman's failure, the "system is ready" for any contingency.

end.


Moody's has just cut Greece's rating to its lowest level C from Ca:


(courtesy Bloomberg)



Greece Ratings Cut to Lowest Level by Moody’s











Greece’s credit rating was cut to the lowest level by Moody’s Investors Service after the country began the biggest sovereign debt restructuring ever.
Greece’s long-term foreign currency debt was downgraded to C from Ca late yesterday, with Moody’s saying in a statement that investors who participate in the nation’s debt exchange will get about 70 percent less than the face value of their holdings. The deal constitutes “a distressed exchange, and hence a default,” the New York-based rating company said.
Greece has published the formal offer document for its agreement to exchange bonds for new securities. The restructuring uses so-called collective action clauses to discourage holdouts, the use of which would trigger credit- default swap insurance contracts, according to the rules of the International Swaps & Derivatives Association.
The debt exchange aims to help reduce national debt to 120.5 percent of gross domestic product by 2020, from 160 percent last year, and to meet the terms of a 130 billion-euro ($172 billion) international bailout. The swap will slice about 100 billion euros off more than 200 billion euros of privately held debt should all investors participate.

Earlier Cuts

The downgrade follows Standard & Poor’s decision on Feb. 27 to lower Greece to “selective default” after the announcement of the plan for investors to trade their bonds. It also follows a two-level reduction last week by Fitch Ratings to C, which said it will further cut Greece’s rating to “Restricted Default” once the bond exchange is completed.
The country faces a high risk of default even if the plan is successful, Moody’s said. It will be unlikely to be able to sell bonds to private investors once its bailout package runs out, according to the rating company.
Euro area finance ministers approved the exchange and financing plan, Greece’s second following a 110 billion-euro bailout in May 2010, on Feb. 21 after Greek lawmakers backed austerity measures demanded by the European Union and International Monetary Fund. The leaders of the two biggest parties, which support Prime Minister Lucas Papademos’s interim government, pledged to continue with the measures after elections, likely to take place in April.
Critics of the package, which include spending cuts and a 22 percent reduction in the minimum wage, say the program will deepen the recession, making it harder to achieve the program’s debt sustainability goals.
The European Commission forecasts Greece’s economy will shrink 4.4 percent this year, as the country goes through a fifth year of recession. Gross domestic product contracted 6.8 percent in 2011.
To contact the reporter on this story: Marcus Bensasson in Athens atmbensasson@bloomberg.net Zeke Faux in New York at zfaux@bloomberg.net





end






Here is a great piece on the changing of the house rules in order to prevent a credit default swap event:


(courtesy  RCWhalen/zero hedge)





Greek CDS and the New House Rules: Get Over It

rcwhalen's picture





"Derivatives shift wealth opportunistically. The theory behind them is to stabilize risk in volatile markets by providing a means to rectify a portion of the losses incurred in less liquid activities. However, every transaction produces a winner and a loser. In other words, 50% of market activity results in a realized loss to one party. Thus derivatives enable smarter firms with deeper talent pools to exploit lesser players. Herein lies the flaw for the financial industry. While volatility is stabilized for a few, the net effect on the system is that the losses are merely passed to the dumbest player at the table."
"Complex Structured Assets: Feds Propose New House Rules"
The Institutional Risk Analyst
May 24, 2004
I decided not to say much about credit default swaps or CDS over the last little while.  The reason was that the "reforms" in Dodd-Frank seems to have disturbed the collusive equilibrium between the exchanges and the large dealer banks enough for the former to finally go after the lunch of the latter. This had to happen.  Now the fact of MF Global seems to have reminded all in Chicago who is the real enemy.
The large banks led by JPM are effective acting as mini-exchanges for CDS, but with paltry disclosure and transparency and often equally poor risk management.  There is no collective oversight of exposure by the dealers in the fantasy world of OTC CDS, only opaque bilateral relationships that allow counterparties to create and hide risk from other dealers as well as regulators. 
This deliberate dysfunction in the government oversight of OTC dealers is the legacy of Gerry Corrigan, who shut down dealer surveillance at the FRBNY in 1993 before leaving in a swirl of personal scandal to join his clients at Goldman Sachs. Later Corrigan spawned the "Counterparty Risk Management Group" so that the large dealer banks could continue to obfuscate on and delay any true reform of the OTC derivative ghetto. Today, the only people in the market with a partial view are at DTCC, but even this dataset is incomplete and, by design, inconsistent in terms of the data structure.   
The Greek situation, however, has focused everyone on the basic unfairness of the OTC market model.  A private group called ISDA, which is dominated by the big banks, is the supposed standards setting body for a marketplace measured in the trillions of dollars.  This body has no set rules for judging when a default occurs, but instead uses a set of guidelines to direct a case-by-case assessment of default events.
Because of the changes in the ISDA rules post-Delphi that allow for cash settlement of CDS and other OTC derivatives, it is possible to create exposures that are orders of magnitudes larger than the cash basis -- if there is a cash basis for the contract.  The ratio of open positions to actual debt in the Delphi default was about 40:1.  In those days, holders of CDS had to deliver the underlying debt to get paid on the insurance.  In the case of today's CDS, there is no effective limit to the ability of counterparties to create long or short exposures in most corporate or soveriegn names.
The first question to ask is whether it is reasonable for market participants to be surprised by the decision taken by ISDA saying that the Greek restructuring is not a default event.  Given that this market is run by and for the dealer banks, why should any of the merry gamesters trading these cash settlement derivatives be surprised?  My friend Barry Ritholtz, for example, expressed the general sentiment -- "bullshit" -- in a fine post yesterday.  Bruce Krasting captured same in a review of the more notable yowling over the Greek CDS decision by ISDA: <http://www.zerohedge.com/contributed/2012-09-02/default-isn%E2%80%99t-de...
But why are we all surprised? 
The second, more basic question is whether it is reasonable for market participants to be surprised by the Greek outcome given the political stakes.  A greek default will probably push some of the other EU perifery states into default as well.  We already saw the EU suspend short-selling on the banks in the Eurozone.  This is just the latest step by Angela Merkel to pull up the drawbridge on Fortress Germania.
But the third and most important issue involving CDS generally is why anybody with their head screwed on tight would be surprised to see the house changing the rules on CDS in the middle of the proverbial game.  Just as casinos can now change the look, feel and odds of most slot machines on the fly and in real time via the Internet, the dealers in the world of CDS are constantly changing the contractual template, legal rules and custodian arrangement to give the house maximum advantage. 
Again in this regard, re-read the ZH post from last week on MF Global, "Where's the Cash."  <http://www.zerohedge.com/contributed/mf-global-wheres-cash-part-ii>
And what is the lesson from MF Global?  That the lawyers and lobbyists for the large banks have rigged the legal game in favor of the OTC markets and the large dealers to allow them to steal customer funds in individual accounts from a broker-dealer with impunity.  The age of financial repression turns investors into chattel.  Why are market participants so surprised that the large back lackeys at ISDA are now enabling the banks to welch on these supposed credit default insurance "contracts?"
Some of you may recall that Tim Geithner and the Wall Street CEOs made a great fuss over the sanctity of OTC derivatives contracts during the failure of Lehman Brothers, Bear, Stearns and American International Group.  At the time of these failures, we were told that a restructuring was "impossible" because of the potential for systemic contagion if a market resolution occurred. Today, however, Tim Geithner and his clients in the large Wall Street banks prey upon investors like the creatures in the film Jurassic Park.
So please do be angry at the developments with respect to MF Global and Greece, but please do not tell me that you are surprised by any of this. The cash settlement world of OTC derivatives is not investing, but gaming.  And the House sets the rules. 

The Two Economic Clutch Type Events Of This Period

My Dear Extended Family,



The history of this period will focus attention on two economic clutch type events. These events will have mandated the need for the construction of a new monetary system utilizing a virtual reserve currency traded only by central banks. This reserve currency will be related to gold via a global Western world M3.
An economic clutch type event is one that by its occurrence allows the world to shift gears and change into a new economic velocity and direction.
The first economic clutch event took place when the decision was made that the US Federal Reserve and US Treasury would not support a rescue of the prestigious investment firm of Lehman Brothers. By doing this, they threw that institution and all of its transactions in which it was the deficit other party into default via bankruptcy.
Before then the entire OTC derivative debacle had a simple but extremely controversial solution. The tactic would have been similar to the means of nullifying the effect of the historic failure of the Savings and Loan Institutions during the last great housing recession. This at hand solution was to net the entire global derivative problem into a singular institutions named the Derivative Bank. At that time all OTC derivatives which were established would be returned to the instance of establishment when obligations netted almost zero. It was the institution of Lehman as a bankruptcy that removed the ability to net out to near zero from the daisy chain of global derivatives. To bring the daisy chain of OTC derivatives to net the winner would have to place their paper winnings into the pool and the paper losers would have placed their paper losses back into the pool. This would have reduced the entire loss to only part of the earnings on the banking institution from 1991 (the birth of the derivative use globally) rather than the more than now 20 trillion dollars worth of liquidity required to fund the winners who have benefited mightily from that windfall we financed.
The forced flushing of Lehman Brothers is therefore the economic clutch event that brought quantitative easing to provide the rescue funds to finance the winnings of the global Western world financial system. The downshift was from 5th gear to 1st gear that nearly blew up the world economic engine.
We now have had the 2nd Western world economic clutch event that will shift the gears directly from the plodding along in 1st gear economically into reverse gear, therein blowing the transmission and engine simultaneously. This event is the ISDA blessing of the credit event which reduced the value of Greek debt to its holders by 70% without triggering a default. They have now made it virtuous to walk away from the once lest risk loans, loans to Western governments. Such a walk away is now deemed a credit event, not the dirty D word, default.
A pattern of action has been set in place now which takes QE, the gift from Lehman’s economic clutch event, to QE to infinity, the direct result of the Greek economic clutch event that was declared via the International Swaps and Derivative Association. These Gods of Mammon declared 70% of the Greek sovereign debt to be valueless without guilt, sin or consequences.
Replacing the lost value from the sovereign credit event (non-default) in this paper selectively to the banking system makes unlimited creation of liquidity an act of virtue and blessedness.
To assume that other nations facing the same problems will not wish the same treatment is madness. To assume the private sector facing the same problems will not demand the same treatment is madness. Therefore QE to infinity is now deemed an act of virtue and blessedness.
A 70% haircut in the value of the Greek sovereign debt does not constitute a credit event defined as a credit default according to the most powerful financial entity on the planet, the ISDA. This group is more financially influential than governments today. This decision by the revered members of the Association’s Determinations Committee has acted to prevent the notional value of all the credit default swaps, an OTC derivative, from becoming real value as would occur if the CDSs were called upon to function.
The ISDA has, according to MSM, taken offense to being described as secretive in its proceedings. The ISDA said minutes of the meeting of the committee would not be publicly distributed as the decision was unanimous.
What has occurred in what is now described as “the successful handling of the Greek problem” by the ECB is in fact a total disaster for mankind in its introduction of QE to Infinity as the blessed settlement to a problem that now is more severe than it was prior to the Lehman event. That problem is that the mountain of OTC derivative has not been attended to, but rather has grown to include the size of all Western world sovereign debt as it is all western sovereign debt that is now threatened by an event of default on a national level. That will simply occur regardless of whatever the ISDA says. Much of it will not be paid, period.
This enfranchised QE to infinity sets a floor via Chinese gold acquisitions to any reaction in price. Alf Field’s price objective of gold at $4500 is by this 2nd economic clutch event now in the crosshairs of the gold price.
Gold prices staying high have now been guaranteed. Further to that, those intelligently managed gold producers internationally will shift to dividend payers of note, transforming the gold industry into the utility type equity of the future. Opinions expressed to the opposite are simple exercises in economic ignorance.
Gold’s price reactions, when they do occur, will be violent and very short lived. This is fact.
Respectfully,
James Sinclair





end






This is the big news of yesterday.  The second LTRO took in 529 billion euros (net 331 billion euros).
The reason for the net amount is due to some matured treasury bills  on the books of the ECB from the first LTRO, came due but  they already have issued euros for this. The total number of euros issued for the two LTRO's resulted in 1.02 trillion euros printed as the ECB took back as  collateral sovereign debts plus national central bank debt or other crazy collateralized debt. On the first night since the announcement of the second LTRO, 302 billion euros out of the net 330 billion was re-deposited back to the ECB.  Thus the banks are not using it for the carry trade as they are only filling major holes in their balance sheets and for refinancing purposes when their outstanding bonds come due as  they now will have sufficient euros on hand to pay off holders of those bonds.

You can see a problem developing here.  The ISDA temporarily voted for a credit default non event in Greece.  If nobody can use credit default swaps to protect their investment in buying sovereign bonds, why would anybody buy any sovereign bond from this point in time forward?

The 1% cost of the bonds minus the .25% interest on the re-deposit costs European banks close to 6 billion euros per year for the privilege of holding cash. What is going to happen in 3 years when this crap is re-swapped back for those original euros? How are they going to handle the new rollovers?
And all of those hedge funds that bought sovereign bonds front running, thinking that national central banks were engaging in the carry trade, good luck to them.  They are holding a bunch of garbage!

(courtesy zero hedge)



What Carry Trade? Euro Banks Deposit Entire LTRO 2 At ECB, Bring Total To Over $1 Trillion

Tyler Durden's picture



When explaining the practical effect of Wednesday's second and certainly not last LTRO, we said that "when it comes to explaining why Europe's banks are not only not deleveraging but increasing leverage while paying an incremental 75 bps on up to €700 billion in deposits soon to be handed over to the ECB, one needs all the favorable spin one can muster." We also estimated that net of rollovers and other tangents, the true net liquidity add would be €311 billion and "the final number by which the ECB's deposit account will increase will be about €210 billion less than the overhead number" of €529.5 billion. Sure enough, as of this morning, which takes into account the full settlement and allocation of the second LTRO cash installment, the ECB's deposit facility has soared by precisely as expected, rising by €302 billion overnight to an all time record of €777 billion, or just over $1 trillion. In other words, Europe has now successfully managed to fool everyonethat it is executing the carry trade, when it is doing nothing like that at all, and it continues to park record amounts of cash with the ECB on which not only is it not earning a carry spread,but it is losing 75 basis points as it is paid a meager 0.25% for a deposit that cost it 1.00%. Said otherwise, instead of building a cash position and retaining earnings to fund €3 trillion in debt rollovers over the next three years (by the time the LTRO matures incidentally - good luck paying down that additional €1 trillion, which makes it a total of €4 trillion in maturing debt), roughly 800 European banks will bleed by €6 billion in the next year just to store their cash with the ECB. So much for promises of the carry trade. And we certainly commiserate with all those who bought European bonds on the assumption that they were frontrunning banks who are buying up BTPs, Bonos and what not. They were only frontrunning themselves.

THURSDAY, MARCH 1, 2012


Nothing Is But What Is Not*

The events my old colleague and I talked about back in 2002 that we anticipated that would blow our minds are happening now.  ISDA - controlled by the issuing banks - has determined that the Greek bond deal has not resulted in an even of default event though the new bonds being issued will result in about a 35% recovery rate - initially.  When Greece hits the wall again these bonds will be worthless.  And the corruption, fraud and crime at MF Global will go unprosecuted.  Jon Corzine will walk away with little more than slight embarrassment.  In fact, at Wall Street "elitist" cocktail parties, getting away with the theft of billions like this is probably awarded a high degree of social status.  This stuff blows my mind...
*This is a quote from Shakespeare's "Macbeth," Act 1, Scene 3.  For me this famous and much discussed line from the play pretty much encapsulates and describes the realities of our political and economic system.  Let's look at one of Bernanke's comments yesterday from his Humphrey Hawkins testimony.  Bernanke defended the Fed's massive currency swap [sic, bailout] of the EU banking system by stating that "the ECB is well capitalized."  Hmmm...let's take a look at the EU balance sheet (data source from zerohedge, it's accurate].   On a "book" basis after the latest LTRO operation, the ECB has $3 trillion in "assets."  The large portion of these "assets" are direct liabilities of ECB counterparties - national Central Banks and gold lease obligations.  Supporting this garbage is $82.2 billion in net capital.  That's a leverage ratio of nearly 37 to 1.  Banana Republic-esque.  A bona fide mark to market of the ECB "assets" would completely wipe out that net capital and the ECB would be in an unequivocal position of insolvency, but for its ability to print money. Unequivocal.  It certainly is not "well capitalized."  Bernanke stated under oath in front of Congress that the ECB is "well capitalized."  It is not.  Nothing is but what is not.  You can peruse the ECB balance sheet HERE.  Zerohedge has nice leverage chart HERE

Curiously, no one has said anything about the "Gold and gold receivables" asset account on the ECB balance sheet.  The key term is "receivables."  Unbeknownst to many, and in affirmation of the massive Central Bank gold leasing program used to try and keep a lid on the price of gold, several years ago the BIS changed its accounting rules and permitted Central Banks to account for gold leased out as a "receivable" and part of the gold asset account, rather than as a "lease receivable."  Any accountant and financial analyst will tell you that a lease receivable is not of the same quality of asset as the actual asset.  But what is even more deceptive about this re-classification of leased out gold is it eliminates the fact that the gold lease receivable is actually a counterparty liability.  Given the poor credit quality of the EU member banks, the gold lease receivables on the ECB balance sheet are therefore very poor in quality.  They certainly are not worth face value.  Nothing is but what is not...

And one more point about this gold leasing business.  No one really knows for sure how much of the ECB's gold is actually leased out.  Based on the collective observations of several well respected market analysts who have looked at this issue for close to 20 years, it is likely that most of the ECB's gold is leased out.  But lets assume only 1/2 of it is leased and the lessees ultimately default on those leases and are unable to return the gold that was leased out and sold (perhaps some to Venezuela, who recently took physical possession of its 200 tonnes of gold - now you know why).  You can see that the claim that a gold "receivable" can be valued at face value is quite questionable.  For me this underscores that fact that the entire asset quality of the ECB's (and the U.S. Fed's) balance sheet is like not what it appears to be on paper.  Nothing is but what is not...

One more interesting tidbit I want to get out of my "in" box.  Many of you have seen this already but many have not.  A big source of irritation for me has been the way the media, Wall Street and politicians have been focusing everyone's attention on Greece/Europe and making it seem like that's the problem we have.  Keep your eye on the ball, not the shell-game operator.  I think this chart will settle the issue for anyone who cares to look at the truth.  It turns out that on a per capital basis, the United States has the highest amount of debt per capita of any country in the world:  LINK  I think that statistic pretty much speaks for itself and it highlights for me why the real problem facing our system is us.  It turns out the China, the U.S's largest creditor by far, agrees with my assessment.  Per this WSJ article, China is starting to shift its foreign reserves away from the U.S. dollar:  LINK.   We know per the revised TIC data that China dumped over $100 billion in U.S. Treasury holdings in December.  This is not good.  And it further underscores the fact that Bernanke's attempt to deflect the probability of more QE3 yesterday was total bullshit.  I'm still waiting for someone, anyone, to explain to me how the U.S. Treasury can possibly fund the Governmnet's spending in 2012 without a significant amount of money printing...

One last note.  Mission accomplished yesterday.  I surmised that if yesterday's silver hit was just another run of the mill manipulation operation by JP Morgan, that we would see a massive reduction in the open interest of the March silver contract, of which very little would be accounted for by delivery notices.  It turns out that the open interest in silver in total declined by 1039 contracts.  Of that, March silver o/i actually declined by 1081 contracts.  Of that, only 160 of the March decline was accounted for my delivery notices. JP Morgan's silver market operation thus achieved its goal by substantially reducing the amount of silver that might have stood for delivery.  Forget rule of law in this country.  It's dead.  This illegal manipulation will go on until the Comex eventually defaults.  Obama was supposed supposed to reform Wall Street corruption and restore rule of law.  Not only has he NOT fulfilled this campaign promise, he enables the widespread corruption and looting.  Nothing is but what is not...

Brazil declares new 'currency war' against foreign devaluations

 Section: 
By Samantha Pearson
Financial Times, London
Thursday, March 1, 2012
SAO PAULO, Brazil -- Brazil has declared a fresh "currency war" on the United States and Europe, extending a tax on foreign borrowings and threatening further capital controls in an effort to protect the country's struggling manufacturers.
Guido Mantega, the finance minister who was the first to use the controversial term in 2010, said the government would not "sit by passively" as developed nations continue to pursue expansionary monetary policies at the expense of Brazil.
"When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper, and it creates unfair competition for businesses in Brazil," he said on Thursday after announcing changes to the so-called IOF tax.

In a presidential decree, the government extended the existing 6 per cent financial transactions tax on overseas loans maturing in up to three years. Previously the levy was applied only to loans with maturities of under two years.
President Dilma Rousseff later weighed in on the debate, vowing to defend Brazilian industry and stop developed countries' policies from causing the "cannibalisation" of emerging markets.
The move comes as Brazil's central bank also steps up direct intervention in the market, selling dollars and offering derivatives called reverse currency swaps to curb the real's near 9 per cent surge against the U.S. dollar this year.
Brazil was one of the first emerging markets to speak out against the loose monetary policy of richer nations in the wake of the financial crisis, which it blamed for directing a flood of hot money to the country and overvaluing the real.
Although the crisis in the eurozone eased pressure on Brazil's currency late last year, a flurry of debt issuance this year has made the real one of the biggest gainers of 2012.
Countries from Colombia to Thailand have also followed suit with their own currency measures, and even the International Monetary Fund was seen to tacitly endorse the use of capital controls last April, giving Brazil's government further ammunition.
These currency intervention practices "were always just in reserve but today they are even recommended by the IMF," Mr Mantega said on Thursday. "The IMF didn't think this way and then they started to think this way mainly after Brazil introduced intervention measures which have been successful."
However, analysts doubt that such short-term measures will be enough to significantly change the direction of Brazil's currency.
"There is nothing they can do to really prevent the real from appreciating; they can just delay it from appreciating," said Italo Lombardi, Latin America economist at Standard Chartered.
He added that Thursday's measure would also have little effect because the average maturity of Brazilian bond placements abroad is much longer than three years.
After the announcement on Thursday, the real actually strengthened in midday trade to around 1.71 per dollar.


end





Spain just announced a major forecast of a 24.3% unemployment and another 1.7% GDP contraction.
It just does not look to good for Spain as it is following the deteriorating conditions inside Portugal.



(courtesy zero hedge)




Spain Forecasts 24.3% Unemployment In 2012, 1.7% GDP Contraction

Tyler Durden's picture




Nothing good here for our Spanish readers: while speaking at a news conference, Deputy Prime Minister Soraya Saenz de Santamaria said that Spain's economy will contract by 1.7 percent this year as the government carries out drastic austerity measures. The forecast matched the International Monetary Fund's outlook for Spain's economy this year and was less optimistic than the outlooks from the country's central bank and from the European Commission. Earlier, Spain also defied the European Union, setting a 2012 deficit target at 5.8 percent of gross domestic product, a far softer goal than the 4.4 percent agreed with Brussels. More importantly, the country now anticipates that its unemployment rate will hit 24.3%. Frankly, while horrendous and worse even than in Greece (as it also implies a youth unemployment rate well into the 50%s), this is an overoptimistic number, because as noted before, Spain's unemployment soared from 21.5% to 23.3% in Q4 alone. When all is said and done, look for Spain's 2012 YE unemployment to be well over 25%. So as the economic deterioration across the PIIGS accelerates, at least the banks are "safe."
Spain's historical unemployment:

And other forecast highlights via Bloomberg, citing Spain's De Guindos:
  • *SPAIN GROWTH MAY BE NEGATIVE UNTIL THIRD QUARTER INCLUDED
  • *SPAIN HOUSEHOLD SPENDING TO DECLINE IN 2012, DE GUINDOS SAYS
  • *SPAIN GOVERNMENT FORECASTS 24.3% UNEMPLOYMENT RATE IN 2012
  • *SPAIN GOVERNMENT FORECASTS 24.3% UNEMPLOYMENT RATE IN 2012
  • *SPAIN HOUSEHOLD SPENDING TO CONTRACT 4 PERCENT IN 2012
  • *SPAIN 2012 SPENDING LIMIT SET AT EU118.6BLN
  • *SPAIN 2012 SPENDING LIMIT DOWN 4.7% FROM 2011
As we said, nothing good.




end.

This was sent to me from a reader on the Spanish plight with special thanks:





(courtesy Reuters)



When you open the gates on the dam, you better be prepared for a torrential flood.  Why does one sense that they are probably unprepared for this?  Another 12-18 months of hell.

Is that the straw which will break the German's European resolve???


Euro slides on Spain's deficit move; crude falls

By Barani Krishnan and Herbert Lash
NEW YORK | Fri Mar 2, 2012 7:48pm GMT
(Reuters) - The euro fell against the dollar on Friday after Spain set a deficit target that defied Europe's new fiscal pact, and oil prices retreated after touching the highest level in 3-1/2 years as fears eased of a supply disruption from Saudi Arabia.
U.S. stocks edged lower, though the S&P 500 and Nasdaqremained on pace for their eighth week of gains in the last nine.

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The stronger dollar weighed on gold, which was headed for its worst weekly performance in two months.

The euro was on track for its worst week against the dollar since mid-December after Spain set a softer 2012 deficit target than one agreed under the euro zone's austerity drive.

The euro was last at $1.3201, down 0.9 percent on the day, and on course for a weekly loss of nearly 2 percent.

"The new higher self-imposed Spanish debt limit calls into question the basis of the European rescue agreement withGreece and other nations," said Joseph Trevisani, chief market strategist at Worldwide Markets in Woodcliff Lake, New Jersey.

Against the yen, the dollar rose to a nine-month high afterJapanese data for January showed that core consumer prices declined for a fourth consecutive month. Markets interpreted the data as suggesting the Bank of Japan will focus on monetary easing, which would weaken the yen.

The yen was last down 0.7 percent at 81.63 to the dollar.

In commodities markets, Brent crude futures fell after surging above $128 a barrel, the highest levels since July 2008, in post-settlement trade on Thursday in reaction to an Iranian media report of a pipeline fire in Saudi Arabia. Prices retreated after CNBC cited a Saudi oil official saying the report was untrue.

London's Brent crude was down nearly 2 percent at $123.97 a barrel. U.S. crude also fell almost 2 percent to $106.86.

Oil prices were being closely watched in the stock market. A steep rise in crude and gasoline prices could cut into consumer spending and damage the economic recovery.

"If we have some big event in the Middle East with Iran or what have you, then obviously that could throw a monkey wrench into things in the short run," said Doug Foreman, director of equities at Kayne Anderson Rudnick in Los Angeles California.

On Wall Street, both the Nasdaq and S&P 500 were on track for their third straight weekly advance but gains were limited as economic data throughout the week cast some doubt on the strength of the economic recovery.

The S&P 500 remained within the tight range that has held over the past two weeks, mostly holding gains of nearly 9 percent since the beginning of the year.

"We are not racing away any more. We are stuck right at" these numbers, said Ken Polcari, managing director of ICAP Equities in New York.

"You just have the markets in this holding pattern, biding their time. Everyone is trying to figure out what the answer is going to be."

The Dow Jones industrial average was down 8.74 points, or 0.07 percent, at 12,971.56. The Standard & Poor's 500 Index was down 4.34 points, or 0.32 percent, at 1,369.75. The Nasdaq Composite Index was down 11.14 points, or 0.37 percent, at 2,977.83.

European stocks finished little changed although the effects of this week's injection of cheap money from the European Central Bank buoyed banking stocks and were expected to continue to underpin the market next week.

By the close, the STOXX Europe 600 banking sector index had added 0.6 percent.

The FTSEurofirst 300 index closed up 0.03 percent at 1,087.08 points, a day after rising 1.1 percent.

Global equities, measured by the MSCI's world equity index, were down 0.4 percent and on track to close the week flat.

U.S. Treasury debt prices rose after a three-day losing streak, with long-dated government debt supported by scheduled purchases of 30-year bonds by the Federal Reserve as it attempts to stimulate lending and economic growth.

The benchmark 10-year U.S. Treasury note was up 14/32 in price to yield 1.9808 percent.

Gold trimmed early losses but was unable to rebound for a second day after Wednesday's massive selloff. Spot gold was down 0.1 percent versus an early loss of 0.6 percent.

For the week, bullion was headed for a drop of nearly 3.5 percent, largely due to Wednesday's 5 percent plunge -- gold's biggest one-day loss in more than three years.

(Additional reporting by Nick OlivariChuck Mikolajczak,Robert Gibbons and Ellen Freilich in New York/Blaise Robinson in Paris/Atul Prakash and Neal Armstrong in London; Editing by Leslie Adler)


end





Now the Bank of America is joining Goldman in cutting its GDP for first quarter to 1.8%.

(courtesy zero hedge)





Bank Of America Joins Goldman In Cutting Its Q1 GDP Forecast

Tyler Durden's picture




Yesterday, when we reported about Goldman not one, but two GDP Q1 forecast cuts in one day, we said to "watch for the Wall Street lemming brigade to quickly follow in Goldman's footsteps." Sure enough, here is Bank of America, rushing first into the bandwagon, trimming its Q1 forecast from 2.2% to 1.8%. This is perfectly expected: recall that from day 1 of 2012, most banks had been pushing for QE3, ignorant of the massive liquidity tsunami that was going on behind the scenes. Well, the impact of that has now come and gone, with no more easing from the ECB on the horizon for a long time. Which means that the focus can again shift to how "bad" the US economy is in preparation for the inevitable Bernanke gambit. Needless to say this will make the pre-election economy appear like a total farce in the months before the re-election: soaring employment and plunging everything else. Good luck explaining that away. Incidentally explains why the EURUSD has resumed its slide: the market is now pushing Bernanke to halt the appreciation of the USD against the EUR, and thus the implicit benefit of German's economy over that of the US, which can only happen with further promises of easing. That said, we can't wait for the statement as the vaudeville Trio of Bianco, Chadha and of course LaVorgna to follow suit and slash their now comically hyperbolic expectations.
From Bank of America
While we are quite concerned about second-half growth, we expect continued mixed news in the near term. Four fair winds are supporting growth: the fading shocks from the Arab Spring; the rebound in Japanese-related manufacturing after last year’s tsunami; reduced home foreclosures as banks wait for clarification on the rules; and mild winter weather. On the back of a very weak consumption report, we have lowered Q1 GDP growth from 2.2% to 1.8%. However, the early data for February has been healthy: although the national PMI weakened, jobless claims continue to drift lower, measures of consumer confidence continue to rebound and auto sales inched higher (Table 1). In the week ahead, we expect more of the same, with a solid 215,000 reading for February payrolls.

Unfortunately, the winds are starting to shift. In the spring the weather is much less important to economic activity than in the winter. Hence, the mild-weather induced bump up in the data should fade. Gasoline prices are up roughly 50 cents from their December lows and with the usual lags this could impact spending (Chart 1). The Attorney General Agreement in February paves the way for a ramp up in foreclosures over the next several months, dampening home prices and potentially construction. And the recovery in the auto sector now seems complete, suggesting a return to a slower pace of growth in sales and production. Based on these cross winds, we expect the data surprises to turn negative over the course of this spring.

When the facts change…

A popular indicator among clients is the Economic Cycle Research Institute (ECRI) leading index. Back in September ECRI argued that a recession was “inescapable,” pointing not just to their publicly released index, but to a series of other proprietary indexes. “Once the  [negative] feedback loop starts,” they warned, “it’s more powerful than any policy response.” In the past week, they were back on the airwaves, saying “our call stands”: a recession is still likely in the first half of this year. Indeed, they argue, “when you look at the hard data that is used to officially date business cycle recessions, it has been getting worse, not better, despite…the consensus view of an improving economy

Risk of recession rises in the second half

The deterioration in leading indicators last summer was mainly because of waves of financial market stress coming from Europe and weak US data due to the oil and Japan shocks. Those shocks have now faded and the risk of a near-term recession has in our view fallen back to normal levels. Unfortunately, we believe the risk of a recession rises in the second half. The sudden stop in fiscal policy at the end of the year will likely cause a sharp slowing in growth. If it is handled badly, it could cause an outright recession. However, this has nothing to do with the now out-of-date signals from last fall.











CurrentDebt Held by the PublicIntragovernmental HoldingsTotal Public Debt Outstanding
03/01/201210,755,610,818,537.194,745,403,897,606.5315,501,014,716,143.72








Street Examiner on the housing crisis:









If The Guilty (Mortgage Mafia) Are Never Punished, Housing Will Never Recover

ilene's picture





If The Guilty (Mortgage Mafia) Are Never Punished, Housing Will Never Recover

And The Rent IS Too Damn High
Housing data continues to be mixed. Lagging closed sales data shows prices still declining. However, the most current sales data represents January closings, which were mostly sales that went under contract in November 2011. That tells us nothing about the current market. Real time listings data, which over time has correlated well with subsequently reported sales data, is actually up on a year over year basis. The supply side of the law of supply and demand is working. There’s less supply offered at these low levels and seller asking prices have firmed up because of that. But the demand side is still broken in spite of an apparent increase in buyer “willingness.”
Get the full sized chart with analysis in the Professional Edition
Most demand markers remain extremely weak. The number of buyers may have increased, but huge numbers of sales are falling through because of problems with financing. Appraisers, unwilling and unable to see prices leveling out, continue to apply downward time adjustments resulting in one third of contracts blowing up. The willingness to buy is there, but the ability to finance is not. At the same time, a high percentage of sales being all cash suggests that many buyers are sensing intrinsic value in some markets. Unfortunately for the market, value and price isn’t the same thing.
Demand depends largely on employment. While there are hints that the employment picture may be improving, it has not improved enough to cause a sustained increase in demand that would lead to a sustained rise in house prices.
The supply of existing houses on the market has been radically reduced, while builders continue to build. They got a boost in January with a surge in new home demand. It appears that the dead in the water new house market may have turned a corner of sorts, but it’s not clear yet whether a sustained uptrend will follow. Sales as measured by the Commerce Department are barely above record lows. Based on the current NAHB builder survey, February sales data should show a substantial increase.
Inventories of existing homes are way down, and that has helped inventory to sales ratios based on contracts, but one third of those contracts are blowing up due to low appraisals and credit rejections on other grounds. Appraisers applying downward time adjustments to comparable sales exacerbates a problem that might no longer exist if it were not for the low appraisals. It’s a chicken and egg problem. Appraisers won’t stop adjusting comparable sales down in price until the price downtrend stops, and the downtrend won’t stop until appraisers stop using negative time adjustments.
So while there appears to be an increase in the willingness of buyers to buy, there’s no increase in effective demand, or the ability to close the sale, and hence no real improvement in the supply demand imbalance in spite of sharp reductions in supply.
One half of the problem, that of oversupply, is well on the way to being solved. The problem of financing deals so that they can close is not. The same mortgage lenders who caused the problem in the first place by being too easy for too long, are now exacerbating the problem by being too tight.
Their stupidity and short-sighted self dealing are boundless, in the end only harming the market they are supposed to facilitate in the due course of the conduct of their business. A little honesty would have gone a long way. Unfortunately, that’s a non existent quality among the big mortgage banks. They’re crooks, and they continue to screw the system as they seek to cover their crimes. The only way out of what is in its essence a criminal morass is to punish the guilty. The only solution is to put a few thousand of the industry’s top players in jail. That’s not happening, and it’s not going to happen. Until there’s punishment of bad behavior, the bad behavior will only be reinforced.
While lenders ironically screw the system by now rejecting deals that they should make, the shadow inventory problem grows like a cancer in the mortgage and banking criminal enterprises. As I have discussed in the past, and have reposted below, it is less of a direct problem for the housing market. A growing portion of that shadow inventory has become, or is in the process of becoming, non marketable. To the market, the shadow inventory boogieman is just that, a boogieman, not a real threat. But to the criminal enterprise itself, it constantly siphons off its lifeblood, and limits the ability of the mortgage mafiosi to skim and divert fictitious profits into their own pockets.
Ultimately, if people lose confidence and the financial system implodes, then it’s game over and prices will collapse again. For purposes of this analysis, I will assume that that’s not going to happen. As long as the Fed and foreign central banks keep their criminal crony zombie banks on life support they can bleed off the losses over a generation or two and the land of make believe will persist. It will never prosper, but it will persist, while those running the scam continue to stuff their pockets.
A real bottom in prices and the beginnings of a housing recovery will require a sustained increase in effective demand coupled with continued reductions in supply. The supply reductions are happening in a real and material way. There are indications of some increase in demand, including large percentages of cash sales and a surge in contracts signed in January, as well as possibly the beginnings of increasing employment. But these seeds of demand growth have to be cultivated and harvested as closed sales, and it’s not clear when or if the dysfunctional criminal banking system will ever be able to fully perform that function. So while there is probably less risk in housing now due to supply reductions that’s a long way from being in a sustained recovery. That requires consistent effective demand, which is being broadly stifled by the massive effort in the industry and in government to sustain the criminal enterprise.
As for the financial system itself, it will remain under pressure for as long as it takes to recognize the reduced value of housing collateral, a process which, in spite of 5 years of declining prices, hasn’t even begun. I’ve long estimated that the collateral value loss is in the vicinity of 30% nationally, and a report out today from CoreLogic more or less verified that. That there will be more foreclosures, and that the banking system will remain a dysfunctional, disreputable cesspool are givens. As long as that’s the case there will be a ceiling on how far prices can rise, even with wave after wave of malfeasant central bank money printing.














Evaporating Japanese Pension Fund Assets

testosteronepit's picture





Wolf Richter   www.testosteronepit.com
Japanese pension funds face a tricky situation. On one side is an investment environment of near-zero yields, declining real estate values, and a stock market that is down 75% from its peak in 1989. On the other side is a ballooning retirement-age population who enjoys the longest life expectancy in the world. But these investments have to fulfill the promises made to current and future retirees, however impossible that may be. So the one thing they don’t need is pension fund assets evaporating from an asset management firm.
Given the importance of age in Japan, the Ministry of Health released a slew of statistics just before "Respect for the Aged Day," a national holiday in September—the Japanese might not have a lot of vacation, but they do have a lot of holidays. A record-breaking 30% of the Japanese are 65 or older. A record 47,756 were at least 100 years old, the oldest two being 114. Due to the scandals in 2010 when some of the oldest people turned up as mummified bodies or didn't turn up at all—pension fraud!—the ministry announced that this survey had been conducted more carefully. And despite the March 11 tsunami, whose victims were mostly elderly, the number of centenarians rose by 3,300 over last year.
These statistics are the envy of any other nation—but they’re a nightmare for pension funds. And so it’s no surprise that 22% of the 119 Japanese pension funds sought “alternative investments” in the current fiscal year, according to a survey by JPMorgan Chase. And AIJ Investment Advisors Co., an asset management firm based in Tokyo, enchanted these yield-hungry pension fund managers with “alternative investments” that had stable but high yields, even when markets were crashing, as during the financial crisis or after March 11.
Pension fund managers were also lured by the pedigree of AIJ’s management team. President Kazuhiko Asakawa, a “breezy and confident talker,” was a former manager at Nomura Holdings, Japan’s largest securities company. Chief investment officer Shimpei Matsuki also hailed from Nomura. But there was a detail they didn’t tell their clients: Matsuki had a suspended prison sentence on his record; he’d paid off a guy who’d threatened to cause havoc at the shareholder meeting in 1995. It’s a common form of corporate extortion in Japan. And it’s also a yakuza specialty—for how Japan is trying to crack down on the yakuza and their ways, read.... No More Golf or Pizza for Yakuza.
In a newsletter, AIJ bragged about one of its funds that had made 241% since its inception in May 2002 by trading Nikkei options. “The aim is to secure absolute returns regardless of the market directions,” said the newsletter, of which Bloomberg News obtained a copy.
It appears that 84 corporate pension funds swallowed AIJ’s bait, hook, line, and sinker. And they handed what is now believed to be ¥210 billion ($2.6 billion) to the firm. Alas, most of the money is gone, regulators suspended the firm on February 24, authorities are investigating, and rumors are flying.
Prosecutors allege that the company lied to its clients about fund performance and supplied them with fictitious financial reports. AIJ officials told the investigating Securities and Exchange Surveillance Commission (SESC) that they invested most of the money in funds registered in the Cayman Islands. Sources said that the money was then transferred to a European bank in Hong Kong from where it was used for futures trading in Japan; and that only ­¥20 billion ($250 million) remained.
Then on March 2, sources revealed that the SESC would “consider, if necessary, raiding the company's offices to seize documents and other materials that would shed light on AIJ's investment operations.” (You mean they haven’t done that yet?)
Worried that other pension fund assets have evaporated as well, regulators initiated the first steps of a nationwide probe of all 263 asset management firms, the most expansive fund probe in Japan’s history. And the ruling Democratic Party is planning to propose changes to the Financial Instruments and Exchange Law to prevent this kind of fiasco in the future—because,stunningly, that law doesn’t require closely held asset management firms to hire independent auditors. Bernie Madoff at least had to pay for one. Which made a heck of a lot of difference.
After so much bad news, and after the horrid reports on the tragedy of March 11, and the subsequent nuclear catastrophe in Fukushima, there was something ... lighter. And cynical. And in a deeper sense, truthful.... Nuclear Contamination As Seen By Japanese Humor (mostly visuals).
end


I guess it is time to hit the send button.
I wish you all a grand weekend and I will
see on Monday night

all the best

Harvey

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