My Dear Extended Family,
I have asked Editor Dan to post this article in full. Please take time to read the article in order to understand why there is NO solution to the present problems due to the attitude and sociopathic mindset of today’s financiers. These demons would put their mothers in a microwave on high for a commission or spread.
Big Banks Hide Risk Transforming Collateral for Traders
By Bradley Keoun – Sep 11, 2012 6:43 AM MT
BlackRock Inc. (BLK), MetLife Inc. (MET) and the California Public Employees’ Retirement System, known as Calpers, probably will need more collateral to meet the new rules, according to regulatory documents, public statements by company officials and people with knowledge of the industry’s collateral needs.
“This is a client base that hasn’t had a need for securities financing,” Dave Olsen, JPMorgan’s head of over-the- counter clearing, said in an interview. “You take a typical life insurance company or pension fund, and they might have anywhere from a single-digit percentage to over 10 percent of their derivatives portfolio now required to be pledged to a clearinghouse.”
U.S. regulators implementing the rules haven’t said how the collateral demands for derivatives trades will be met. Nor have they run their own analyses of risks that might be created by the banks’ bond-lending programs, people with knowledge of the matter said. Steve Adamske, a spokesman for the U.S. Commodity Futures Trading Commission, and Barbara Hagenbaugh at the Federal Reserve declined to comment.
Banks could be squeezed if they have borrowed the Treasuries that they’re lending as collateral, and the original lender suddenly demanded them back, said Duffie, the Stanford finance professor.
“We just keep piling on lots of operational risk as we convert one form of collateral into another,” said Richie Prager, global head of trading at New York-based BlackRock, the world’s largest asset manager.
Lenders also could suffer if a trader defaults and his collateral is seized. In that case, the bank loses its Treasuries and is left holding lower-grade bonds that the trader posted in the collateral transformation.
“This is not a solution to collateral availability during market stress, but it is necessary to address the new rules’ unintended consequences that impact the safety of systemically important central clearinghouses,” JPMorgan’s Zuccarelli said.
The process allows investors who don’t have assets that meet a clearinghouse’s standards to pledge corporate bonds or non-government-backed mortgage-backed securities to a bank in exchange for a loan of Treasuries. The investor then posts the Treasuries — the transformed collateral — to the clearinghouse. The bank earns fees plus interest, and the investor is obliged at some point to return the Treasuries. In effect, the collateral is being rented.
The new business resembles the existing $5.5 trillion repurchase market, known as repo, where banks and investors can temporarily pledge their bonds to other lenders or mutual funds in exchange for cash loans. The sudden withdrawal of some participants from that market in 2008, partly because of concerns about the quality of collateral, contributed to the near-collapse of Bear Stearns Cos. and led the Fed to create a $148 billion emergency-lending program to backstop other Wall Street firms that depended on the financing.
The demand for collateral could stoke Wall Street’s fee machine even as the industry faces shrinking profits from regulations that increase price reporting and competition in derivatives trading, according to consulting firm Oliver Wyman, a unit of New York-based Marsh & McLennan Cos. (MMC)
While the $170 billion of annual revenue that securities dealers get from trading may fall by 20 percent to 40 percent once derivatives clearing becomes mandatory, “new revenues in collateral and funding are likely to offset much of those lost” from executing trades, Oliver Wyman wrote in a March report.
The firm declined to estimate how much the banks might reap. Lenders and Wall Street dealers generate a combined $11 billion from clearing trades and managing collateral for clients, identified in the report as an industry growth area.
Bank of America has a return-on-equity target of 10 percent to 15 percent from its clearing business, where the collateral- transformation desk will be located, said Denis Manelski, head of short-term rates trading at the Charlotte, North Carolina- based company. The bank’s return on equity last year was 0.04 percent, after a loss in 2010.
One constraint may be new capital rules that limit how much lending banks can do, according to Raymond Kahn, New York-based head of over-the-counter derivatives clearing for Barclays.
“We’re doing the best we can to factor in all costs and capital charges that are related to clearing, and we are building that into our pricing,” Kahn said.
Executives at Bank of New York and Frankfurt-based Deutsche Bank confirmed that their companies plan to offer collateral transformation. Tiffany Galvin, a spokeswoman at New York-based Goldman Sachs, declined to comment.
Meanwhile, clearinghouses are lowering collateral standards. CME, owner of the Chicago Mercantile Exchange and Chicago Board of Trade, where U.S. interest-rate futures are traded, said in March it would accept as much as $3 billion of corporate bonds from each member firm, up from $300 million previously. The bonds must carry a credit rating of at least A-, four levels above junk.
The exchange decided to accept the corporate bonds because Wall Street firms are under pressure to build capital and probably will face constraints on how much high-quality collateral they can lend, said Kim Taylor, president of the CME’s clearing business.
“We are trying to be aware of the needs of the market and help alleviate the systemic bottlenecks,” Taylor said. “If it’s not something we can safely take, then no matter what the market wants us to do, we can’t take it, so we won’t.”
LCH.Clearnet, which says it clears more than half of all interest-rate derivatives,announced in April it would accept mortgage-backed securities guaranteed by Ginnie Mae (BGNMX), which in turn is backed by the U.S. government. The closely held company is owned by its members, which include representatives of JPMorgan, Goldman Sachs, Deutsche Bank and Barclays.
Since regulators have mandated clearing, they should support “some flexibility on collateral, where the clearinghouse can make a strong case that they can manage the risk,” said Andrew Howat, LCH.Clearnet’s head of collateral and liquidity management. “You can’t have all this over-the-counter clearing without collateral, so something needs to give.”
The life-insurance industry has pushed regulators to allow looser collateral guidelines. The American Council of Life Insurers said in an October presentation to staffs of the CFTC and Securities and Exchange Commission that “high-quality corporate bonds” should be allowed as collateral on derivatives trades. The industry has 42 percent of total assets in corporate bonds, compared with 14 percent in government bonds, the presentation shows.
Members of the trade group, including MetLife, Allstate Corp. (ALL), Nationwide Financial Services Inc., Prudential Financial Inc. (PRU) and Principal Financial Group Inc. (PFG), declined to discuss whether they would sign up for collateral transformation.
“This is a level of detail that we wouldn’t be doing interviews on,” said Maryellen Thielen, a spokeswoman for Northbrook, Illinois-based Allstate, the largest publicly traded U.S. auto and home insurer, which had $18.7 billion of derivatives as of June 30.
Calpers, the largest state pension fund in the U.S. with $226.6 billion under management, would use “existing assets in the portfolio” to meet any extra collateral calls, senior portfolio manager Anne Simpson said in a voicemail message. The Sacramento-based fund has derivatives with a notional value of $30.4 billion.
“There’s discussion to be had around what would count as suitable quality, suitably liquid and unencumbered collateral for that purpose,” Simpson said.
The added costs of posting collateral or borrowing it from banks may push some derivatives users to stop trading them altogether, reducing liquidity in the market, said Charley Cooper, a senior managing director at State Street in New York. He said other traders may shift to futures exchanges, which require less than half the collateral needed to clear over-the- counter derivatives, according to CME.
The potential shortage of high-quality bonds to post as collateral is becoming its own risk, the IMF said in its April report. Investors, unable to obtain the Treasuries they need, may “settle for assets that embed higher risks,” according to the report.
“Safe-asset scarcity could lead to more short-term volatility jumps, herding behavior and runs on sovereign debt,” the report said.
The banks’ new lending business “smells like trouble,” said Anat Admati, a finance and economics professor at Stanford who studies markets and trading and advises bank regulators on systemically important firms.
“The point of the initiatives on derivatives was that derivatives can hide a lot of risk,” Admati said. “Now they’re going to just shuffle the risk around.”
Jim Sinclair’s Commentary
This interview is extremely interesting when you know who the Council on Foreign Relations is.
Jim Sinclair’s Commentary
As per Ayn Rand, "Obedient victims sanction their enslavement."
He who passively accepts evil is as much involved in it as he who helps to perpetrate it.
–Martin Luther King, Jr.
Jim Sinclair’s Commentary
- Real Median Household Income Collapses to 16-Year Low;
- 2011 Income Below Levels of Late-1960s, Early-1970s
- Income Variance Hits Record High, Suggestive of Greater Financial and Economic Crises Ahead
- Trade Deficit Contained by Short-Lived Decline in Oil Prices
Jim Sinclair’s Commentary
But not to worry, the Western world Banksters are billionaires.
US slips from No. 1 to also-ran in global economic rankings
Published September 11, 2012
June 13, 2012: Workers assemble the new 2013 Ford Escape on the production line at the company’s newly transformed Louisville Assembly Plant in Louisville, Ky. (REUTERS)
The United States is losing its competitive edge.
So says a new report from the World Economic Forum which found the U.S. slipping in dozens of areas compared with just a few years ago. Perhaps most troubling is the conclusion that since 2008, the United States has slid from No. 1 in the world in "global competitiveness" to No. 7 this year.
Out-ranking America are: Switzerland, Singapore, Finland, Sweden, the Netherlands and Germany.
Sure, it’s just a number. But the WEF’s ranking takes into account a broad range of factors, from debt to corruption to regulation to red tape to education to health care.
And virtually across the board, the U.S. is falling behind.
"The slide in the global competitiveness report is almost certainly due to … policy-related factors," James Gwartney, economics professor at Florida State University, told FoxNews.com. Gwartney, with dozens of other institutes, has co-authored a separate report on economic freedom set to be unveiled next week.
Jim Sinclair’s Commentary
How would you like to wake up to this in the morning?
Jim Sinclair’s Commentary
You have been informed of this growing trend toward a decline in the use of the dollar as the international settlement currency for 2 years.
That is the benefit a reserve currency gets in the demand for contract settlement written in the dollar. This is the footprint that can be identified as the US Dollar now a reserve currency by default, not choice. It is the beginning of the end of the reserve role.
China And Russia Are Ruthlessly Cutting The Legs Out From Under The U.S. Dollar
The mainstream media in the United States is almost totally ignoring one of the most important trends in global economics. This trend is going to cause the value of the U.S. dollar to fall dramatically and it is going to cause the cost of living in the United States to go way up. Right now, the U.S. dollar is the primary reserve currency of the world. Even though that status has been chipped away at in recent years, U.S. dollars still make up more than 60 percent of all foreign currency reserves in the world. Most international trade (including the buying and selling of oil) is conducted in U.S. dollars, and this gives the United States a tremendous economic advantage. Since so much trade is done in dollars, there is a constant demand for more dollars all over the globe from countries that need them for trading purposes. So the Federal Reserve is able to flood our financial system with dollars without it causing a tremendous amount of inflation because the rest of the world ends up soaking up a lot of those dollars. But now that is changing. China and Russia have been spearheading a movement to shift away from using the U.S. dollar in international trade. At the moment, the shift is happening gradually, but at some point a tipping point will come (for example if Saudi Arabia were to declare that it will no longer take U.S. dollars for oil) and the entire global financial system is going to change. When that tipping point comes the global demand for U.S. dollars is going to absolutely plummet and nightmarish inflation will come to the United States. If such a scenario sounds far out to you, then you have not been paying attention. In fact, China and Russia have been working very hard to move us toward exactly such a scenario.
America’s Under Water: Debt Equals 103 Percent of GDP
By Terence P. Jeffrey
September 11, 2012
(CNSNews.com) – According to the most recent official estimate by the federal Bureau of Economic Analysis, the Gross Domestic Product for 2012 will be $15.6061 trillion–or about $440.5 billion less than the $16.0466 in debt that the federal government had accumulated as of the close of business on Monday.
In other words, the debt is now approximately 103 percent of GDP.
The BEA, which is part of the Department of Commerce and which officially calculates GDP, based its current estimate of this year’s GDP, published on Aug. 29, on economic data available through the end of the second quarter of this calender year.
If that current estimate is correct, the debt of the United States government eclipsed the value of the Gross Domestic Product of the United States on April 2 of this year.
On Friday, March 30, according to the Bureau of the Public Debt, the federal debt was $15,582,078,681,188.69. By the close of business on Monday, April 2, it was $15,620,325,998,403.96.
The BEA defines GDP as: "The market value of goods and services produced by labor and property in the United States, regardless of nationality."
Jim Sinclair’s Commentary
"Billionaires invest in Asteroid Mining" reported by MSM is better understood as NASA wakes up to the fact that there is a strong possibility of an asteroid hitting the Earth in 2028.
The standard operating practice of MOPE and MSM is never disturb the social order. The Billionaires supposedly investing in mining of asteroids looks a lot like NOCS to me. NOCS are non official cover sponsors for secret operations.
Mining an asteroid is the dumbest thing I have ever heard due to the outrageous costs of the operation.
Billionaires are not dumb at making money.
JUPITER SWALLOWS AN ASTEROID:
Around the world, amateur astronomers have been scanning the cloudtops of Jupiter for signs of debris from an explosion witnessed by Dan Peterson and George Hall on Sept. 10th. So far the cloud layer is blank. "Several observers have now obtained excellent images on the second and third rotations after the fireball, and there is nothing new nor distinctive at the impact site," reports John H. Rogers, director of the Jupiter Section of the British Astronomical Association:
The fireball was probably caused by a small asteroid or comet hitting Jupiter. Apparently, the giant planet swallowed the impactor whole.
When fragments of Comet Shoemaker-Levy 9 hit Jupiter in 1994, each major flash observed by NASA’s Galileo spacecraft produced a "bruise," a murky mixture of incinerated comet dust and chemically altered Jovian gas twisting and swirling among the clouds. In July 2009, amateur astromer Anthony Wesley discovered a similar mark thought to be debris from a rogue asteroid crashing into the planet.
So where is the debris this time? Perhaps the impactor was small, packing just enough punch to make a flash, but without leaving much debris. Indeed, studies suggest that Jupiter is frequently struck by relatively small 10-meter-class asteroids. In such cases, minimal debris is to be expected.
Stay tuned for updates in case something surfaces.
Jim Sinclair’s Commentary
Whatever money is needed here and there will be provided when markets challenge the status quo.
QE, now acceptable in Euroland, will go to infinity but on their time schedule, not MSM’s.
German Constitutional Court Rules in Favor of Euro Zone Bailout Fund, With Conditions
Published Wednesday, Sep. 12 2012, 4:41 AM EDT
The euro zone dodged a potentially fatal bullet when Germany’s constitutional court ruled that the new €500-billion ($644-billion U.S.) bailout fund could go ahead. But it attached conditions on its use that will limit its ability to maneuver.
The ruling came as a relief to the markets, which had been rising steadily since the middle of last week on the expectation that the German court would not lift an injunction against the fund, known as the European Stability Mechanism (ESM). Economists and strategists agreed that a “nein” vote would have triggered market chaos.
Markets rose after the ruling. The euro hit a four-month high $1.29017 (U.S.) and the FTSE-100 index climbed almost half a percentage point.
Setting a cap of on Germany’s ESM liability appeared to be the key condition set by the court’s eight judges. They ruled that the €190-billion in German financial guarantees already approved by the German parliament could only be increased by another parliamentary vote.
In effect, this limits taxpayers’ exposure to a fund that is gearing up for more sovereign rescues.