Posted at 6:27 PM (CST) by & filed under Jim's Mailbox.

Gentlemen,

When I saw those infamous words “In essence it is creating new money” I thought of the big helicopter drop and had a good laugh. Inflation? This should be called counterfeiting.

CIGA Marty

Fed bets $800 billion on consumers
Central bank and Treasury announce a massive plan to jumpstart lending.
By Chris Isidore, CNNMoney.com senior writer
Last Updated: November 25, 2008: 2:33 PM ET

NEW YORK (CNNMoney.com) — The Federal Reserve and Treasury Department on Tuesday unveiled a plan to pump $800 billion into the struggling U.S. economy in an attempt to jumpstart lending by banks to consumers and small businesses.

The government hopes that these initiatives will enable more money to flow to consumers in the form of loans than has occurred so far in previous bailout plans.

One program will make $200 billion available from the Federal Reserve Bank of New York to holders of securities backed by consumer debt, such as credit cards, car loans and student loans.

In addition, the Federal Reserve, announced it will purchase up to $500 billion in mortgage backed securities that have been backed by Fannie Mae (FNM), Freddie Mac (FRE) and Ginnie Mae, the three government-sponsored mortgage finance firms set up to promote home ownership. It will also buy another $100 billion in direct debt issued by those firms.

Together, the programs from the Federal Reserve and the New York Fed are more than Congress approved in October for a bailout of the nation’s banks and Wall Street firms. The Fed said the money will come from an increase in its reserves — in essence, it is creating new money.

More…

Posted at 4:15 PM (CST) by & filed under General Editorial.

Dear CIGAs,

1. Gold is a currency.

2. Hyperinflation is a currency event

3. Hyperinflation builds slowly then explodes. See the chart of any of the currencies of all the many historical periods of hyperinflation given you in previous missives on www.JSMineset.com.

4. All periods of currency events that birthed the explosion of hyperinflation occurred during extremely depressive to depressionary economic conditions.

5. The key element of the event preceding the loss of confidence was the failure of the liquidity or coin clipping programs capped by forms of Quantitative Easing. Secretary Paulson this morning and the Federal Reserve three weeks ago said that they were embarking on this program.

6. The loss of confidence during the depression to come will be the failure of all programs to reverse a meltdown of OTC derivatives.

7. The world is looking towards the US dollar for the rescue, bailout and airdrops to include them.

8. The dollar is the prime monetary inflator and therefore the confidence to be lost is in the US dollar.

Posted at 3:01 PM (CST) by & filed under In The News.

Dear CIGAs,

See the section I bolded below – Now we know who is going to step up to the plate and buy Fannie and Freddie debt seeing that the custodial account reports have shown that Foreign Central Banks have been disgorging nearly $100 billion worth of their paper since July of this year! I find it no coincidence that is the exact amount the Fed has announced that they will purchase!  We knew it was just a matter of time before the Fed had to come in and buy FNM and FRE debt since no one else was willing to do so – without that debt having a market there is no way to backstop home mortgages!

Dan

Fed Commits $800 Billion More to Unfreeze Lending (Update2)
By Scott Lanman and Dawn Kopecki

Nov. 25 (Bloomberg) — The Federal Reserve took two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion.

The central bank will purchase as much as $600 billion in debt issued or backed by government-chartered housing-finance companies. It will also set up a $200 billion program to support consumer and small-business loans, the Fed said in statements today in Washington.

With today’s announcement, the central bank is starting to use some of the unorthodox policy tools that Chairman Ben S. Bernanke outlined as a Fed governor six years ago. Policy makers are aiming to prevent a financial collapse and stamp out the threat of deflation.

“They’re trying to put funds into the system, trying to unfreeze these markets,” said William Poole, the former St. Louis Fed president, in an interview with Bloomberg Television. “Clearly, the Fed and the Treasury are beginning to take a large amount of credit risk.”

The Fed will purchase up to $100 billion in direct debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks and up to $500 billion of mortgage-backed securities backed by Fannie, Freddie and Ginnie Mae, the statement said.

Help for Housing

“This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally,” the Fed said.

Fannie and Freddie bonds rallied. The yield premium on Fannie Mae’s five-year debt over similar-maturity Treasuries tumbled 21.5 basis points to 114.7 basis points as of 8:35 a.m. in New York, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.

More… 

 

Jim Sinclair’s Commentary

You know it is worse than this. They know it is worse than this. It is almost embarrassing to report to you what we all know is pure fabrication.

FDIC Shows Massive Growth In Problem Banks, But The Data Is Still Wishful Thinking

Today, the FDIC issued banking data from the third quarter ended September 30, which showed that the number of insured institutions on the FDIC’s "Problem List" increased from 117 to 171 and the assets of "problem" institutions rose from $78.3 billion to $115.6 billion during the quarter. The FDIC said this is the first time since the middle of 1994 that assets of "problem" institutions have exceeded $100 billion.

The FDIC said during the third quarter 73 institutions were absorbed in mergers, and 9 institutions failed. This was the largest number of failures in a quarter since the third quarter of 1993, when 16 insured institutions failed. Among the failures was Washington Mutual Bank, an insured savings institution with $307 billion in assets and the largest insured institution to fail in the FDIC’s 75-year history. The number of insured commercial banks and savings institutions fell to 8,384 in the third quarter, down from 8,451 at midyear.

The FDIC data also showed that net income of $1.7 billion was the second-lowest since 1990, and loan-loss rates rose to a 17-year high. On a positive note, net interest margins registered improvement.

Like it was in the second quarter (they left-out WaMu), the data the FDIC is issuing on the problem bank assets in the third quarter is misleading. We all know now that Wachovia (NYSE: WB) was near failure at the end of the third quarter and at the very start of the fourth quarter it was merged with Citi (NYSE: C) then later Wells Fargo (NYSE: WFC). Wachovia’s assets base would have easily surpassed the $115.6 billion the FDIC mentioned as the total in the problem list. In addition, yesterday Citi (NYSE: C) needed a U.S. government rescue plan. How can it be that this data is so wrong? Is it the fear factor that they feel would be created if they were truthful. Maybe certain institution don’t qualify as "troubled" but should. They need to look at how they qualify a troubled bank. Assets of troubled institutions should be in the trillions not $100 billion.

More…

Jim Sinclair’s Commentary

FDIC will guarantee even for a day? Their cash is crashing. They can’t.

They haven’t got the money, just like credit default derivatives guaranteed without any chance of performing.

Who IS FDIC kidding? You?

Goldman to sell $2 billion in FDIC-backed bonds: source
Mon Nov 24, 2008 5:25pm EST

NEW YORK (Reuters) – Goldman Sachs (GS.N) plans to sell at least $2 billion of new debt that will be guaranteed by the Federal Deposit Insurance Corp, with pricing expected Tuesday, according to a market source familiar with the sale.

The debt will mature no later than June 30, 2012, the source said. Goldman Sachs is the sole bookrunner, while Citigroup and Morgan Stanley are joint leads, the source said.

The debt is guaranteed under the FDIC’s Temporary Liquidity Guarantee Program, and investors are watching the deal as a test case for demand under the new program.

The new debt is expected to price at 85 basis points over midswaps, plus or minus 3 basis points, the source said.

Goldman is expected to be the first firm to tap the FDIC’s new program. The FDIC on Friday approved a program to guarantee to banks’ new senior unsecured debt, potentially allowing the firms to issue debt with top "AAA" ratings.

More…

Jim Sinclair’s Commentary

Don’t compare what is happening now to the Japanese zero bound conditions.

What is below did not happen in Japan on any scale near what has already occurred in the USA and is bound to grow by orders of magnitude.

That comparison is total nonsense that reveals ignorance, not intelligence.

U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit (Update2)
By Mark Pittman and Bob Ivry

Nov. 24 (Bloomberg) — The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.

When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.

“Whether it’s lending or spending, it’s tax dollars that are going out the window and we end up holding collateral we don’t know anything about,” said Congressman Scott Garrett, a New Jersey Republican who serves on the House Financial Services Committee. “The time has come that we consider what sort of limitations we should be placing on the Fed so that authority returns to elected officials as opposed to appointed ones.”

More…

Posted at 2:53 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

The 100 day moving average near the $832 level provided the overhead selling resistance in today’s gold session. The chatter was that $100 worth of gains in gold over the past three trading sessions was enough of a move to bring in some short term profit taking. That is probably true although I would not be surprised to learn that the bullion banks showed up at the $830 level trying to draw another line in the sand. Dip buyers are appearing however which is a good sign as the technicals have flipped to friendly with the turn higher in the 10 and 20 day moving averages and the consistent trade above the 40 day. Thus far gold has managed to maintain its footing above the 50 day as well which comes in closer to the $800 level.

It looks as if we are oscillating around the 50% retracement level from the October peak. If gold can maintain a general consolidation-type trade around this level, it will be constructive. We are headed into a holiday shortened period in which liquidity can dry up some – that leaves the market vulnerable to wide swings in price on even relatively small orders.

Technically, a closing trade above the $835 level should enable gold to run to $850 before it encounters anything much in the way of overhead resistance. Stops are building just above today’s session high. Support lies at today’s lows and then the $790 level. Open interest numbers remain very, very low which does give me a bit of concern. Figures from yesterday reveal that a large amount of the buying was indeed short covering. It is constructive to push the shorts out as no doubt happened when the market pushed into stops that were located above the $800 – $810 level but we need fresh buying, not just short covering, to sustain prices at these levels and set things up for an extended push higher.  We must see a continued increase in open interest (an end to the deleveraging) before we can mount a sustained rally.

Interestingly enough, the Euro-Yen cross was knocked lower today even in the face of the newly announced Fed plan to buy up FNM and FRE debt. Stocks initially greeted the plan with happiness but then moved lower mid-morning. That took the cross lower and as it faded, so too did gold but as that cross began to recover off its lows, so too did the gold price.

The HUI managed a close above the horizontal resistance level near 225 yesterday but could not manage (thus far) to get a second consecutive close above that level. It will need to do so in order to bring in more technically based buying into the mining shares. So far the selling in the HUI and the XAU has not been unmanageable.

The Dollar (USDX) did dip below the critically important 85 level in today’s session but it managed to claw its way back above that by mid-morning. Watch that level closely as two consecutive closes below it will begin to push the concentrated speculative long side positions into liquidation. Right now the USDX is bouncing from its 40 day moving average which tells me that the fund longs are attempting to defend their positions. If they cannot hold it there, they will be forced out and a top will be confirmed on the technical charts. Their exodus will bring the 83.50 level into play quite quickly. They know that and so do we.

Click chart to enlarge today’s 12 hour action in gold in PDF format as of 12:30 pm CDT with commentary from Trader Dan Norcini.

 

November2508Gold1230pmCDT

Posted at 10:59 AM (CST) by & filed under Guild Investment.

Dear CIGAs,

WE ARE QUITE CERTAIN THAT IN THE UNITED STATES, BANK AFTER BANK WLL BE RESCUED AS CITIBANK WAS THIS WEEKEND

WHO WILL BE NEXT…BANK OF AMERICA, JP MORGAN, GOLDMAN SACHS, MORGAN STANLEY?

The surprise is not that they will be rescued, the surprise is that not enough attention is being paid to the fact that the U.S. will have to sell several $ trillions in bonds in order to finance the above bail outs.

If bond buyers wise up, they will stop buying a bond with an almost infinite quantity for sale, and they will start selling them. This will send the US dollar lower. We expect the market to awaken to this obvious outcome, sooner rather than later. We are bullish on foreign currencies and gold longer term.

FOR THOSE WHO THINK THAT DEFLATION WILL BE A LONG TERM OUTCOME

May I remind you of the words of Milton Friedman, who said "Inflation is always and everywhere a monetary phenomenon".

My money is on Milton Freidman.  He will be proven correct as the devastatingly inflationary monetary policies being pursued worldwide will lead to inflation in years to come.  His former co-author, Anna Schwartz, said as much in a recent Barrons’ interview, inflation will return.

I lived through the inflation of the 1970’s and have been a student of inflations worldwide for 40 years.  In past recessions (much like today’s), as the recession/depression starts to get underway, it can initially appear to be a dis-inflationary cycle as prices moderate for a few months.

We go through a large amount of economic data every month.  A tremendous amount of liquidity has been added to the global banking system, but the system has not yet engendered enough confidence for it to function.  As confidence returns to the system, all the money circulating will ignite inflation.  If confidence does not return to the system, we expect even more and more liquidity pumped into the system…which can create the possibility of a loss of confidence in the government’s ability to manage the problem.  This will likely set off a run on the currency.  In other words, if the U.S. continues its rapidly growing liquidity creation, and it does not create confidence in the banking system…eventually confidence in the U.S. Government will be damaged…and the world investors will not want to hold the main asset of the U.S. Government, its currency.

In this case, the country’s currency becomes an unattractive investment, because of the perception that the government has failed to bring order to its banking system.  Recent examples are Iceland and Zimbabwe.  In both cases, when the banking system failed, the currency collapsed.

POLITICIANS PANIC

Meanwhile, politicians are panicking.  It is not good for their re-election prospects to have a slow and sluggish economy.  Their constituents want benefits, they want restrictions on imports, they want handouts, they want special treatment for their industry, and they want government loans for themselves or their family.  Eventually, whole classes of citizens (the poor, the homeowners, those in certain states or professions) will be lining up for their share of the pie.  Politicians listen, and act in their own best interest…which for most of them is protecting their place at the public trough.

Eventually, the effects of the unwise, inflationary monetary and fiscal policies (which are being promulgated not only in one country, but in many countries worldwide) begin to seep into the system.  Inflationary psychology takes hold, and rational investors begin to invest for inflation.  The final result is prices rising higher…and for longer.

THIS IS THE FUTURE AS WE SEE IT…THE QUESTION IS…WHEN WILL INVESTOR PSYCHOLOGY REFELCT THIS EVENTUALITY?

The following article found in this past weekend’s Barrons illustrates how the U.S. Central Bank’s inflation fighting ability is being compromised.

Has the Fed Mortgaged Its Own Future?
By: JACK WILLOUGHBY
The fed’s highly leveraged balance sheet will make it hard to fight inflation.

IF THE FEDERAL RESERVE BANK WERE A COMMERCIAL LENDER, it would be a candidate for receivership, based on its capital ratios. Bank examiners generally view any lender with a ratio below 2% to be dangerously undercapitalized. The Fed’s current capital ratio, or capital as a percentage of assets, is 1.9%.

The Fed has provided so many loans and emergency credits — to banks, brokers, money funds and foreign countries — that its balance sheet, viewed one way, is as leveraged as any hedge fund’s: Its consolidated assets amount to 53 times capital. Only 11 months ago, its leverage on this basis was a more modest 25 times, and its capital ratio 4%. A caveat: Many of the loans are self-liquidating facilities that will disappear in a few months if the financial crisis eases.

Although the Fed’s role as a central bank is much different from the role of a private-sector operation, the drastic changes in the size and shape of its balance sheet worry even some long-time Fed officials. Its consolidated assets have swelled to $2.2 trillion from $915 billion in about 11 months, and contain at least a half-dozen items that weren’t there before. Some, like a loan to backstop the purchase of a brokerage, Bear Stearns, are unprecedented. (See table for highlights.)

Critics say this action could hinder the Fed in achieving its No. 1 priority: keeping inflation in check. To try to get in front of the crisis, many decisions have had to be made on the fly.

"If the Fed had been [a savings-and-loan] ballooning its balance sheet so fast, the supervisors would have been all over it," says Ed Kane, a Boston College finance professor.

verweelfed

Adds Walker Todd, a former Fed lawyer: "The Fed has stretched its authority farther and wider than it ever has in its entire history. The risk is that they won’t be able or willing to mop up all this excess liquidity when it comes time to head off inflation a few years down the road."

How did the U.S. central bank, under Ben Bernanke, get to this place? The boldest move hit the headlines on St. Patrick’s Day, when the Fed made its unique 10-year loan to bail out Bear Stearns by backstopping JPMorgan Chase ‘s (ticker: JPM) purchase. That was done, some say, to prevent the domino effect that Bear Stearns’ collapse might have had on certain big counterparties, including banks.

In September, the Fed provided $85 billion to American International Group (AIG), effectively taking control of the world’s biggest insurer in a deal that’s since been restructured. And the central bank has poured so many billions into the commercial-paper and money-market mutual-fund markets that one in every seven dollars, about 15% of the $1.6 trillion commercial-paper market, is Fed-supported.

The Fed also created special lines for London offices of primary U.S. government dealers after the Bank of England cut off its short-term lending to them because Lehman Brothers repatriated $8 billion to New York from London just before its bankruptcy filing.

Then came the $571 billion in foreign-currency swap lines funded and operated by the Fed. The last time swap lines were used in a major crisis, the so-called Exchange Stabilization Fund — to bail out Mexico in 1995 — was operated by the Treasury and Fed.

The Fed has its supporters. "Given the alternative — doing nothing in the face of a crisis — the Fed has done a remarkable job of holding the system together by inventive use of short-term liquidity," says Charles Blood, senior strategist at Brown Brothers Harriman.

Yet others see a willy-nilly series of moves that didn’t weed out insolvent banks. Boston College’s Kane blames Treasury Secretary Henry Paulson for frightening Congress into parting with $700 billion. Kane’s view is that the Fed’s independence has been compromised by working too closely with Treasury.

For all that, banks remain reluctant lenders, because no one’s sure who’s solvent. Reserve balances held with Federal banks now rest at $592 billion, up from the normal $15 billion in the months prior to September.

"The Fed has violated two principal tenets of central banking," says Lee Hoskins, former president of the Cleveland Fed: "First, don’t lend to insolvent institutions, and second, don’t lend on anything but the most pristine collateral" — and at a penalty rate.

In lending and selling off most of its hoard of U.S. Treasuries, the central bank may not have the resources to sop up all the liquidity. Its current accounts show that the Fed’s holdings of Treasuries not already lent to dealers have dropped to about $250 billion, the lowest level since the late 1980s.

The Bottom Line
In attempting to calm the financial crisis, the Fed has more than doubled the size of its balance sheet. Yet insolvent lenders still lurk — and so does the specter of inflation.

The Fed needs at least $48 billion more in capital to return to 2007 levels, just to meet the standard it demands of banks, says Gerald P. O’Driscoll, a senior fellow at the Cato Institute and former vice president of the Federal Reserve Bank of Dallas. And some of that capital might go into reserves to shield against unanticipated loan losses. "[The Fed has] spooked the market with [its] scare tactics and ever-changing plans," he says "The Fed’s actions coupled with the Treasury’s bailout of the banks have taken us one big step closer to corporatism — big business in cahoots with big government."

It’s possible some of the better-capitalized regional Fed banks may balk at some point. "Of course, there are plenty of regional Reserve bank presidents and directors deeply concerned about what the Fed has done," says Hoskins. "But how do we register that concern?"

THE MARKET HAS RALLIED, AS WE EXPECTED.  THE RALLY WILL CONTINUE UNTIL THE NEXT BANK MELTS DOWN. 

VOLATILITY WILL CONTINUE, SO BE A NIMBLE TRADER IN THIS MARKET.

Thanks for listening.
Monty Guild and Tony Danaher
www.GuildInvestment.com

Posted at 10:33 PM (CST) by & filed under Trader Dan Norcini.

Dear Friends,

Linked below are a few charts detailing the price of gold when viewed through the prism of differing major currencies. As you can see, gold in British Pound terms has notched another new all time high. So did gold priced in Canadian Dollar terms. Gold in Australian dollar terms is just a wee bit below its all time high. The same goes for gold in terms of the Russian Ruble. Gold in Euro terms is 20 euros below its all time high. The weakest gold chart is Yen-Gold which has been hit because of the strength in the Yen coming from the carry trade unwind. That has served to push the yen sharply higher which depresses the price of gold when measured in those terms.

We Americans tend to view the price of gold only in US Dollar terms forgetting that a major portion of the world does not do so. It is my opinion that those American-based analysts who make their prognostications of gold without considering the price in terms of the other major currencies of the world do their readers a huge disservice. Ask yourself a simple question as you look at the following price charts – does this look like a metal that is experiencing a deflationary psyche among a large portion of the global investment community or does it look like a metal that is preserving the wealth of millions of international investors as the global economic chaos expands?

Keep this in mind whenever you read some self-proclaimed gold expert dissing the metal because it is not trading back above $1000 US and is anxious to short it. Such gloom and doom gold dirges would be met with incredulous scorn in the UK and perhaps with amusement in Canada and elsewhere. Australian investors must be thinking that American beers are missing a few vital ingredients if this is the kind of thinking that they are producing.

Whether some folks want to admit it or not, gold is an international currency of last resort and always will be, no matter how much the US based elites and their paper love-sick puppies want to pooh-pooh it.

Trader Dan

 

Click here for today’s action in Gold in various currencies and the Dow/Gold Ratio with commentary from Trader Dan Norcini

Posted at 9:01 PM (CST) by & filed under General Editorial.

Dear CIGAs,

Add this to the Begging Bowl Fed loan window and TARP:

Quantitative Easing

Be prepared to watch the Federal Reserve over the next 18 months as this is the last of two arrows left in the quiver. Quantitative Easing is going to look more and more attractive.

Quantitative Easing is the process of dumping money directly into business enterprises. The other tool is simple – announce a target of 2% for 10 year bonds to further drop mortgage rates as you Helicopter Drop funds directly into non-financial business enterprises for the public to pick up and spend. This is a tactic added to the Begging Bowl Fed loan window and TARP.

Business glossary
Quantitative Easing
Guardian.co.uk, Tuesday October 14 2008 12.10 BST

Quantitative easing is what non-economists call ‘turning on the printing press’.

In extreme circumstances, governments flood the financial system with money, easing pressure on banks and business entities by giving them extra capital.

Ben Bernanke, the chairman of the Fed, won the nickname ‘helicopter Ben’ when he floated just such an idea earlier this decade. US economist Milton Friedman had originally said it would be theoretically possible for governments to drop large amounts of cash out of helicopters for the public to pick up and spend.

More…

Dear Jim,

Many respected commentators, even in our camp, warn not of hyper-inflation but rather a bone chilling depression.

Help me please.
CIGA Arlen

Dear CIGA Arlen,

History declares that all major hyper-inflation started in depressive to depression type business conditions as a currency loss of confidence event.

The key is the word HYPER which means a total currency unwind.

Large inflationary periods are products of the mechanics that creates bubbles, but are not HYPER in nature.

Bubble-Inflation and Hyper-Inflation are two distinctly different events

All "Hyper-Inflation" events have occurred as a product of "Quantitative Easing." Google that term and study it.

The Fed has announced their move towards "Quantitative Easing" because of all that occurred so far in bailing out the good ole boys that caused the problems with their damn OTC derivatives, now known as "Toxic Paper."

All the best,
Jim

Posted at 8:51 PM (CST) by & filed under Jim's Mailbox.

Dear Friends,

I have received close to 700 emails today. I will do my best to reply, yet at this number the task is quite overwhelming.

Truth be known, almost every question has already been answered here on JSMineset.com.

Respectfully yours,
Jim

Dear Jim,

The litany of disasters continues. The Fed has only one alternative to improve its balance sheet – get money from the Federal Government. The government can either borrow from the world through debt issuance, or they can print money. Either alternative exercised is very bad for the US dollar and very good for gold. As always you have called it again and again.

Respectfully yours,
Monty

Has the Fed Mortgaged Its Own Future?
By JACK WILLOUGHBY

The Fed’s highly leveraged balance sheet will make it hard to fight inflation.

IF THE FEDERAL RESERVE BANK WERE A COMMERCIAL LENDER, it would be a candidate for receivership, based on its capital ratios. Bank examiners generally view any lender with a ratio below 2% to be dangerously undercapitalized. The Fed’s current capital ratio, or capital as a percentage of assets, is 1.9%.

The Fed has provided so many loans and emergency credits — to banks, brokers, money funds and foreign countries — that its balance sheet, viewed one way, is as leveraged as any hedge fund’s: Its consolidated assets amount to 53 times capital. Only 11 months ago, its leverage on this basis was a more modest 25 times, and its capital ratio 4%. A caveat: Many of the loans are self-liquidating facilities that will disappear in a few months if the financial crisis eases.

Although the Fed’s role as a central bank is much different from the role of a private-sector operation, the drastic changes in the size and shape of its balance sheet worry even some long-time Fed officials. Its consolidated assets have swelled to $2.2 trillion from $915 billion in about 11 months, and contain at least a half-dozen items that weren’t there before. Some, like a loan to backstop the purchase of a brokerage, Bear Stearns, are unprecedented. (See table for highlights.)

Critics say this action could hinder the Fed in achieving its No. 1 priority: keeping inflation in check. To try to get in front of the crisis, many decisions have had to be made on the fly.

"If the Fed had been [a savings-and-loan] ballooning its balance sheet so fast, the supervisors would have been all over it," says Ed Kane, a Boston College finance professor.

More…

 

Dear Jim,

In the heart of this derivatives crisis insurance companies are still selling their junk to unsuspecting customers seeking yield. If sovereign bonds are having trouble you can just see these products will blow up in the future, leaving investors hi and dry again and needing more government money.

Keep up the great work,
Ciga Big Tatanka

Insurers cash in on deflation fears
Firms are using the volatility of the stock markets to push poor products
Jennifer Hill

Investors are being lured into discredited products by insurers keen to capitalise on tumbling interest rates and volatile stock markets.

Legal & General (L&G) has reported a 186% surge in sales of with-profits bonds in the first nine months of the year, while Prudential saw a 174% jump in business. Norwich Union has sold bonds worth £1 billion in the first nine months alone.

With-profits bonds, which had fallen out of favour after the mis-selling scandals of the 1980s and 1990s, are an easy sell in the current climate because they are pushed as a “halfway house” between equities and deposit accounts. They invest in a mix of shares, gilts and cash, so claim to be less volatile than the equity markets.

They are also attractive to income seekers because they allow you to take an income of up to 5% a year with no immediate tax to pay. This is particularly attractive following this month’s 1.5 percentage point cut in Bank rate.

More…

 

Dear Big Tatanka,

When these people depart the mortal coil the only way to keep them departed is to screw them into the ground.

As long as there is someone stupid enough to buy something, someone will manufacture and sell it.

Regards,
Jim