Here is a very good lesson in Credit Default Swaps and how to use them to kill massive amounts of people. When I say kill, I mean it literally as loss of jobs, homes, and families is worse than death and is a form thereof. When this comes as a product of fancy paperwork, the sin is egregious. No story of degradation in history can equal the horror of today’s financial world.
Financial predators are people eaters guilty of crimes more serious then murder, slow death and fear. Financial predators are criminals with victims suffering terribly. There is real blood on their hands.
If you are not now interested in this priceless knowledge please print out and file the following article as you will be there before the end of 2009.
Credit Default Swaps: Financial Weapons of Mass Destruction
"The credit world has become a hall of mirrors, where nothing is necessarily as it seems. At best, this makes it very difficult to tell how corporate defaults will affect banks; at worst, it creates the risk of needless value destruction as creditors tip companies into default."
"Financial companies have used their agents, U.S. lawmakers, to pressure the FASB to relax fair-value accounting rules. The result has been the official endorsement of fair-value lying. The other hand tax evader and Treasury Secretary Timothy Geithner has constructed a framework whereby politically privileged banks with worse than worthless toxic assets sell them for cash at an inflated fair value lying price to a self-funded Special Investment Vehicle (SIV), a similar entity as Enron used, that receives a non-collateralized loanfrom their government puppets."
"Company M is completely evaporated and thousands of workers lose their jobs.
Total profit for Banks G and J: $2.85M-$1M-$30k-60k=$1.76M. Nice pay for a day’s work slaughtering and cremating a slight hobbling but otherwise generally healthy going concern."
At a Cambridge House Investment Conference I received a question about Bear Stearns. In my answer I alluded to the possible financial benefit of some from its implosion. When pressed I had to explain how credit default swapsworked and then we were out of time. Because the owners of the majority of the financial press have too much money to make from bankruptcies this topic is sparingly covered. But the Financial Times editor let an article wiggle through.
On 6 February 2009 the Kazakhstan Tenge went poof and was devalued by 18% in a single day. The currency has continued falling from 110 to the current 150.60241:FRN$1. The free-flowing credit to Eastern Europe stopped gushing months ago. Although BTA, Kazakhstan’s largest bank, was taken over by the government, it still serviced its loans. BTA currently has total liabilities to credit institutions (.pdf) of 863,688,000,000 Kazakhstani tenge or about $5.7B. As the Financial Times reported:
But last week Morgan Stanley (MS) and another bank suddenly demanded repayment. BTA was unable to comply, and thus tipped intopartial default. That sparked fury among some other creditors and shocked some Kazakhs, who wondered why Morgan Stanley would havetaken an action that seemed likely to create losses. One clue to the US bank’s motives, though, can be seen on the official website of theInternational Swaps and Derivatives Association. One page reveals that just after calling in the loan Morgan Stanley also asked ISDA to start formal proceedings to settle credit default swaps contracts written on BTA.
CREDIT DEFAULT SWAPS
A credit default swap (CDS) is a credit derivative contract between two counterparties. The buyer makes periodic payments to the seller, and in return receives a payoff if an underlying financial instrument defaults. In effect, the owner of a credit default swap is short the underlying going concern.
Many of the largest Wall Street banks are heavily involved in the derivative markets with reported (.pdf) notional amounts outstanding as of 31 December 2008 for JP Morgan (JPM) at $87.4T, Goldman Sachs (GS) at $30.2T and the single digit midgets of Bank of America (BAC) and Citigroup (C) at $38.3T and $31.9T, respectively.
The Financial Times reported,
As a result, speculation is rife that Morgan might have deliberately provoked the default of BTA to profit on its CDS, since a default makes the US bank a net winner, not a loser as logic might suggest. Morgan Stanley, for its part, refuses to comment on this speculation (although its officials note that the bank does not generally take active “short” positions in its clients). And I personally have no way of knowing whether Morgan is short or long, since Morgan refuses to disclose details of its CDS holding. Right now more than $700 million BTA CDS contracts are registered with the Depositary Trust & Clearing Corp. in New York.
This represents about 12.3% of the total liabilities to credit institutions. But later in the article the key point is hit upon:
But the rub for regulators and investors is that BTA credit risk has not entirely disappeared: Somebody right now is holding the other side of Morgan Stanley’s contracts, and unfortunately there is little way for outsiders to know exactly who. Worse, the presence of those CDS contracts makes it fiendishly hard to work out what the true incentives of any creditors are. In theory, lenders should have an interest inavoiding default. In practice, CDS players do not. The credit world has become a hall of mirrors, where nothing is necessarily as it seems. At best, this makes it very difficult to tell how corporate defaults will affect banks; at worst, it creates the risk of needless value destruction as creditors tip companies into default.
FAIR VALUE ACCOUNTING AND GEITHNER’S PLAN
Financial companies have used their agents, U.S. lawmakers, to pressure the FASB to relax fair-value accounting rules. The result has been the official endorsement of fair-value lying. The other hand tax evader and Treasury Secretary Timothy Geithner has constructed a framework whereby politically privileged banks with worse than worthless toxic assets sell them for cash at an inflated fair value lying price to a self-funded Special Investment Vehicle (SIV), a similar entity as Enron used, that receives a non-collateralized loanfrom their government puppets.
For the sake of argument and simplicity assume that Bank G loans Company M $1M in either a leveraged buyout or some other type of deal that was common over the past few years when credit flowed freely. Then Bank G purchases a CDS on Company M’s loan for $30,000 from Bank B and the CDS is reinsured by Insurance Company A.
Company M deteriorates because its free cash flow and a little more all goes to service debt and Bank G sells 90% of its loan to Bank J. Because credit risk has increased Company M’s bond now trades in the market for $25,000 and Bank J purchases a CDS from Bank L for the current market price of $60,000 and reinsured by Insurance Company A. Banks B and L go bankrupt, the trader at Bank L who sold Bank J the CDS now either goes to work at Bank J or receives consulting fees and the privileged creditors of Banks B and L, such as subsidiaries of Bank J and G, receive government bailout payments through Insurance Company A.
Company B, while still able to service its debt, does violate some provision of its debt covenant.
First, being friendly competitors Bank G and J decide to both press for default proceedings and then initiate settlement of the CDS they own.
Second, they fund a SIV with $25,000 of cash which borrows another $825,000 from the Bank’s government puppets.
Third, the SIV pays Banks G and J $850,000 of cash for the Company M loan which, while trading for $25,000 in the market is being carried on their balance sheet for $600,000 and consequently results in a $250,000 gain on the income statement for the quarter after having written down a couple quarters ago.
Fourth, Banks G and J receive $2M in bailout funds for the failed CDS contracts.
Fifth, Company M is completely evaporated and thousands of workers lose their jobs.
Total profit for Banks G and J: $2.85M-$1M-$30k-60k=$1.76M. Nice pay for a day’s work slaughtering and cremating a slight hobbling but otherwise generally healthy going concern.
FINANCIAL WMDs AND FINANCIAL TERRORISTS
As the great credit expansion continued it culminated in hundreds of trillions of dollars worth of derivative instruments. Some of these are registered while many, if not most, are not. These instruments are at the evaporating top of the liquidity pyramid while gold and silver are at the bottom tip.
Just imagine what the GLD ETF Authorized Participants, including Bear Stearns & Co. Inc., Lehman Brothers Inc., Citigroup Global Markets Inc., Merrill Lynch, Goldman Sachs, J.P. Morgan Securities, and Morgan Stanley & Co., will use the language in the prospectus to do.
These derivatives, with their fiendish counter-party risk, infest the balance sheets of almost every publicly traded corporation along with many local, state and national governments. Financial terrorists are greatly incentivized to detonate these financial weapons of mass destruction.
When confronted with these type of financial terrorists society has often had to take powerful measures. For example, when John Law co-opted the French economy and tried to prevent its credit contraction by outlawing the use of gold and silver with the death penalty, the French Revolution was sparked.
In the United States of America Section 19 of the Coinage Act of 1792provided,
That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of fine gold or fine silver therein contained, or shall be of less weight or value than the same ought to be pursuant to the directions of this act, through the default or with the connivance of any of the officers or persons who shall be employed at the said mint, for the purpose of profit or gain, or otherwise with a fraudulent intent, and if any of the said officers or persons shall embezzle any of the metals which shall at any time be committed to their charge for the purpose of being coined, or any of the coins which shall be struck or coined at the said mint, every such officer or person who shall commit any or either of the said offences, shall be deemed guilty of felony, and shall suffer death.
Under Section 9 of that Act a Dollar is
to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver.
While the USA has 303M people about 2.3M are incarcerated or more than 1 in 100 American adults and it officially executed 59. On the other hand, the police state China has about 1.5M incarcerated adults and officially executed 3,400.
While China has had its problems it has not appeared to have had any serious problems with their domestic banks and derivative instruments. Perhaps a reason is because of how they deal with financial crimes. For example, the New York Times reported that Zheng Xiaoyu, former head of the State Food and Drug Administration in China, admitted to taking bribes to approve untested medicine and he was swiftly executed.
Because the great credit contraction has begun, capital has started burrowing down the liquidity pyramid to safety and liquidity. Individuals, companies and governments have more leverage than they can sustain.
With the Federal Reserve refusing to comply with Bloomberg’s FOIA request for where trillions of dollars have gone and with JP Morgan, Goldman Sachs, Bank of America and Citigroup all acting like Morgan Stanely and ‘refuse to disclose’ it does beg the questions: What are the next companies to be destroyed? How many hundreds of thousands of jobs will be lost as a result? What will the American people do about it?
Disclosure: Long physical gold and silver with no position in GLD, SLV, GS, C, BAC, JPM and MS. No credit default swaps or other similar position in Bear Stearns or Lehman Brothers and neither a job with nor consulting income from JP Morgan or Goldman Sachs.
Jim Sinclair’s Commentary
Not simply risk. It is guaranteed by quantitative easing. That is monetary madness.
China Says Global Easing Policies Risk Devaluation (Update2)
By Sandy Hendry
May 6 (Bloomberg) — Global central banks risk inflation, currency devaluation and a “big consolidation” in bond markets by pumping cash into their economies, the People’s Bank of China said in its quarterly monetary policy report.
The Federal Reserve and the Bank of England this year started quantitative easing, or printing money to buy government bonds, a policy that the Bank of Japan pioneered to revive its economy at the start of the decade. The European Central Bank’s 22-member board, which meets tomorrow, is split on whether it should buy financial assets to tackle its recession.
“A policy mistake made by some major central bank may bring inflation risks to the whole world,” China’s central bank said in the report today. “As more and more economies are adopting unconventional monetary policies, such as quantitative easing, major currencies’ devaluation risks may rise.”
Chinese Premier Wen Jiabao expressed concern in March that the dollar will weaken, eroding the value of China’s holdings of Treasuries, as the U.S. borrows unprecedented amounts to spend its way out of recession. China’s Treasury holdings climbed 52 percent in 2008 and stood at about $744 billion as of the end of February, according to U.S. government data.
“In the medium and long term, as the financial markets stabilize and economies gradually recover, increasing inflation expectations, rising interest rates and central bank’s liquidity-absorbing operations may cause a ‘big’ consolidation in bond prices,” the central bank’s statement said.
Jim Sinclair’s Commentary
As Armstrong says, "It Is Only Time."
Gold is headed into multiple four figures. When that will happen is only a short time away.
This winter is going to be unbearable to many.
The Gold War: China and the U.S. Treasury Market
"Who will win the Gold War? The simplest answer also holds the most truth. Over the past five thousand years, the winners are those who are holding the gold at the war’s end."
May 06, 2009
NEW YORK CITY, FEBRUARY 11, 2009 – Luo Ping, director-general at the China Banking Regulatory Commission, gave what may be a landmark quote in the years to come ahead. Besides chastising the United States for its "laissez-faire capitalism" – at which point I distinctly remember choking on my breakfast of delicious jiaozi (I was in Shanghai eating Chinese dumplings) since Ping obviously understands that corporate cronyism is NOT laissez-faire capitalism as fellow columnist Steven McDuffie recently reminds – in retrospect another part of his speech may prove to be the most prophetic. From Reuters:
Except for US Treasuries, what can you hold? Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.
As I related in "China Nearly Doubles its Official Gold Reserves", China revised its official gold holding from 600 tons in 2003 to 1,054 tons last month. However, the very fact that China reported no increase for 6 years and then suddenly doubled should prove one thing – the Chinese are abiding by the IMF Articles of Agreement only as it pleases them. For instance, the state-owned banks can hold as much gold as they wish without reporting, although this gold is de facto the Chinese government’s. Please understand that subtlety, not brazen statements like Bush’s sad "Mission Accomplished" ceremony or Obama’s 100 Days congratulation party, is the Chinese way.
"US Treasuries are the safe haven… the only option."
Really? Although March and April data are not available, you could have fooled me! For perspective, the size of the US Treasury market was $10,700,000,000,000 in December 2008. Of this, $727 billion, or 6.8%, belongs to China, and close to one-third is foreign-owned. (Although some would argue that the $4.8 Trillion owned by the Federal Reserve is foreign-owned as well, in actuality this interest is mostly returned to the Treasury as described here "The Federal Reserve – A Good Company to Work For?.") See the chart below (source www.treas.gov).
Jim Sinclair’s Commentary
In case you missed this the first time it was posted, please do not miss it this time. What allowed me to call $900 in the early 1970s was pure math.
Here is another exercise of similar character.
Mises’ Equation = Gold Price $6,000 – $31,000?
"Thorsten Polleit, Honorary Professor at Frankfurt School of Finance and Management, did some calculations for this and found (as of March ’09):
– backing all of M1 with gold. M1 divided by gold oz. results in $6000 per oz.
– backing M2 with gold and you get $31,000 per oz.
– backing Euro M3 and gold is E26,000"
Does Mises’ Equation Give a Basis for Gold Price?
May 03, 2009
Assuming you agree to a strict Austrian approach to life and love, Mises advocated sound monetary policy by returning to a gold standard and developed this equation for a “regression” to a properly backed currency called the gold cover ratio:
GCR = (C+D+T+S+L) / G
Where C is cash, D is demand deposits, T time deposits, S savings, and L banks long term liabilities. And our favorite variable G is oz of gold at Fort Knox.
Thorsten Polleit, Honorary Professor at Frankfurt School of Finance and Management, did some calculations for this and found (as of March ’09):
backing all of M1 with gold. M1 divided by gold oz. results in $6000 per oz.
backing M2 with gold and you get $31,000 per oz.
backing Euro M3 and gold is E26,000
But the real impact of Mises’ work is not in what the price of gold should or could be but rather the conclusion that no matter what the government does (e.g. quantitative easing, free running printing presses, artificially low interest rates, stimulus packages, bank bailouts, TARP, TALF, etc, etc) we still get a serious erosion if not all out loss of the exchange value of fiat money.
Jim Sinclair’s Commentary
You think it is about time? I bet this has to do with the Chrysler bankruptcy, amongst other things.
I will believe it when I see it. That is the prevailing attitude amongst the naked short North American crowd.
SEC’s Schapiro aims at short selling rules. Hedge funds next?
By Alan Fein
(AXcess News) New York – SEC Chairwoman Mary Schapiro says new short-selling rules are a priority, though the plague of recent hedge fund scandals could make Long Island’s seedy crowd of penny stock swindlers face deeper scrutiny by regulators who say hedge funds are next.
Sources in the New York Attorney General’s office say informal inquiries into hedge fund players in Long Island’s crowd of penny stock promoters and hard money lenders are being conducted quietly over a rash of complaints by investors who say losses they’ve incurred are a result of deliberate shorting through unregulated hedge funds.
"Trading patterns are difficult to associate with intent," a source within New York’s Attorney General’s office said in a telephone interview late Monday.
But with the SEC’s openness on short selling activities, a formal investigation into criminal activity may be pursued in New York if enough evidence can be built to support charges. Those inquiries were brought to light following a growing number of news articles on stock swindlers after the downfall and arrest of Bernie Madoff.
At an open hearing in New York Tuesday, the Securities and Exchange Commission expressed concern over short selling practices with an eye towards evaluating deeper regulation.
Jim Sinclair’s Commentary
Today in Pakistan.
Pakistan: Christians locking themselves in their homes for fear of Misunderstanders of Islam
May 6, 2009
Christian families in Karachi, Pakistan are locking themselves in their own homes following escalating violence against them in recent weeks, Catholic Mission Pakistan director, Fr Mario Rodrigues has said.
Last week, six families’ homes were burned to the ground, along with shops, and a number of churches in the locale of Taiser Town, Karachi, Catholic Mission Australia reports.
Describing the violence, Fr Rodrigues said the perpetrators had "misbehaved with the women and asked them to accept Islam otherwise they will kill them."
"They burnt the Holy Bibles and the worst, they have killed people (when) a group of 35 to 40 men armed with AK47, TT pistols, repeaters, and rifles and fired indiscriminately at the Christian community," Fr Rodrigues said.
Prior to the violence, vandals had left messages on the Church walls which included – "Long Live the Taliban" and "Long Live Al Qaeda".
Women were beaten on the streets and dragged by their hair, and many people were injured, Fr Rodrigues reported.
Jim Sinclair’s Commentary
Another article that speaks for itself.
Bank of America Needs $33.9 Billion, U.S. Determines
By LOUISE STORY and ERIC DASH
Published: May 5, 2009
The government has told Bank of America it needs $33.9 billion in capital to withstand any worsening of the economic downturn, according to an executive at the bank.
If the bank is unable to raise the capital cushion by selling assets or stock, it would have to rely on the government, which has provided $45 billion in capital through the Troubled Asset Relief Program.
It could satisfy regulators’ demands simply by converting non-voting preferred shares it gave the government in return for the capital, into common stock.
But that would make the government one of the bank’s largest shareholders.
Executives at the bank, one of the largest being examined, sparred with the government over the amount, which is higher than executives believed the bank needed.
Jim Sinclair’s Commentary
As we move toward 2012 please understand there are no certainties even if the words of the agreement speak otherwise. You must protect yourself as no one else is going to do it for you.
As long as there is a financial agent between you and yours, you are in questionable safety.
True Custodian Accounts are the only way to go.
401(k)s Hit by Withdrawal Freezes
Investors Cry Foul as Some Funds Close Exits; Perils of Distressed Markets
By ELEANOR LAISE
Some investors in 401(k) retirement funds who are moving to grab their money are finding they can’t.
Even with recent gains in stocks such as Monday’s, the months of market turmoil have delivered a blow to some 401(k) participants: freezing their investments in certain plans. In some cases, individual investors can’t withdraw money from certain retirement-plan options. In other cases, employers are having trouble getting rid of risky investments in 401(k) plans.
When Ed Dursky was laid off from his job at a manufacturing company in March, he couldn’t withdraw $40,000 from his 401(k) retirement account invested in the Principal U.S. Property Separate Account.
That fund, which invests directly in office buildings and other properties, had stopped allowing most investors to make withdrawals last fall as many of its holdings became hard to sell.
Now Mr. Dursky, of Ottumwa, Iowa, is looking for work and losing patience. All he wants, he said, is his money.
"I hate to be whiny, but it is my money," Mr. Dursky said.
Jim Sinclair’s Commentary
The enormous domino Pakistan is in the marketplace is yet to be discounted.
Pakistan threat ‘worst since Cuban missile crisis’
By James Lamont in New Delhi
Published: May 5 2009 15:40 | Last updated: May 5 2009 15:40
Loss of control in nuclear-armed Pakistan threatened the world with the worst global crisis since the 1962 Cuban Missile Crisis, the closest the world has ever come to nuclear war, a senior former US diplomat warned on Tuesday.
The stark warning comes as US President Barack Obama meets the leaders of Pakistan and Afghanistan at the White House on Wednesday to discuss efforts to stabilise their countries in the face of Islamist insurgencies. It also comes as the international community fears a possible breakdown in the security surrounding Pakistan’s 100 warhead nuclear arsenal and their capture by religious extremists
The stark warning comes as US President Barack Obama meets the leaders of Pakistan and Afghanistan at the White House on Wednesday to discuss efforts to stabilise their countries in the face of Islamist insurgencies. It also comes as the international community fears a possible breakdown in the security surrounding Pakistan’s 100 warhead nuclear arsenal and their capture by religious extremists.
“For every good reason, the Obama Administration is devoting enormous thought to Pakistan, since it is the most dangerous foreign policy problem that Washington presently faces…The evolving situation in Pakistan is potentially the most dangerous international situation since the 1962 Cuban Missile Crisis,” Robert Blackwill, the former US ambassador to New Delhi, said.