FedUpUSA

Archive for April 7th, 2010

The following is a video produced by Jeff, a SwarmUSA supporter, to help bring attention to the cause. Jeff is targeting younger folks with this video, appreaciate spreading it around. Thank you, Jeff, people like you keep me hopeful, great job!

Derivatives Exposure Among US Commercial Banks

I have not looked at this in some time. The amounts are still quite impressive and highly concentrated in a handful of the TBTF banks.

As in the case of LTCM, leverage is a source of income, the higher the leverage, the greater the profits from which you can claim and take your salaries and bonuses.

Here is how things looked in the middle of 2008 Derivates Report June 30, 2008

“My Son..Went Inside There And Basically Saw that the Vault was Empty.”

Every day when I think I am going to get a day off from this story, some revelation seems to be come out, each as compelling, shocking, and suspicious as the others, but all fitting together in what looks like a nasty picture of reckless behaviour gone wrong developing.

Apparently some banks and brokers had been selling gold and silver which they do not have. We know it happens because Morgan Stanley was caught doing it, and was even charging storage fees from unsuspecting investors.

Do these banks not have auditors? Are the regulators sweeping this under the rug? Are the insiders and their spokespeople correct in just dismissing this as a problem, as was done with the subprime market even by Ben Bernanke himself before it collapsed into a bank run that shocked the financial system?

Now, we have to carefully distinguish between allocated metal, in which one holds a certificate and are assured of a firm ownership of actual metal, and an unallocated holding in which you hold basically a paper claim on metal, for which you may be an unsecured creditor, even if you are paying regular storage fees. But in the cases I am hearing about it is a firmly stated ownership of something that does not exist, and cannot be obtained at current prices.

This is important because although there is always shorting, and some fractional reserve aspect to all banking , even in the case of bullion banking, in this case the proportion or leverage of the selling of the assets starts to look more like a Ponzi scheme than a rational and efficient market. There is a point at which ‘speculation’ becomes fraud, and the fraud becomes large enough to start risking the health of the bank.

And in our under-regulated and excessively leveraged financial system, that becomes a problem because it all looks to be a pyramid scheme of sorts. JPM alone is holding derivatives with notional values approaching a very large portion of World GDP.

The banks seem to be pointing to bullion supplies elsewhere, such as the LBMA in London, or in this case Hong Kong, and saying, “See if certificate holders demand their bullion, we can easily fulfill their requests.” The problem with this is that it appears that they are ALL doing this, overleveraging their supplies, becoming counterparties and potential sources of supply to each other, with few having a full supply of what they say they have.

King News World Interview Regarding Lack of Physical Bullion at Large Canadian Bank

Make what you will of this. I don’t understand what they are saying about the Bank of Nova Scotia as the only bullion storage facility. There are several. CEF and Central Gold Trust store their bullion at CIBC as I recall. And Sprott stores their gold at the Royal Canadian Mint. This may seem like a small point, but its important. It is also important to understand what is stated by the bank on the certificate that you hold. As outlined above, you might just be an unsecured creditor to an unallocated account. There is no fraud in that, only a risk of actual delivery should you ever ask for it.

I am sure more will be coming out, eventually. But for now this information is barely penetrating the radar of the mainstream media. These fellows may be wrong, but so far no one is denying specifically what they are saying with any persuasive proof. They just seem to be hiding behind secrecy and opaque transactions, saying ‘Prove it, prove it.’

As I have stated before, the problem I have with this is the lack of transparency and auditing in these markets, which makes them absolutely ripe for fraud and excessive leverage by the usual suspects in the TBTF banks.

This seems to be exactly what caused the subprime crisis and the bank run in 2008: a lack of liquidity and the mispricing of risk. How can one not be suspicious? We have just seen it happening, even though the herd behaviour is to simply ignore it because it is too alarming, too inconvenient.

Let the truth come out. Let justice be done.

Have we learned nothing? What time is the next bailout?

Consumer Credit: OUCH!

Posted by Karl Denninger

So much for the “expected” -500 million print:

Consumer credit decreased at an annual rate of 5-1/2 percent in February 2010.  Revolving credit decreased at an annual rate of 13 percent, and nonrevolving credit decreased at an annual rate of 1-1/2 percent.

As is my usual practice I’ve grabbed the data updates and put them into year/over/year graphical format, thereby removing the seasonal impacts.  Here we are!

No increase of materiality here in the second derivative (that is, households are still de-levering on the plastic side, and effectively flat on a non-revolving.) 

In the larger time-frame:

For those who argue that we are emerging from recession and that we are seeing real final demand increases, you have to square that against these charts.  It simply isn’t happening.  For a look at the contraction in dollar terms, the change is seen here:

That’s a $9.5 billion decrease in revolving (credit card) debt in one month (February) and a $2 billion non-revolving decrease.

While in the intermediate and longer term de-leveraging is good for the consumer, in the short term it throws cold water all over the improving final demand picture.

Here’s what’s going on folks – the so-called “increased consumer spending” is coming from people not paying their mortgages, blowing it on silly stuff like iPads instead, along with the government borrowing and spending.

That’s not positive for the consumer outlook (or profit outlook) at all, since that decision not to spend on mortgages (e.g. blowing off shelter costs) only works until the bank forecloses and you are forced to start paying rent somewhere.  Then that cost which formerly allowed you to go out to eat at Olive Garden every night comes back with vengeance.

Last month’s report was trumpeted as evidence that the consumer had turned the corner and was able to borrow and spend again, raising the possibility that the economy truly was turning and the government could start to cut back on the fire hose.

This report blows that argument to bits – we have a consumer that is tapped out with our GDP being supported only by massive borrow-and-spend at a federal level, aided and abetted by a massive stock market and credit bubble.

This is not going to end well.