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Sinclair - Cyprus Disaster Is Much Bigger Than Being Reported
Mar. 19, 2013
KingWorldNews
Today legendary trader Jim Sinclair told King World News that the Cyprus disaster is much bigger than what is being reported and the implications are stunning. Sinclair, who was once called on by former Fed Chairman Paul Volcker to assist during a Wall Street crisis, had this to say in this extraordinary and exclusive KWN interview:
Sinclair: “If people believe that $13 billion is the total of this bailout, they are out of their minds. $130 billion is not the true total of even the Russian deposits in Cyprus banks. One important Russian businessman, in his various business enterprises, would have $100 billion on deposit himself. 10% of all deposits in Cypress could be $500 billion or more because Cyprus is the banking entity for Russia, not Switzerland or Grand Cayman.
The Central Bank of Cyprus doesn't even know how big the Russian deposits are because it is held as secret at the behest of the Russians. It is a secret banking system set up for the Russians, by the Russians, and the IMF has just taken a large bite out of that elephant.
Because of that, any attempt to shift the weight of bank solvency to depositors has failed. This was the grand experiment which was the defining event where the financial shift from the onus of insolvency was to be placed on the shoulders of depositors rather than on quantitative easing....
Before Sinclair continues with this interview, people around the world should understand the significance in history of this legendary trader and his family. Sinclair’s father (Bert Seligman), his firm used to control a staggering 10% of the daily New York Stock Exchange trading volume throughout the 1950s.
Sinclair was always around his father’s firm as a kid and even as a young man, but he started full-time in 1958. For people in the know, Bert Seligman and Jesse Livermore were business partners, and the Seligman name is truly legendary. But his father wasn’t just business partners with Jesse Livermore, Sinclair also remembers his father telling him stories about operations that he and Joe Kennedy (who later headed the SEC) conducted together in the stock market as well as the commodity markets in the 1920s and 1930s.
Being around and later working in his father’s firm shaped his entire career and molded him into the legendary trader he ultimately became. Sinclair later earned the nickname “Mr. Gold” because he was considered to be the largest trader in the 1970s bull market in gold, later calling the top of that market to the day.
But later in his life and when Wall Street found itself in jeopardy because of the significant break in the price of gold and silver in 1980, it (Wall Street) petitioned the Fed for a $1 billion bailout. People don’t know this, but Bache was broke and so was Merrill Lynch. At that time a bailout of that size was almost unthinkable, but something had to be done.
Well, the $1 billion was granted on one condition by Paul Volcker, who headed the Fed at that time, and that condition was that Jim Sinclair was to be retained by the Hunt’s to effect the liquidation of their monstrous positions in silver, copper, zinc, and gold. Volcker literally made it a criteria of granting the one billion dollars in loans that Jim Sinclair would guide the Hunt liquidation.
With KWN readers having a better understanding of his background, Sinclair continues: “People need to grasp that this is not about $130 billion. The real dollar figure is orders of magnitudes larger than that number. How much higher we’ll never know, but it is massive. This is the Bank of Russia we are talking about here. The Central Bank of Russia is for the people in Russia. What the IMF went after here is the central bank of the Russian elite and former KGB, and the Russians simply will not stand still for that.”
Sinclair also added: “When the Cyprus event first took place, the mainstream media completely missed the entire point of the story. This is why I immediately did an interview with King World News to explain that what the IMF had just done was to steal the Russian elite, or ex-KGB officials’ money.
Although the mainstream media is days late and a dollar short, I find it flattering that they are now taking my words almost verbatim and using them in their reports. I noticed that when you released the second interview that we did earlier today, I listened to and read my words being read back to me almost verbatim by the mainstream media within 22 minutes. As I said, I guess copying us is the sincerest form of flattery at this point.
Part of the result of all of this is the Russian elite will now move heavily out of currencies and into gold. Going forward, the Russian sovereign entity will now support the price of gold and it will be for the benefit of the Russian oligarchy. This will also serve to bring Russian and Chinese financial interests closer together, and, in time, will finally result in freeing the gold market from Western price manipulation and influence.
This IMF catastrophe in Cyprus is literally a landmark event in history, and the single most important event in the entire history of the gold market. I full expect that the key point I have now made, that this concerns much more money than has been reported, will now be cloned in the mainstream media as well.”
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/3/19_Sinclair_-_Cyprus_Disaster_Is_Much_Bigger_Than_Being_Reported.html
Why the Cyprus Bailout Could Set Banking Back 300 Years
By Martin Hutchinson
Global Investing Strategist
March 19, 2013
Even by the standards of the EU bureaucracy, raiding the private deposits of Cyprus' banks is spectacularly foolish.
For a measly $5.8 billion euros, the EU has now put the entire Eurozone on edge-not to mention the entire global economy.
It revolves around something as simple as trust. And as a former banker, I can tell you that there's no substitute for the belief that your deposits are safe and sound.
It's a thin line and once it's been crossed it's nearly impossible to repair.
Now savers in Spain, Italy and elsewhere in the Eurozone are left to wonder about the safety of their own accounts.
Here's why savers everywhere should be concerned...
The Problem With the Cyprus "Bailout"
Like Ireland and Iceland, Cyprus has a banking sector that's not only shaky but is far bigger than its overall economy, with deposits of around $90 billion, or five times its GDP.
Unlike most banking systems, more than half of those deposits are in large chunks of over 100,000 euros ($128,000), the limit of Cyprus' deposit insurance. Indeed, about $20 billion of Cyprus' deposits are held by the Russian mafia.
Since Cyprus' president Nicos Anastasiades didn't want to shut down the island's attraction as a money haven and playground for the Russian jet-set, he agreed to a deposit tax of 6.7% on deposits up to 100,000 euros and 9.9% on deposits above 100,000 euros, to satisfy the EU's demand of 5.8 billion euros ($7.2 billion) part of the bank bailout.
But like most schemes designed by politicians and EU bureaucrats, this one has huge flaws, including the fact it angered Russian president Vladimir Putin. Even at this level, with much of the money coming from Cyprus' modestly well-off citizens, Putin described it as "unfair, unprofessional and dangerous."
But the main flaw isn't about Putin. It has to do with the idea of deposit insurance itself.
Under a separate scheme introduced by the EU after the 2008 financial crash, deposits under 100,000 euros are insured by the Cyprus government.
Of course, the "tax" on deposits is a supposedly clever way to get around this without the Cyprus government itself defaulting. However, all this little trick does is call into question deposit insurance throughout the EU and, indeed, worldwide.
That's why this tiny country, with a population of only 800,000 and $17 billion in GDP, has roiled the world markets-- it attacked the central principle of deposit insurance.
After all, if governments can just seize deposits by means of a "tax" then deposit insurance is worth absolutely zippo.
Meanwhile in Cyprus, there were a number of alternatives to breaking this underlying bond of trust. The banks have some bond debts outstanding, which certainly should have been written down before the deposits were attacked. In fact, the tax is an attempt to avoid this, and should be resisted on that ground alone.
Instead, because the large deposits are so big, you could raise the required 5.8 million euros simply by a 15% tax on large deposits - but that would make Putin REALLY angry (he personally may or may not have money in Cyprus, but lots of his friends do).
They could also write down Cypriot government bonds, but because the banking system is relatively so huge the write-off would have to be a big one. To get 5.8 billion euros it would take more than a 50% write-down.
In the big picture, Cyprus doesn't matter much, unless EU incompetence and the recalcitrance of its own politicians makes it leave the euro altogether, in which case that currency unit yet again faces the prospect of break-up.
Who Can You Trust?
But in this case, the effect on global deposit insurance systems is much more important.
Deposit insurance was first invented in the United States during the Great Depression as a means to reassure savers about the solvency of banks, a third of which had just gone belly-up. It worked beautifully. Americans trusted the federal government (at least, they did back then), so once deposit insurance was in place savers came to have complete trust in the banking system.
Unfortunately, that same trust had a very bad effect on the banking system itself.
From leverage ratios of $4-5 of assets to $1 of capital in the 1920s, banks leveraged themselves ad infinitum, having leverage ratios of $10-12 of debt to $1 of capital in the 1970s, and up to $30 of assets to $1 of capital in 2008.
Even today, after de-leveraging, J.P. Morgan Chase (NYSE: JPM), in many ways the most solid of the big banks, had assets of $2,359 billion at the end of 2012 and tangible equity of only $146 billion -- or a ratio of 16.2 to 1. As recently as 2010, JPM's leverage was 19.3 to 1.
At those levels you can see the dangers that kind of leverage presents.
In fact, I counseled the National Bank of Croatia to this effect, when they were designing their deposit insurance system in 1996-97, advising them to have insurance covering only 90% of deposits. Unfortunately the politicians in the Croatian parliament overruled us, so Croatia now has the same damaging 100% insurance as everywhere else.
So the depositor today ends up with the worst of both worlds. He can't rely on the banks not to go bust, given their current absurd levels of leverage (which are of course encouraged by Ben Bernanke's money printing). On the other hand, now there's a question of whether he can rely on deposit insurance either.
If these worries become really serious, it will be devastating for the world economy. Small savers will take their money out of banks and resort to household safes and a shotgun.
If savers no longer have a solid place in which to put their money, we will have undone the financial revolution of the last 300 years, and returned to a world in which Samuel Pepys didn't trust the local goldsmith, so buried most of his wealth in the back garden. Needless to say, that won't do much for small business - the entire flow of finance will seize up altogether.
The solution is to do away with deposit insurance, forcing banks that want to attract depositors to hold $1 of capital for every $4-5 of assets, at most.
Eliminating Ben Bernanke and going back to a gold standard will probably be necessary too-even though that's not likely to happen anytime soon.
But if politicians continue behaving as badly as those who designed the Cyprus bailout, the gold standard will be the only economically viable alternative.
With this "bailout" all the EU has done is open up a Pandora's Box.
http://moneymorning.com/2013/03/19/why-the-cyprus-bailout-could-set-banking-back-300-years/
Why the Cyprus Bailout Could Set Banking Back 300 Years
By Martin Hutchinson
Global Investing Strategist
March 19, 2013
Even by the standards of the EU bureaucracy, raiding the private deposits of Cyprus' banks is spectacularly foolish.
For a measly $5.8 billion euros, the EU has now put the entire Eurozone on edge-not to mention the entire global economy.
It revolves around something as simple as trust. And as a former banker, I can tell you that there's no substitute for the belief that your deposits are safe and sound.
It's a thin line and once it's been crossed it's nearly impossible to repair.
Now savers in Spain, Italy and elsewhere in the Eurozone are left to wonder about the safety of their own accounts.
Here's why savers everywhere should be concerned...
The Problem With the Cyprus "Bailout"
Like Ireland and Iceland, Cyprus has a banking sector that's not only shaky but is far bigger than its overall economy, with deposits of around $90 billion, or five times its GDP.
Unlike most banking systems, more than half of those deposits are in large chunks of over 100,000 euros ($128,000), the limit of Cyprus' deposit insurance. Indeed, about $20 billion of Cyprus' deposits are held by the Russian mafia.
Since Cyprus' president Nicos Anastasiades didn't want to shut down the island's attraction as a money haven and playground for the Russian jet-set, he agreed to a deposit tax of 6.7% on deposits up to 100,000 euros and 9.9% on deposits above 100,000 euros, to satisfy the EU's demand of 5.8 billion euros ($7.2 billion) part of the bank bailout.
But like most schemes designed by politicians and EU bureaucrats, this one has huge flaws, including the fact it angered Russian president Vladimir Putin. Even at this level, with much of the money coming from Cyprus' modestly well-off citizens, Putin described it as "unfair, unprofessional and dangerous."
But the main flaw isn't about Putin. It has to do with the idea of deposit insurance itself.
Under a separate scheme introduced by the EU after the 2008 financial crash, deposits under 100,000 euros are insured by the Cyprus government.
Of course, the "tax" on deposits is a supposedly clever way to get around this without the Cyprus government itself defaulting. However, all this little trick does is call into question deposit insurance throughout the EU and, indeed, worldwide.
That's why this tiny country, with a population of only 800,000 and $17 billion in GDP, has roiled the world markets-- it attacked the central principle of deposit insurance.
After all, if governments can just seize deposits by means of a "tax" then deposit insurance is worth absolutely zippo.
Meanwhile in Cyprus, there were a number of alternatives to breaking this underlying bond of trust. The banks have some bond debts outstanding, which certainly should have been written down before the deposits were attacked. In fact, the tax is an attempt to avoid this, and should be resisted on that ground alone.
Instead, because the large deposits are so big, you could raise the required 5.8 million euros simply by a 15% tax on large deposits - but that would make Putin REALLY angry (he personally may or may not have money in Cyprus, but lots of his friends do).
They could also write down Cypriot government bonds, but because the banking system is relatively so huge the write-off would have to be a big one. To get 5.8 billion euros it would take more than a 50% write-down.
In the big picture, Cyprus doesn't matter much, unless EU incompetence and the recalcitrance of its own politicians makes it leave the euro altogether, in which case that currency unit yet again faces the prospect of break-up.
Who Can You Trust?
But in this case, the effect on global deposit insurance systems is much more important.
Deposit insurance was first invented in the United States during the Great Depression as a means to reassure savers about the solvency of banks, a third of which had just gone belly-up. It worked beautifully. Americans trusted the federal government (at least, they did back then), so once deposit insurance was in place savers came to have complete trust in the banking system.
Unfortunately, that same trust had a very bad effect on the banking system itself.
From leverage ratios of $4-5 of assets to $1 of capital in the 1920s, banks leveraged themselves ad infinitum, having leverage ratios of $10-12 of debt to $1 of capital in the 1970s, and up to $30 of assets to $1 of capital in 2008.
Even today, after de-leveraging, J.P. Morgan Chase (NYSE: JPM), in many ways the most solid of the big banks, had assets of $2,359 billion at the end of 2012 and tangible equity of only $146 billion -- or a ratio of 16.2 to 1. As recently as 2010, JPM's leverage was 19.3 to 1.
At those levels you can see the dangers that kind of leverage presents.
In fact, I counseled the National Bank of Croatia to this effect, when they were designing their deposit insurance system in 1996-97, advising them to have insurance covering only 90% of deposits. Unfortunately the politicians in the Croatian parliament overruled us, so Croatia now has the same damaging 100% insurance as everywhere else.
So the depositor today ends up with the worst of both worlds. He can't rely on the banks not to go bust, given their current absurd levels of leverage (which are of course encouraged by Ben Bernanke's money printing). On the other hand, now there's a question of whether he can rely on deposit insurance either.
If these worries become really serious, it will be devastating for the world economy. Small savers will take their money out of banks and resort to household safes and a shotgun.
If savers no longer have a solid place in which to put their money, we will have undone the financial revolution of the last 300 years, and returned to a world in which Samuel Pepys didn't trust the local goldsmith, so buried most of his wealth in the back garden. Needless to say, that won't do much for small business - the entire flow of finance will seize up altogether.
The solution is to do away with deposit insurance, forcing banks that want to attract depositors to hold $1 of capital for every $4-5 of assets, at most.
Eliminating Ben Bernanke and going back to a gold standard will probably be necessary too-even though that's not likely to happen anytime soon.
But if politicians continue behaving as badly as those who designed the Cyprus bailout, the gold standard will be the only economically viable alternative.
With this "bailout" all the EU has done is open up a Pandora's Box.
http://moneymorning.com/2013/03/19/why-the-cyprus-bailout-could-set-banking-back-300-years/
JPM Was Speculating with $350 Billion of Other Peoples Money
3/17/2013
Forbes
Robert Lenzer
The worst revelation about JP Morgan is that it was using $350 billion of its customer deposits, insured by Uncle Sam, to speculate in illiquid credit default swap indexes– that may or may not have been part of a hedging operation that may or may not be outlawed by the Dodd-Frank legislation/
The next worst revelation was the misrepresentations of the extent of the bank’s losses from January to May, 2012. I imagine the FBI will be trying to pin that act of fudging the numbers on someone, perhaps Ms. Ina Drew, who blamed the whole infernal mess on traders in London who, like herself, are no longer employed by JPM.( the Senate report found a work sheet showing that over 5 days a loss of over $400 million was avoided)
The next eyebrow raising revelation was the cavalier manner in which the bank’s risk control standards were violated several hundred times while the $6.2 billion losses was being run up.
Okay, the market saw the whole thing as no more than ” a tempest in a teapot.” The loss of $6.2 billion was a mere 2% of the $350 billion in the Corporate Investment Account. The Synthetic Credit Portfolio of over $150 billion in early 2012 was a mere smidgeon of the bank’s normal overall derivatives book that in nominal terms is valued on the books at some many tens of trillions of dollars. Yes, many trillions quite dwarfs the outrage over the loss of $6.2 billion.
Lastly, there’s the matter of JPM common shares, which before Friday’s drop, had risen higher than the peak price set in October, 2007. It’s quite difficult to see the government bringing any criminal case against the House of Morgan– after Attorney General Holder clearly ruled out such a move against any major bank in the interests of avoiding another 2008 meltdown. More likely is a civil action brought by the SEC involving a quite sizable fine– without obligation of fessing up to breaking the law. That’s the way America works.
http://www.forbes.com/sites/robertlenzner/2013/03/17/jpm-was-speculating-with-350-billion-of-other-peoples-money/
Cyprus bailout worries push investors into gold
Worries over Cyprus bailout push investors to gold; copper, palladium fall on housing concerns
By The Associated Press | Associated Press – 4 hrs ago
Worries about the Cyprus bank bailout drove investors into the safe haven of gold on Monday.
Gold for April delivery rose $12, nearly 1 percent, to $1,604.60 per ounce.
News about Europe's bailout plan for cash-strapped Cyprus unsettled many investors, and all three major U.S. stock indexes lost ground. Traders were surprised that the bailout plan included slapping a tax on deposits in the country's banks — essentially forcing anyone who keeps money in a Cypriot bank to take a "haircut," or a loss.
Edward Lashinski, at RBC Capital Markets' futures group, said investors were worried about a run on Cypriot banks, and whether Europe would impose similar requirements on other struggling countries in the region. They saw gold as a safer bet, he said, because "it's hard to haircut gold."
May silver inched slightly higher, up 2.3 cents to $28.874 per ounce.
(Cont...)
http://news.yahoo.com/cyprus-bailout-worries-push-investors-211442284.html
Unfair, Dangerous' Cyprus Deal Hits Russians
By Holly Ellyatt | CNBC – 3 hours ago
Mar 18, 2013
As the Cypriot parliament convenes in an emergency session to decide whether to ask its citizens to part-fund a bailout for the country's banks, the shadow of Russian money on the island in the form of billions of euros of banking deposits and a $3.3 billion loan, looms large.
Investors in Europe are digesting the news of Cyprus' surprise bailout proposal which includes a levy on savers as a condition for 10 billion euros in financial aid . Dow Jones Cyprus reported on Monday that the initial proposal will be amended.
According to two sources cited by the agency, the new proposal would see savers with less than 100,000 euros in their accounts pay a one-time tax of 3 percent (the initial figure was 6.75 percent). Those with deposits from 100,000 to 500,000 euros would pay 10 percent and anyone with over 500,000 euros in their accounts would pay 15 percent.
(Read More: Cyprus Bailout 'Disaster' Risks New Euro Crisis )
With an estimated 37 percent of the $68 billion of deposits in Cypriot banks belonging to foreigners,many of whom are Russian investors and businesses according to experts, Cypriots are not the only savers that could lose money under the deal.
Vladimir Putin's spokesman quoted the Russian President as saying on Monday morning that a deposit levy would be "unfair, unprofessional and dangerous", Reuters reported.
Conservative reports put the amount of personal deposits of Russian money in Cypriot banks at 20 billion euros, though it could be as high as 35 billion euros, according to media reports. Last year, Moody's ratings agency reported that at the end of 2012, Russian banks had around $12 billion placed in Cypriot banks, an increase of around $3 billion from 2011, according to data from Russia's central bank.
Russian businesses and investors have been attracted to Cyprus for its low corporate tax rates and relaxed financial regulation. The latest bailout proposal, the first of its kind in the euro zone, would see corporate tax raised from 10 to 12.5 percent. The richest depositors stand to lose 15 percent of their savings.
Liza Ermolenko, emerging markets economist at Capital Economics, told CNBC that the move was bad news for Russian depositors.
"The details of the Cypriot bailout are bad news for Russian depositors who hold around 20% of total deposits of the Cypriot banking system," she told CNBC on Monday.
"All of Russia's major banks have some exposure to Cyprus and stand to lose some of their deposits there. Nonetheless, as things stand it looks like the effects on the Russian banking system as a whole should be relatively limited. So far the biggest impact has been on the Russian stock market...with banks being the biggest losers," Ermolenko said.
"In the longer-run this means that if the deal goes ahead, Russian banks and companies will probably start to transfer their money away from Cyprus," she added.
Indeed, the IMF is reported to have been keen on the levy as a way to stem the flood of Russian money into the island over the last few years which has prompted concerns over money laundering .
(Read More: Cyprus Bailout Crisis Slams Brakes on Risk-On )
If ratified by parliament on Monday in an afternoon vote, the money could be extracted from savers' accounts before banks open on Tuesday. Russian investors have been spooked by the move. The Moscow exchange fell 2.3 percent at the open though the Russian deputy economy minister Andrei Klepach said the proposal would not alter Russia's domestic capital flow.
"I don't think (the tax) will have significant implications... This is a matter of increased risks, not (capital) flight," Klepach said, according to the Prime news agency.
On Wednesday, Cypriot Finance Minister, Michalis Sarris, will visit Russia to discuss extending a 2.5 billion ($3.3 billion) euro loan to Cyprus and reduce interest rate payments. The country has already requested 5 billion euros more from Russia , but the country has refused. No decision over whether to extend the loan to Cyprus has yet been made, a source told Reuters.
Sarris told CNBC that Cyprus had managed to pursuade EU officials that the country was not facilitating money laundering or tax evasion, and had agreed to undergo a "a very thorough analysis" of its financial practices. "We have committed to adopt best-practice based on the findings and outcome of this thorough investigation," he said.
http://finance.yahoo.com/news/unfair-dangerous-cyprus-deal-whacks-092914695.html
Gold To Gain On Lost Trust In European Banks
Mar 18 2013, 08:58
Tom Luongo
The news that the bailout of the Cyprus banking system released after the markets closed on Friday will carry with it confiscation of up to 10% of Cypriot bank deposits will be yet another important moment in this phase in monetary history. By refusing to allow bondholders to bear even a modicum of responsibility for the eurozone banking tragedy, the Troika have pushed through a barrier that once breached will not be repaired any time soon, if ever. The effect will be positive for both the U.S. dollar in the short term and gold in the long run.
During the Great Depression, loss of faith in the banking system had become so complete that nothing short of deposit guarantees would bring money out from underneath mattresses. I agree with those that cite the creation of the FDIC as the watershed moment in that era. Only after the government backed bank deposits could there be a positive credit growth cycle. This is not an endorsement of that process, just an observation of its effect.
Fast forward to today and we see the exact opposite scenario playing out in Cyprus. I guess for Cypriots the current version of the plan to steal their bank deposits is far more benign than what the Germans were asking for originally - 40% of all deposits versus the 10% that is in the current proposal. And even though the EU is reaching new levels of venality with their constantly shifting the terms of the theft to see which trial balloon will float the longest, the main point is that like food scares, once trust in one's money or bank is gone, it won't be coming back any time soon.
In addition, the FDIC in the U.S. stands like a paper wall in a Japanese home between depositors and any real banking stress in the U.S. Because, when push comes to shove it will be the depositors who will lose either in a similar wealth tax on a previously protected form of savings, the swapping of pension/401K assets for Treasury bonds or good old taxation via mass inflation.
The instability created by this will have ripple effects well beyond Cyprus. There are rumblings that Italy is going to be offered the same deal, or worse, though I can't imagine that would go over at all given the outcome of the latest elections. One almost gets the sense that this bailout in Cyprus is a response to the Italian situation, with the EU and IMF attempting to exert as much control over the situation as possible because the actual threat of a eurozone breakup is, in reality, remote.
In the same way that the commodity markets in the U.S. have not been the same since MF Global -- with traders leaving the market and volumes in the precious metals pits falling steadily as it became clear that those markets are less about price discovery than they are about price management --the breach of trust between depositor and banker will never be regained.
Personally, I despise the eurozone and everything that it portends. But my opinion of it as a political and economic monstrosity is irrelevant. This is a project that has been 60 years in the making; carefully planned, laid out and executed. To me, then, the most useful analysis of this turn of events in Cyprus involves considering it as euro-positive even though that seems counter-intuitive.
While this truly may be one of the biggest poker bets of all-time it is very likely that it will work out to the Troika's advantage while ultimately pitting them against Russia and savers across the eurozone.
The positive about this is that the Cyprus situation has been dealt with and if the Cypriot parliament votes in favor of it over current schizoid public opinion - 71% being against the deal but 62% wanting to stay in the euro - then everything will work out to their advantage. Cyprus will be effectively fixed and at little cost to the ECB.
And this will be positive for gold as the inherent trust between the banking system and savers in Europe will have been broken. Absent a coherent deposit insurance program, a portion of the money that will flow out of European banks on fear of confiscation will flow into the precious metals. Rising gold is also bullish for the euro as it will further improve the ECB's balance sheet along with that of the rest of the BRICS who will come in to take the price higher as needed.
Sure, the U.S. dollar and U.S. Treasury bonds will see a bid from this. The immediate reaction was a jump in bond future prices and the yen on safe-haven buying. The gold market is simply not big enough to soak up the money that will flow out of European banks but at the same time, this fear trade will not result in a simultaneous hammering of the gold price.
Even if the uncertainty over Cyprus accepting these conditions lingers for a couple of weeks, last year's eurozone-breakup-fear trade happened against a backdrop of the Federal Reserve actively tightening the monetary base. This year we are in the exact opposite environment. We are starting from a different place. U.S. bond yields have been rising for months and looked very weak coming into this news. gold isn't coming off of a $275 rally in two months like it was last February. Quite the opposite has been occurring. The only common denominator is rising equity prices.
So we will see some savings flow into gold, at a minimum supporting the current price range. Now, if there is a response to this by Russian or Chinese interests in the futures markets then I would be expecting $1700 gold very quickly on a short-squeeze thanks to a near biblical hedge fund short position. Once the euro is past the uncertainty over Cyprus, it will be free to begin rising versus the dollar, which is being actively debased by the Fed, helping gold climb the wall of worry.
Remember, activation of the OMT will result in sterilized QE of some form or another. The ECB will resist adding anymore to its balance sheet for as long as it can -- and certainly through the German elections. The Fed, on the other hand, is expanding its balance sheet by at least $85 billion per month. Remove eurozone fear even a little and the exchange rate will stabilize.
Banking -- especially that of the fractional reserve variety -- is ultimately a confidence game. And any loss of that confidence will quickly turn into a panic. There are a lot of people in Europe right now reconsidering the definition of what a safe haven is for their money.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I own physical gold, silver and a few dairy goats. (More...)
http://seekingalpha.com/article/1282521-gold-to-gain-on-lost-trust-in-european-banks
Gold To Gain On Lost Trust In European Banks
Mar 18 2013, 08:58
Tom Luongo
The news that the bailout of the Cyprus banking system released after the markets closed on Friday will carry with it confiscation of up to 10% of Cypriot bank deposits will be yet another important moment in this phase in monetary history. By refusing to allow bondholders to bear even a modicum of responsibility for the eurozone banking tragedy, the Troika have pushed through a barrier that once breached will not be repaired any time soon, if ever. The effect will be positive for both the U.S. dollar in the short term and gold in the long run.
During the Great Depression, loss of faith in the banking system had become so complete that nothing short of deposit guarantees would bring money out from underneath mattresses. I agree with those that cite the creation of the FDIC as the watershed moment in that era. Only after the government backed bank deposits could there be a positive credit growth cycle. This is not an endorsement of that process, just an observation of its effect.
Fast forward to today and we see the exact opposite scenario playing out in Cyprus. I guess for Cypriots the current version of the plan to steal their bank deposits is far more benign than what the Germans were asking for originally - 40% of all deposits versus the 10% that is in the current proposal. And even though the EU is reaching new levels of venality with their constantly shifting the terms of the theft to see which trial balloon will float the longest, the main point is that like food scares, once trust in one's money or bank is gone, it won't be coming back any time soon.
In addition, the FDIC in the U.S. stands like a paper wall in a Japanese home between depositors and any real banking stress in the U.S. Because, when push comes to shove it will be the depositors who will lose either in a similar wealth tax on a previously protected form of savings, the swapping of pension/401K assets for Treasury bonds or good old taxation via mass inflation.
The instability created by this will have ripple effects well beyond Cyprus. There are rumblings that Italy is going to be offered the same deal, or worse, though I can't imagine that would go over at all given the outcome of the latest elections. One almost gets the sense that this bailout in Cyprus is a response to the Italian situation, with the EU and IMF attempting to exert as much control over the situation as possible because the actual threat of a eurozone breakup is, in reality, remote.
In the same way that the commodity markets in the U.S. have not been the same since MF Global -- with traders leaving the market and volumes in the precious metals pits falling steadily as it became clear that those markets are less about price discovery than they are about price management --the breach of trust between depositor and banker will never be regained.
Personally, I despise the eurozone and everything that it portends. But my opinion of it as a political and economic monstrosity is irrelevant. This is a project that has been 60 years in the making; carefully planned, laid out and executed. To me, then, the most useful analysis of this turn of events in Cyprus involves considering it as euro-positive even though that seems counter-intuitive.
While this truly may be one of the biggest poker bets of all-time it is very likely that it will work out to the Troika's advantage while ultimately pitting them against Russia and savers across the eurozone.
The positive about this is that the Cyprus situation has been dealt with and if the Cypriot parliament votes in favor of it over current schizoid public opinion - 71% being against the deal but 62% wanting to stay in the euro - then everything will work out to their advantage. Cyprus will be effectively fixed and at little cost to the ECB.
And this will be positive for gold as the inherent trust between the banking system and savers in Europe will have been broken. Absent a coherent deposit insurance program, a portion of the money that will flow out of European banks on fear of confiscation will flow into the precious metals. Rising gold is also bullish for the euro as it will further improve the ECB's balance sheet along with that of the rest of the BRICS who will come in to take the price higher as needed.
Sure, the U.S. dollar and U.S. Treasury bonds will see a bid from this. The immediate reaction was a jump in bond future prices and the yen on safe-haven buying. The gold market is simply not big enough to soak up the money that will flow out of European banks but at the same time, this fear trade will not result in a simultaneous hammering of the gold price.
Even if the uncertainty over Cyprus accepting these conditions lingers for a couple of weeks, last year's eurozone-breakup-fear trade happened against a backdrop of the Federal Reserve actively tightening the monetary base. This year we are in the exact opposite environment. We are starting from a different place. U.S. bond yields have been rising for months and looked very weak coming into this news. gold isn't coming off of a $275 rally in two months like it was last February. Quite the opposite has been occurring. The only common denominator is rising equity prices.
So we will see some savings flow into gold, at a minimum supporting the current price range. Now, if there is a response to this by Russian or Chinese interests in the futures markets then I would be expecting $1700 gold very quickly on a short-squeeze thanks to a near biblical hedge fund short position. Once the euro is past the uncertainty over Cyprus, it will be free to begin rising versus the dollar, which is being actively debased by the Fed, helping gold climb the wall of worry.
Remember, activation of the OMT will result in sterilized QE of some form or another. The ECB will resist adding anymore to its balance sheet for as long as it can -- and certainly through the German elections. The Fed, on the other hand, is expanding its balance sheet by at least $85 billion per month. Remove eurozone fear even a little and the exchange rate will stabilize.
Banking -- especially that of the fractional reserve variety -- is ultimately a confidence game. And any loss of that confidence will quickly turn into a panic. There are a lot of people in Europe right now reconsidering the definition of what a safe haven is for their money.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I own physical gold, silver and a few dairy goats. (More...)
http://seekingalpha.com/article/1282521-gold-to-gain-on-lost-trust-in-european-banks
'Unfair, Dangerous' Cyprus Deal Hits Russians
By Holly Ellyatt | CNBC – 3 hours ago
Mar 18, 2013
As the Cypriot parliament convenes in an emergency session to decide whether to ask its citizens to part-fund a bailout for the country's banks, the shadow of Russian money on the island in the form of billions of euros of banking deposits and a $3.3 billion loan, looms large.
Investors in Europe are digesting the news of Cyprus' surprise bailout proposal which includes a levy on savers as a condition for 10 billion euros in financial aid . Dow Jones Cyprus reported on Monday that the initial proposal will be amended.
According to two sources cited by the agency, the new proposal would see savers with less than 100,000 euros in their accounts pay a one-time tax of 3 percent (the initial figure was 6.75 percent). Those with deposits from 100,000 to 500,000 euros would pay 10 percent and anyone with over 500,000 euros in their accounts would pay 15 percent.
(Read More: Cyprus Bailout 'Disaster' Risks New Euro Crisis )
With an estimated 37 percent of the $68 billion of deposits in Cypriot banks belonging to foreigners,many of whom are Russian investors and businesses according to experts, Cypriots are not the only savers that could lose money under the deal.
Vladimir Putin's spokesman quoted the Russian President as saying on Monday morning that a deposit levy would be "unfair, unprofessional and dangerous", Reuters reported.
Conservative reports put the amount of personal deposits of Russian money in Cypriot banks at 20 billion euros, though it could be as high as 35 billion euros, according to media reports. Last year, Moody's ratings agency reported that at the end of 2012, Russian banks had around $12 billion placed in Cypriot banks, an increase of around $3 billion from 2011, according to data from Russia's central bank.
Russian businesses and investors have been attracted to Cyprus for its low corporate tax rates and relaxed financial regulation. The latest bailout proposal, the first of its kind in the euro zone, would see corporate tax raised from 10 to 12.5 percent. The richest depositors stand to lose 15 percent of their savings.
Liza Ermolenko, emerging markets economist at Capital Economics, told CNBC that the move was bad news for Russian depositors.
"The details of the Cypriot bailout are bad news for Russian depositors who hold around 20% of total deposits of the Cypriot banking system," she told CNBC on Monday.
"All of Russia's major banks have some exposure to Cyprus and stand to lose some of their deposits there. Nonetheless, as things stand it looks like the effects on the Russian banking system as a whole should be relatively limited. So far the biggest impact has been on the Russian stock market...with banks being the biggest losers," Ermolenko said.
"In the longer-run this means that if the deal goes ahead, Russian banks and companies will probably start to transfer their money away from Cyprus," she added.
Indeed, the IMF is reported to have been keen on the levy as a way to stem the flood of Russian money into the island over the last few years which has prompted concerns over money laundering .
(Read More: Cyprus Bailout Crisis Slams Brakes on Risk-On )
If ratified by parliament on Monday in an afternoon vote, the money could be extracted from savers' accounts before banks open on Tuesday. Russian investors have been spooked by the move. The Moscow exchange fell 2.3 percent at the open though the Russian deputy economy minister Andrei Klepach said the proposal would not alter Russia's domestic capital flow.
"I don't think (the tax) will have significant implications... This is a matter of increased risks, not (capital) flight," Klepach said, according to the Prime news agency.
On Wednesday, Cypriot Finance Minister, Michalis Sarris, will visit Russia to discuss extending a 2.5 billion ($3.3 billion) euro loan to Cyprus and reduce interest rate payments. The country has already requested 5 billion euros more from Russia , but the country has refused. No decision over whether to extend the loan to Cyprus has yet been made, a source told Reuters.
Sarris told CNBC that Cyprus had managed to pursuade EU officials that the country was not facilitating money laundering or tax evasion, and had agreed to undergo a "a very thorough analysis" of its financial practices. "We have committed to adopt best-practice based on the findings and outcome of this thorough investigation," he said.
http://finance.yahoo.com/news/unfair-dangerous-cyprus-deal-whacks-092914695.html
For Everyone Shocked By What Just Happened... And Why This Is Just The Beginning
Submitted by Tyler Durden on 03/16/2013 18:28 -0400
Today, lots of people woke up in shock and horror to what happened in Cyprus: a forced capital reallocation mandated by political elites under the guise of an "equity investment" in insolvent banks, which is really code for a "coercive, mandatory wealth tax." If less concerned about political correctness, one could say that what just happened was daylight robbery from savers to banks and the status quo. These same people may be even more shocked to learn that today's Cypriot "resolution" is merely the first of many such coercive interventions into personal wealth, first in Europe, and then everywhere else.
For the benefit of those people, we wish to point them to our article from September 2011, "The "Muddle Through" Has Failed: BCG Says "There May Be Only Painful Ways Out Of The Crisis", which predicted and explained all of this and much more. What else did the September BCG study conclude? Simply that such mandatory, coercive wealth tax is merely the beginning for a world in which there was some $21 trillion in excess debt as of 2009, a number which has since ballooned to over $30 trillion. And with inflation woefully late in appearing and "inflating away" said debt overhang, Europe first is finally moving to Plan B, and is using Cyrprus as its Guniea Pig.
For those who missed it the first time, here it is again. Somehow we think many more people will listen this time around:
Restructuring the debt overhang in the euro zone would require financing and would be a daunting task. In order to finance controlled restructuring, politicians could well conclude that it was necessary to tax the existing wealth of the private sector. Many politicians would see taxing financial assets as the fairest way of resolving the problem. Taxing existing financial assets would acknowledge one fact: these investments are not as valuable as their owners think, as the debtors (governments, households, and corporations) will be unable to meet their commitments. Exhibit 3 shows the one-time tax on financial assets required to provide the necessary funds for an orderly restructuring.
(Cont...)
http://www.zerohedge.com/news/2013-03-16/everyone-shocked-what-just-happened-and-why-just-beginning
For Everyone Shocked By What Just Happened... And Why This Is Just The Beginning
Submitted by Tyler Durden on 03/16/2013 18:28 -0400
Today, lots of people woke up in shock and horror to what happened in Cyprus: a forced capital reallocation mandated by political elites under the guise of an "equity investment" in insolvent banks, which is really code for a "coercive, mandatory wealth tax." If less concerned about political correctness, one could say that what just happened was daylight robbery from savers to banks and the status quo. These same people may be even more shocked to learn that today's Cypriot "resolution" is merely the first of many such coercive interventions into personal wealth, first in Europe, and then everywhere else.
For the benefit of those people, we wish to point them to our article from September 2011, "The "Muddle Through" Has Failed: BCG Says "There May Be Only Painful Ways Out Of The Crisis", which predicted and explained all of this and much more. What else did the September BCG study conclude? Simply that such mandatory, coercive wealth tax is merely the beginning for a world in which there was some $21 trillion in excess debt as of 2009, a number which has since ballooned to over $30 trillion. And with inflation woefully late in appearing and "inflating away" said debt overhang, Europe first is finally moving to Plan B, and is using Cyrprus as its Guniea Pig.
For those who missed it the first time, here it is again. Somehow we think many more people will listen this time around:
Restructuring the debt overhang in the euro zone would require financing and would be a daunting task. In order to finance controlled restructuring, politicians could well conclude that it was necessary to tax the existing wealth of the private sector. Many politicians would see taxing financial assets as the fairest way of resolving the problem. Taxing existing financial assets would acknowledge one fact: these investments are not as valuable as their owners think, as the debtors (governments, households, and corporations) will be unable to meet their commitments. Exhibit 3 shows the one-time tax on financial assets required to provide the necessary funds for an orderly restructuring.
(Cont...)
http://www.zerohedge.com/news/2013-03-16/everyone-shocked-what-just-happened-and-why-just-beginning
JPMorgan Report Piles Pressure on Dimon in Too-Big Debate
Mar. 14, 2013 Bloomberg
(special thanks to the cork)
JPMorgan Chase & Co. (JPM)’s efforts to hide trading losses, outlined in a Senate report yesterday, probably will ignite debate over whether the largest U.S. bank is too big to manage and ratchet up pressure on Chief Executive Officer Jamie Dimon to surrender his role as chairman.
Dimon misled investors and dodged regulators as losses escalated on a “monstrous” derivatives bet, according to a 301-page report by the Senate Permanent Subcommittee on Investigations. The bank “mischaracterized high-risk trading as hedging,” and withheld key information from its primary regulator, sometimes at Dimon’s behest, investigators found. Managers manipulated risk models and pressured traders to overvalue their positions in an effort to hide growing losses.
“Too big to fail has been put back on the table -- not providing risk data, misleading shareholders -- this suggests that breaking up the banks is a viable idea,” said Mark T. Williams, a former Federal Reserve bank examiner who teaches risk management at Boston University. “This big trading loss reinforces the need for independence. It’s kind of hard to argue at this point that JPM would’ve been worse off if they had a separate chairman.”
Proprietary Trading
JPMorgan fell 2.8 percent to $49.57 at 9:48 a.m. in New York. The company has advanced 13 percent since Dec. 31. After nine months of investigation, the panel concluded that JPMorgan had “a trading operation that piled on risk, ignored limits on risk taking, hid losses, dodged oversight and misinformed the public,” Chairman Carl Levin, a Michigan Democrat, told reporters yesterday. His team combed through 90,000 documents and interviewed dozens of current and former executives.
Former Chief Investment Officer Ina Drew, 56, among Wall Street’s most powerful women until she resigned in May four days after the bank disclosed the initial trading losses, will testify today at Levin’s hearing in her first public appearance since leaving the New York-based bank.
“Since my departure, I have learned of the deceptive conduct by members of the London team, and I was, and remain, deeply disappointed and saddened to learn of such conduct and the extent to which the London team let me, and the company, down,” she said in prepared remarks.
U.S. lawmakers have pushed banks to halt so-called proprietary trading, and regulators are weighing tightening exemptions for hedging. A panel of British lawmakers today urged regulators to “bear down” on prop trading and renew the case for an outright ban within three years.
Mistakes Acknowledged
JPMorgan, regarded on Wall Street as one of the best- managed banks in the world, lost more than $6.2 billion over nine months last year in a derivatives bet on companies’ creditworthiness.
The bank has “repeatedly acknowledged mistakes” in handling the loss, Mark Kornblau, a spokesman for the bank, said in an e-mail.
“Our senior management acted in good faith and never had any intent to mislead anyone,” Kornblau said. The bank cooperated with the investigation and has “already identified many of the issues cited in the report,” he said. “We have taken significant steps to remediate these issues and to learn from them.”
While JPMorgan won approval yesterday to raise its dividend 27 percent to 38 cents a share and buy back $6 billion in shares, as part of a review of top U.S. banks, the Fed ordered the company to address weaknesses in its capital plan and resubmit a proposal by the end of the third quarter.
‘More Heat’
The derivative bets “caused regulators to rethink capital needs” for banks with large trading operations, said Charles Peabody, an analyst with Portales Partners LLC in New York. “Much more broadly, are we going to get more heat on the too- big-to fail, too-big-to jail, too-big-to-manage theme?”
Bloomberg News first reported on April 5 that U.K. trader Bruno Iksil, known as the London Whale, had built an illiquid book of derivatives in the chief investment office so large that it was distorting credit indexes.
The Senate report cited Bloomberg stories published last year disclosing that Dimon, 57, had transformed the CIO in the past five years from a conservative investment operation into a much larger, high-risk trading profit center, and that he exempted the office from rigorous scrutiny.
The report and its recommendations, issued jointly by the committee’s Democrats and Republicans, may increase pressure on regulators to tighten exemptions in the draft Volcker rule, which would restrict the kinds of trades permitted by banks holding deposits insured by taxpayers. Banks have lobbied against the Volcker rule, arguing that it will restrict market- making and other standard practices.
‘Shameful Demonstration’
“We’re going to continue to work very hard for a final rule that does not allow the kind of manipulation, the kind of concoctions that were created here by the bank to be accepted in the name of hedging,” Levin said.
John McCain of Arizona, the ranking Republican on the subcommittee, said the report offers a “shameful demonstration” of what goes on at federally insured banks and said JPMorgan and other institutions are not “too big to fail” or “too big to jail.”
JPMorgan’s credit portfolio more than tripled from a net notional size of $51 billion in late 2011 to $157 billion by the time trading was shut down in late March of last year, the report says. Iksil acquired more than $80 billion, or about 50 percent, of a thinly traded credit index, which made it difficult to find buyers, according to the subcommittee.
‘No Hope’
“There’s nothing that can be done, absolutely nothing that can be done. There is no hope,” Iksil said, according to a transcript of a March 16 call with junior trader Julien Grout. “The book continues to grow more and more monstrous.”
As losses ballooned, Iksil faced increasing pressure from manager Javier Martin-Artajo to report a higher value of his portfolio by marking it aggressively when compared with market prices, the report said.
“I can’t keep this going, we do a one-off at the end of the month to remain calm,” Iksil told Grout in discussing a price adjustment that the report said was apparently requested by Martin-Artajo.
The change would have valued the portfolio $400 million above market prices, the report said. “I don’t know where he wants to stop, but it’s getting idiotic,” Iksil said.
Model Changes
Iksil’s book breached all five of the CIO’s internal risk measures, and with increasing frequency from January through April, totaling more than 330 violations, the report said.
Instead of investigating the cause or reducing its danger, traders, risk managers and executives criticized the metrics as inaccurate and “pushed for model changes that would portray credit derivative trading activities as less risky,” the report said.
On Jan. 30, 2012, the bank began using a new formula for so-called value at risk that cut Iksil’s estimated possible losses by about half. He had breached the limit under the prior model.
“The new VaR model not only ended the SCP’s breach, but also freed the CIO traders to add tens of billions of dollars in new credit derivatives to the SCP which, despite the supposedly lowered risk, led to additional massive losses,” the report said, referring to the synthetic credit portfolio. That model was later scrapped.
‘Too Late’
That wasn’t the only risk measure executives ignored. An internal report in February 2012 projected that Iksil’s portfolio could incur a yearly loss of $6.3 billion, an analysis that the CIO’s chief market risk officer at the time, Pete Weiland, dismissed as “garbage.” Drew also doubted the accuracy of the report, the investigation found. By the time she believed it, “it was too late,” the report said.
JPMorgan misled the public by hiding losses, mismarking trades, withholding information from the Office of the Comptroller of the Currency and “lying to investigators by saying that JPMorgan was fully transparent to regulators regarding the mounting losses when it was not,” McCain told reporters at a press briefing.
The CIO group e-mailed a presentation to Dimon and other executives on April 11 that showed the credit bets were no longer working to protect against losses, the Senate investigators said. It included a chart that showed the portfolio would lose money in a financial crisis.
JPMorgan executives made no mention of the presentation on an April 13 earnings call or that Iksil had already lost more than $1 billion. Dimon and then Chief Financial Officer Douglas Braunstein both knew some of his positions would take weeks or months to exit, the report said.
Untrue Statements
Dimon that day dismissed early press accounts of possible losses in Iksil’s book as a “tempest in a teapot” while Braunstein told investors the company was “very comfortable” with the positions.
“None of those statements made on April 13 to the public, to investors, to analysts were true,” Levin said. “The bank also neglected to disclose on that day that the portfolio had massive positions that were hard to exit, that they were violating in massive numbers key risk limits.”
Dimon “clearly can’t be both chairman and CEO,” said Josh Rosner, an analyst with independent research firm Graham Fisher & Co. in New York. Bank of America Corp., the second-largest U.S. bank, splits the roles of chairman and CEO. Lloyd Blankfein holds both posts at Goldman Sachs Group Inc.
‘Open Kimono’
“I don’t see how it’s feasibly possible for the executive to be expected to effectively oversee himself at the board level” at JPMorgan, Rosner said.
JPMorgan has an “open kimono” with regulators, Dimon told House lawmakers in June 2012. “We don’t hide reports from them,” he said at the time.
The Office of the Comptroller of the Currency noticed that JPMorgan stopped sending the investment bank’s daily profit-and- loss report, in late January or early February of last year, according to the panel. Dimon told executives to stop sending the data “because he believed it was too much information to provide to the OCC,” the report said, citing an interview with the OCC’s head JPMorgan examiner, Scott Waterhouse.
The bank also said there was a data breach that prompted the company to limit the disclosures. When Dimon found out that Braunstein agreed to resume the reports, the CEO “reportedly raised his voice in anger” the subcommittee said.
‘Stupid’ Examiners
JPMorgan frequently pushed back on the OCC, according to the report. Waterhouse “recalled one instance in which bank executives even yelled at OCC examiners and called them ‘stupid,’” according to the report.
While JPMorgan has a reputation for best-in-class risk management, “the Whale trades exposed a bank culture in which risk limit breaches were routinely disregarded, risk metrics were frequently criticized or downplayed, and risk evaluation models were targeted by bank personnel seeking to produce artificially lower capital requirements,” according to the report.
JPMorgan resisted OCC oversight as far back as 2010, when Drew spent 45 minutes “sternly” discussing with an examiner the regulator’s recommendation that her office needed to manage risk better and document changes in the portfolio, the report said.
Drew said the OCC was trying to “destroy” JPMorgan’s business and that investment decisions were made with Dimon’s full understanding, according to the regulator.
Drew was seeking to “invoke Dimon’s authority and reputation in order to avoid implementing formal documentation requirements,” the report said, citing Waterhouse.
‘Voodoo Magic’
Senate investigators said they found little evidence showing what the bets would have protected against. Dimon told senators last year that the wagers were intended to cushion losses on other holdings in the event of a credit crisis.
Drew said the credit derivatives were intended to hedge JPMorgan’s entire balance sheet, while others at the bank said they protected against losses on investments held by the CIO, according to the report.
Patrick Hagan, at one point the CIO’s senior quantitative analyst, told investigators that he was never asked to analyze the bank’s other assets, which would have been necessary to use the bets as a hedge, according to the report.
The credit bets were called a “make believe voodoo magic ‘composite hedge’” by an examiner at the OCC, according to the report.
Questions Raised
Statements and regulatory filings by the bank “raise questions about the timeliness, completeness and accuracy of information” given to investors, the committee said in a section on securities laws and their requirements about disclosing information. The Securities and Exchange Commission has been conducting its own investigation of the bank’s losses.
The evidence suggests the bank “initially mischaracterized or omitted mention” of the portfolio’s problems partly because it “likely understood the market would move against it if even more of those facts were known,” the report says.
Dimon and Drew were among bank managers who spoke with the panel’s investigators. Several ex-employees declined to be interviewed, including Iksil and Achilles Macris, who was chief investment officer of Europe, Middle East and Africa. The panel said it couldn’t require them to cooperate because they lived outside the U.S.
The lender awarded Macris, the trader behind the expansion into credit trading at the office, $31.8 million in the two years before the firm racked up the losses, more than his boss, Drew, and among the most at the bank.
Pay Clawbacks
Macris’s total compensation was $14.5 million for 2011 and about $17.3 million for 2010, according to a presentation in the report. Drew, the former chief investment officer who lost her job because of the bad trades, got $29 million for those two years.
“They were compensated at levels that were at the top range of, or better than, the best investment-bank employees,” the committee wrote.
Iksil, Macris and Martin-Artajo were all forced out of their jobs. The bank told the panel it clawed back the maximum amount permitted under its employment policies with them, or about two years of compensation. The bank canceled outstanding incentive compensation and obtained repayment of previous awards. Drew forfeited about two years’ pay.
Dimon’s pay for 2012 was cut 50 percent by the board of directors after an internal review found him partly responsible for the botched trades on credit derivatives.
Senate Testimony
Braunstein, who stepped down in January as CFO and is still at the bank, will join Drew before the panel today. Ashley Bacon, JPMorgan’s acting chief risk officer, and Michael Cavanagh, who led the internal review of the losses and is now co-CEO for the corporate and investment bank, also are scheduled to testify.
The report showed that on April 5, in responding to early press inquiries about Iksil’s trades, Joe Evangelisti, JPMorgan’s top spokesman, sent Dimon and other executives a list of talking points he wanted to make.
A revised list that took into account their feedback changed the statement, “we cooperate closely with our regulators, who are fully aware of our hedging activities” by removing the word “fully,” the report said.
To contact the reporters on this story: Dawn Kopecki in New York at dkopecki@bloomberg.net; Hugh Son in New York at hson1@bloomberg.net; Clea Benson in Washington atcbenson20@bloomberg.net
http://www.bloomberg.com/news/2013-03-14/jpmorgan-misled-investors-dodged-regulators-senate-report-says.html
thanks basserdan for the link.
An Unlikely Hero Takes a Stand Against Big Banks
By Neil Barofsky Mar 14, 2013 6:30 PM ET
Bloomberg
The decimation of mortgage underwriting standards was one of the core causes of the financial crisis as the Wall Street banks recklessly assembled, packaged and sold bonds backed by fraud-riddled mortgages.
After the crisis, the private market for such mortgage- related bonds understandably vaporized as once-bitten, twice-shy investors steered clear of the financial products that had caused such mayhem.
Alas, years of zero-interest-rate policy by the Federal Reserve has yet again triggered a chase for yield, and in response the banks are gingerly dipping their toes back into the private mortgage-securitization pool. History won’t repeat itself, right?
Well, not so fast. As with all things related to Wall Street, it’s all about the incentives. And the individuals behind the securitization machine before the crisis made a lot of money. Like buy-your-own-island type of money. And when everything collapsed, they largely kept that money. No indictments, no handcuffs, no jail time and no significant financial penalties for the architects of a crisis built on a foundation of fraud (they were called liar loans for a reason).
Although the government has brought some civil cases, they have been settled on terms that can only be compared to the proverbial slap on the wrist, and we are reminded almost daily that there remain banks that are both too big to fail and too big to jail.
Civil Litigation
The one silver lining to this very dark cloud is that the banks haven’t yet proved to be too big to nail, as the wronged purchasers and insurers of their toxic bonds have been waging an occasionally successful multiyear legal battle against the banks and, indirectly, actually punishing them financially for their misconduct. It, therefore, shouldn’t be surprising that, as the banks re-enter the securitization market, their biggest concern seemingly isn’t to ensure that they aren’t once again peddling fraudulent products that might bring government scrutiny, but rather to deal with private civil litigation.
So, as reported in the Wall Street Journal, they have proposed stripping away investors’ ability to later sue them by putting an expiration date on the representations and warranties in the bonds and altering some of the presumptions when a borrower defaults.
Put simply, the old bonds contained legal clauses in the contracts that essentially said: “Hey, we promise that what we say are in these bonds are actually in the bonds. And if not, you can sue us.” The new bonds? “Good luck with that.”
As the Journal reports, however, the banks are facing a most unusual obstacle in their plan to unleash what may prove to be the next wave of ticking time bombs: the credit-rating companies. Yes, the same ones that demonstrated before the crisis that the only thing standing between a mortgage-related bond and a AAA rating was a pile of bank money. They are now apparently refusing to bestow such a rating on bonds whose representations and warranties will expire like stale milk.
This is a problem for the banks because they need that stamp of approval in order to persuade large-scale investors to jump back into the mortgage-bond pool with them.
JPMorgan Chase & Co. (JPM), apparently outraged that a lowly credit-rating company would dare to question one of its elastic economic models, has publicly whined about the stance of one such unidentified rating company. As a result, we are told, credit will be restricted, the economy won’t recover, and countless Americans will be deprived of the opportunity to help inflate the next real-estate bubble.
Rater’s Courage
My response? Well, for the first time in my almost 43 years on this planet, let me say this: Good for you, unidentified credit-rating company.
Whether this is the result of some residual pride in your work (unlikely), a deep sense of shame for your role in the crisis (difficult to fathom), or fear now that the Justice Department has filed a $5 billion lawsuit against Standard & Poor’s for fraud (almost certainly), it’s nice to see someone stand up to the bullies. Now let’s see how long it takes for a rival rating company, fees in hand, to swoop to the banks’ rescue.
(Neil Barofsky served as the special inspector general in charge of oversight of the Troubled Asset Relief Program and is currently a senior fellow at New York University’s School of Law. He is the author of “Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street.” The opinions expressed are his own.)
To contact the writer of this article: Neil Barofsky at neil.barofsky@yahoo.com
http://www.bloomberg.com/news/2013-03-14/an-unlikely-hero-takes-a-stand-against-big-banks.html
An Unlikely Hero Takes a Stand Against Big Banks
By Neil Barofsky Mar 14, 2013 6:30 PM ET
Bloomberg
The decimation of mortgage underwriting standards was one of the core causes of the financial crisis as the Wall Street banks recklessly assembled, packaged and sold bonds backed by fraud-riddled mortgages.
After the crisis, the private market for such mortgage- related bonds understandably vaporized as once-bitten, twice-shy investors steered clear of the financial products that had caused such mayhem.
Alas, years of zero-interest-rate policy by the Federal Reserve has yet again triggered a chase for yield, and in response the banks are gingerly dipping their toes back into the private mortgage-securitization pool. History won’t repeat itself, right?
Well, not so fast. As with all things related to Wall Street, it’s all about the incentives. And the individuals behind the securitization machine before the crisis made a lot of money. Like buy-your-own-island type of money. And when everything collapsed, they largely kept that money. No indictments, no handcuffs, no jail time and no significant financial penalties for the architects of a crisis built on a foundation of fraud (they were called liar loans for a reason).
Although the government has brought some civil cases, they have been settled on terms that can only be compared to the proverbial slap on the wrist, and we are reminded almost daily that there remain banks that are both too big to fail and too big to jail.
Civil Litigation
The one silver lining to this very dark cloud is that the banks haven’t yet proved to be too big to nail, as the wronged purchasers and insurers of their toxic bonds have been waging an occasionally successful multiyear legal battle against the banks and, indirectly, actually punishing them financially for their misconduct. It, therefore, shouldn’t be surprising that, as the banks re-enter the securitization market, their biggest concern seemingly isn’t to ensure that they aren’t once again peddling fraudulent products that might bring government scrutiny, but rather to deal with private civil litigation.
So, as reported in the Wall Street Journal, they have proposed stripping away investors’ ability to later sue them by putting an expiration date on the representations and warranties in the bonds and altering some of the presumptions when a borrower defaults.
Put simply, the old bonds contained legal clauses in the contracts that essentially said: “Hey, we promise that what we say are in these bonds are actually in the bonds. And if not, you can sue us.” The new bonds? “Good luck with that.”
As the Journal reports, however, the banks are facing a most unusual obstacle in their plan to unleash what may prove to be the next wave of ticking time bombs: the credit-rating companies. Yes, the same ones that demonstrated before the crisis that the only thing standing between a mortgage-related bond and a AAA rating was a pile of bank money. They are now apparently refusing to bestow such a rating on bonds whose representations and warranties will expire like stale milk.
This is a problem for the banks because they need that stamp of approval in order to persuade large-scale investors to jump back into the mortgage-bond pool with them.
JPMorgan Chase & Co. (JPM), apparently outraged that a lowly credit-rating company would dare to question one of its elastic economic models, has publicly whined about the stance of one such unidentified rating company. As a result, we are told, credit will be restricted, the economy won’t recover, and countless Americans will be deprived of the opportunity to help inflate the next real-estate bubble.
Rater’s Courage
My response? Well, for the first time in my almost 43 years on this planet, let me say this: Good for you, unidentified credit-rating company.
Whether this is the result of some residual pride in your work (unlikely), a deep sense of shame for your role in the crisis (difficult to fathom), or fear now that the Justice Department has filed a $5 billion lawsuit against Standard & Poor’s for fraud (almost certainly), it’s nice to see someone stand up to the bullies. Now let’s see how long it takes for a rival rating company, fees in hand, to swoop to the banks’ rescue.
(Neil Barofsky served as the special inspector general in charge of oversight of the Troubled Asset Relief Program and is currently a senior fellow at New York University’s School of Law. He is the author of “Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street.” The opinions expressed are his own.)
To contact the writer of this article: Neil Barofsky at neil.barofsky@yahoo.com
http://www.bloomberg.com/news/2013-03-14/an-unlikely-hero-takes-a-stand-against-big-banks.html
Great interview.
Gold To Rise On The Demand For Savings
Mar 13 2013
Tom Luongo
There's been a lot of verbiage spilled over the situation in the price of gold (GLD). This is a difficult situation to handicap because of the sheer importance of this period in time. The Federal Reserve has been trying to talk down the inflation it is inviting through expansion of the monetary base by trying to make us believe that it would end its Quantitative Easing program within a few months. This has cast a pall over the commodity and gold markets as well as the Euro (FXE) which normally would rise on inflation expectations. This is not only not possible it is, frankly, laughable. But, the effects of QE, while not predictable in terms of timing, are unavoidable and will result in much higher gold prices.
Since the beginning of QE IV and the debasement of the Japanese Yen (FXY) began the price of gold has been trading opposite of the inflation expectations of the market. In other words gold is not responding to inflation worries and this has confused and confounded many within the community, myself included. Note the inverse behavior between GLD and the 5/30 Treasury and 5/30 TIPS spread, when normally GLD trades in sympathy with these.
(click to enlarge)
A brilliant admixture of headline manipulation, savvy price suppression in the futures markets, interventions into the foreign exchange markets - Abenomics in Japan -- and improving bank earnings have created a sense of calm that has soothed the markets collective worry and put a huge bid underneath the trade weighted U.S. Dollar index (UUP). This has allowed the central banks to lean on gold while funneling newly-printed money into the equity markets. My hat's off to the Fed for creating this illusion. And I do still believe it to be an illusion.
As I pointed out in my article last week, the Dow Jones Industrial Average (DIA) may be making new highs but it is a relatively narrow rally. Major Dow components like Microsoft (MSFT) are still struggling even after putting in a technical breakout last week, only to see it fail and the stock stay range bound, for example.
The Next Phase of the Cleanup
If the Fed's stress tests and the earnings reports of the major banks are to be believed then we have nearly completed the de-leveraging phase of the cleanup post- Lehman Bros. The Fed has materially weakened its balance sheet - and continues to do so to the tune of $45 billion per month - but strengthened the major banks. If that is the case then the newly-created money the banks are flush with should be making its way into the economy through new lending. So, let's look at the Fed's own statistics on this.
(click to enlarge)
So, while the Fed was tightening excess reserves were falling. This would indicate a healthier banking system, one that felt it could generate a better return in the market than it could by having the Fed pay them 0.25% interest on the money. Now, with the Fed actively trying to drive savings out of the economy - which it is very successfully doing, look at the next chart - the banks are right back to getting cold feet again. All of the money that has been given to them via QE IV is landing right back in the Fed's vaults. Now was this done just to pass the current round of stress tests after which the money will begin to flow like oil from a 19th century West Texas gusher?
If the banks are healthier than they were, and that is a distinct possibility the next phase of this cycle will come in the form of monetary debasement to pay off future liabilities in devalued currency. The political will in Washington D.C. is simply not there to take a meat cleaver to the budget so the current status quo of understating the CPI and unemployment rate will continue such that Social Security obligations can be paid back at a discount since annual payouts are adjusted for the CPI. At the same time debtors will be bailed out because that is who benefits from monetary debasement and that's who will determine who gets re-elected. Savers have not been in charge of the U.S. Treasury's purse strings for a long time.
(click to enlarge)
The Demand for Savings
This is the purpose of QE, to drive what Keynesians feel is excessive savings out of the economy. This is, of course, patent nonsense a priori as the definition of excessive is completely subjective and therefore cannot be derived or even guessed at. But the Fed does believe it can guess better those who actually take the risks of putting their capital in play.
With every iteration of QE there is a time lag between its beginning and a rise in the price of gold. Ascribe what reasons you want to for it, but what is obvious by the headlines that the demand for physical gold as a form of savings is increasing. Savings in dollars is being punished with real interest rates being pushed down so saving in gold is the next recourse for people, institutions and governments. Once the disparity between the gold price and the reality of the money flow reaches a certain point gold is no longer available its current price. Then the scheduling problem takes over that Robert Blumen described so well and the price moves on the anticipation of there being lower future supply.
(click to enlarge)
We are seeing very abnormal physical delivery on the COMEX so far in 2013. With the banks clearly telegraphing their own inherent weakness via their excess reserves, savings being driven out of the banking system by QE and the equity markets clearly running up against the limits of global fundamentals it is only a matter of time before that situation boils over.
Additional disclosure: I own gold and silver as well as a handful of dairy goats
http://seekingalpha.com/article/1271551-gold-to-rise-on-the-demand-for-savings?source=email_authors_alerts&ifp=0
China to Free Yuan in 5 Years, Says Hong Kong Exchanges’ Li
By Matthew Leising & Fion Li - Mar 14, 2013 12:35 AM ET
China, the world’s second-largest economy, will open its markets and allow its currency to float within five years, said Charles Li, chief executive officer of Hong Kong Exchanges & Clearing Ltd.
“China has to reform its interest-rate system,” Li said yesterday during a panel discussion at the Futures Industry Association conference in Boca Raton, Florida. The value of the Chinese currency is limited by the government and is only allowed to rise or fall within a narrow range. Li said that system can’t last forever.
China last week allowed foreign financial companies to invest yuan raised offshore in its domestic markets, a step to reduce the nation’s reliance on the dollar by boosting demand for the currency. People’s Bank of China Governor Zhou Xiaochuan yesterday reiterated plans to gradually reform the exchange rate. HSBC Holdings Plc forecast this week the yuan will become fully convertible within five years.
After keeping the yuan stable for a decade, China allowed its currency to strengthen 21 percent from July 2005 to July 2008, including an initial, single-day gain of 2 percent. Appreciation was then halted for almost two years to help exporters weather a global recession and the currency has advanced 10 percent against the dollar since controls were loosened on June 19, 2010.
More Flexibility
The People’s Bank of China sets a daily reference rate for the yuan based on market makers’ quotations and the spot contract in Shanghai can trade as much as 1 percent on either side. It last increased the band on April 16, 2012, the first expansion since 2007. Of 20 analysts surveyed by Bloomberg News in November, 12 predicted a further widening by the end of this year and eight forecast a revision in 2014.
“I would expect China to increasingly move towards a managed float with more flexibility,” Irene Cheung, a foreign- exchange strategist at Australia & New Zealand Banking Group in Singapore, said by telephone today. “Basically convertible is possible in five years, but it might not be 100 percent convertible.”
Basic convertibility doesn’t mean China would give up total control, Huang Yiping, Barclays Plc’s Hong Kong-based chief economist for emerging Asia, said in September 2011. His understanding of the situation was based on participation in discussions about the yuan with policy makers including those from the Chinese central bank, he said.
The yuan declined 0.04 percent to 6.2162 per dollar as of 11:56 a.m. in Shanghai, after the central bank weakened the currency’s fixing for the first time in three days. Twelve-month non-deliverable forwards dropped 0.1 percent to 6.3070, ending their longest winning streak since September 2010.
Growing Demand
Since China started a pilot program allowing the use of yuan to settle cross-border transactions in 2009, the proportion of its trade conducted in the currency has increased to 9 percent from less than 1 percent, according to the People’s Bank of China. By 2015, a third of China’s cross-border trade will be settled in yuan, making the currency one of the three most-used in global trade along with the dollar and euro, HSBC forecast in a report this month.
The Chinese currency will appreciate 2.1 percent to 6.1 per dollar this year, compared with a 1 percent gain in 2012, the median forecast in a Bloomberg News survey of analysts showed. The yuan has overtaken the Russian ruble for transactions in the global payment system for the first time in January, according to Society for Worldwide Interbank Financial Telecommunications, a financial-messaging platform.
London Racing
London is racing against Paris and Zurich to become the center for yuan trading in Europe as China seeks to take its currency global. The Bank of England said it has the inside edge to be the first Group of Seven nation to sign a currency-swap agreement with the People’s Bank of China after a meeting last month. The deal may allow the U.K. central bank to supply as much as 400 billion yuan ($64 billion) to banks, matching Hong Kong’s swap arrangement, according to Gao Qi, a markets strategist at Royal Bank of Scotland Group Plc (RBS) in Singapore.
Trading in exchange-listed derivatives worldwide fell 15.3 percent last year, compared with 2011, with interest rates, currencies and equity contracts all declining, the Futures Industry Association said earlier this week.
Asia Drop
The central bank policy in the U.S. of holding benchmark interest rates near zero for more than four years has reduced demand from investors to hedge against an increase, hurting the volume of futures tied to the borrowing measure. Trading in CME Group Inc. (CME)’s Eurodollar future dropped 24.4 percent in 2012 compared with the year earlier, while NYSE Euronext’s Euribor contract fell 26.1 percent, FIA said.
The largest drop geographically occurred in Asia-Pacific, with a 23.4 percent decline, according to FIA. Trading in North America fell 11.9 percent while in Europe futures and options on futures declined 12.5 percent.
CME Group, based in Chicago, was the largest futures market by volume, with 2.89 billion contracts changing hands last year, FIA said. Eurex AG was second, with a volume of 2.29 billion.
Contracts based on agricultural products and energy saw gains in 2012. Corn, soybean, wheat and other food-related products rose 27.5 percent last year, while futures on crude oil, natural gas and gasoline jumped 11.2 percent, FIA said.
Interest-rate contracts fell 16 percent, equity indexes dropped 28.5 percent and currencies fell 22.7 percent, FIA said.
To contact the reporters on this story: Matthew Leising in New York at mleising@bloomberg.net; Fion Li in Hong Kong at fli59@bloomberg.net
http://www.bloomberg.com/news/2013-03-13/china-to-free-currency-in-5-years-says-hong-kong-exchanges-li.html
Gold Price "Weakness" Explained By The Ongoing Currency War
Gold Silver Worlds | March 9, 2013
The bearish sentiment against gold (and silver) is almost unprecedented. The mainstream media is using every piece of news “against” the metals. Take for instance Soros who sold a large part of his GLD ETF holding. The news was blown up as being evidence of the bearishness of Soros vis-à-vis gold. Obviously we did not find any interview or written piece from Soros, proving he expects gold to underperform. As noted by contributor K. Xeroudakis, precious metals strategist, it is a fact that trading the GLD requires an official submission to the SEC. In contrast, Soros can remain entirely anonymous when trading the gold futures in the COMEX or buying physical gold to store it in a vault. The truth of the matter is that nobody knows the real gold holdings of Soros; so concluding that he is bearish without knowing all his positions is simply unacceptable. Read more in our article Gold price takedown: noise vs facts.
Back to the facts. The dollar gold chart does not look very rosy in the short term. For the time being, from a chart point of view (see below), the gold price in dollar terms is in a major support area. Suppose it would not hold, then (much) lower prices can be expected. The positive message that comes out of the price chart is that the every retest of this major support area is taking much longer time (see first of the four charts below).
Jim Rickards points out that the recent dollar strength results in gold price weakness, at least in dollar terms. Given the expansion of the US monetary base, it is difficult to understand why the dollar is getting stronger. During an interview on Kitco, Jim Rickards explains into great detail what exactly is happening.
First, in terms of currency wars, a cyclical pattern is visible today.
The fact that the dollar has strengthened recently means that the Fed will need to print more. Monetary policies are easy to predict; you need to look at the cross rates. If the dollar gets weaker, it means the Fed get what it wants. If the dollar gets stronger, they will ease more. The Fed will eventually get what it wants. Ultimately it will be reflected in a much lower dollar, which means a much higher dollar price for gold. The other thing is that gold is always termed in a currency. It could be flat against the dollar right now, but it is screaming in yen. The price of gold in yen right now is hyperbolic. There is a frenzy in Japan right now (people are handing in their gold and jewels). That is where the currency war and gold converge: gold is always going up somewhere in the world. In currency wars, you have sequential devaluations: right now gold is going up in yen, pretty soon it will go up in sterling, eventually it will go up in dollars as the currency wars move around the world.
Indeed, looking to the gold price in three major currencies, the cycles are crystal clear. Dollar gold reached its peak in September 2011 while euro gold got to its highest point one year later. Yen gold is now flirting with its historic highs. Currency devaluations travel around the world, in cycles, and they are reflected in the gold price of each currency.
One common misconception is that people mention higher and lower gold price. That is not really correct. Jim Rickards points out that gold is not going up or down, but the value of the underlying currency is moving.
The truth is that gold is constant, it is not going anywhere. What happens is the dollar (or another currency) goes up and down. If they say that gold goes down, what they really mean is the dollar is going up. I think of gold as the “numéraire”, the unit of account, how you measure things. If you would think the Fed would tighten, and you thought the Fed would raise interest rates, it would strengthen the dollar and gold would go down.
The key question remains: how does it come the dollar remains “strong” given the unprecedented expansion in the US monetary base? Jim Rickards explains the phenomenon by looking at the core objectives of the US Fed:
The Fed and the Treasury want a cheaper dollar. There is no doubt about that; it is clear from monetary policy, their actions and speeches. They try to get it through quantitative easing, but they are not getting it. The dollar remains fairly strong because every time there is a panic it goes with a flight to quality. The dollar has been stronger than the Fed would like which means they will try harder (they will print more). What I think will happen is that the dollar maintains its value, so will keep on printing, until very suddenly and unexpectedly, there will be a loss of trust in the dollar (and all paper currencies). It happens not overnight, but it can happen very quickly.
There you have it: imporant answers on the gold price weakness.
Looking at the long term outlook for gold, it is interesting to note that gold is still moving because it is considered a fear trade, or an inflation trade. Very few people think about gold as money. In an earlier interview, Jim Rickards notes that the gold price level should be in a range between $ 4,000 and $ 11,000 an ounce to support the money supply. “When people tell that there is not enough gold to back the money supply, they are wrong in that there is enough gold to support the money supply, but it is a question on which price you have to peg it.” It is very likely that the currency wars will lead to a loss of trust in paper currencies. Such an event will force our leaders to recognize gold’s role as money, a function that is perceived as unconventional in the West (somehow “exotic”, not accepted by the establishment). In the last four decades, money did not have an official role in the monetary system. That could change in the coming years. Meantime, increased volatility can be expected. Prepare yourself mentally!
http://goldsilverworlds.com/gold-silver-price-news/gold-price-weakness-explained-by-the-ongoing-currency-war/
U.S. dollar’s share of central bank reserves falls to 54% in 2012: World Gold Council
March 13, 2013, 2:26 PM
Myra Saefong
MarketWatch.com
As the world’s central banks look to diversify their reserve portfolios, they’re cutting back on U.S. dollars and the euro and buying more gold, Japanese yen and Chinese yuan, according to a report released Wednesday from the World Gold Council.
The U.S. dollar’s share of total reserves fell from 62% in 2000 to 54% in 2012, according to the report.
Official reserves of global central banks grew to more than $12 trillion in 2012, from $2 trillion in 2000, the WGC said.
Data showed a significant shift away from the U.S. dollar over that 12-year period, and the share of “other” currencies in reserves has tripled in absolute terms since 2008, it said.
Central bank gold buying in the fourth quarter of 2012 marked the eighth straight quarter of net purchases by the official sector and the highest level since 1964, the WGC said. Gold’s percentage of total central reserve holdings remained constant at 13% between 2000 and 2012.
“Building gold reserves in tandem with new alternatives is an optimal strategy as central banks remain under-allocated to gold and many attractive alternatives are either too small or, as is the case with the renminbi [also known as the yuan], not yet open to broader international participation,” said Ashish Bhatia, manager for government affairs at the WGC.
“Gold has a deep and liquid market with no credit risk, making it one of the most attractive assets for central banks to consider as they diversify away from the U.S. dollar and euro,” he said in a press release.
As of Wednesday afternoon, gold futures for April delivery GCJ3 -0.29% traded $5.10, or 0.3%, lower at $1,586.60 an ounce on the Comex division of the New York Mercantile Exchange, but were up about 0.5% month to date.
– Myra Saefong
Follow The Tell on Twitter @thetellblog
http://blogs.marketwatch.com/thetell/2013/03/13/u-s-dollars-share-of-central-bank-reserves-falls-to-54-in-2012-world-gold-council/
U.S. dollar’s share of central bank reserves falls to 54% in 2012: World Gold Council
March 13, 2013, 2:26 PM
Myra Saefong
MarketWatch.com
As the world’s central banks look to diversify their reserve portfolios, they’re cutting back on U.S. dollars and the euro and buying more gold, Japanese yen and Chinese yuan, according to a report released Wednesday from the World Gold Council.
The U.S. dollar’s share of total reserves fell from 62% in 2000 to 54% in 2012, according to the report.
Official reserves of global central banks grew to more than $12 trillion in 2012, from $2 trillion in 2000, the WGC said.
Data showed a significant shift away from the U.S. dollar over that 12-year period, and the share of “other” currencies in reserves has tripled in absolute terms since 2008, it said.
Central bank gold buying in the fourth quarter of 2012 marked the eighth straight quarter of net purchases by the official sector and the highest level since 1964, the WGC said. Gold’s percentage of total central reserve holdings remained constant at 13% between 2000 and 2012.
“Building gold reserves in tandem with new alternatives is an optimal strategy as central banks remain under-allocated to gold and many attractive alternatives are either too small or, as is the case with the renminbi [also known as the yuan], not yet open to broader international participation,” said Ashish Bhatia, manager for government affairs at the WGC.
“Gold has a deep and liquid market with no credit risk, making it one of the most attractive assets for central banks to consider as they diversify away from the U.S. dollar and euro,” he said in a press release.
As of Wednesday afternoon, gold futures for April delivery GCJ3 -0.29% traded $5.10, or 0.3%, lower at $1,586.60 an ounce on the Comex division of the New York Mercantile Exchange, but were up about 0.5% month to date.
– Myra Saefong
Follow The Tell on Twitter @thetellblog
http://blogs.marketwatch.com/thetell/2013/03/13/u-s-dollars-share-of-central-bank-reserves-falls-to-54-in-2012-world-gold-council/
Staring Armageddon In The Face But Hiding It With Official Lies
Paul Craig Roberts, March 10, 2013
(special thanks to the cork)
Dr. Roberts was Assistant Secretary of the US Treasury for Economic Policy in the Reagan Administration.
According to the Bureau of Labor Statistics, the US economy created 236,000 new jobs in February. If you believe that, I have a bridge in Brooklyn that I’ll let you have at a good price.
Where are these alleged jobs? The BLS says 48,000 were created in construction. That is possible, considering that revenue-starved real estate developers are misreading the housing situation. http://www.counterpunch.org/2013/03/08/us-housing-is-the-recovery-real/print
Then there are 23,700 new jobs in retail trade, which is hard to believe considering the absence of consumer income growth and the empty parking lots at shopping malls.
The real puzzle is 20,800 jobs in motion picture and sound recording industries. This is the first time in the years that I have been following the jobs reports that there has been enough employment for me to even notice this category.
The BLS lists 10,900 jobs in accounting and bookkeeping, which, as it is approaching income tax time, is probably correct; 21,000 jobs in temporary help and business support services; 39,000 jobs in health care and social assistance; and 18,800 jobs in the old standby–waitresses and bartenders.
That leaves about 50,000 jobs sprinkled around the various categories, but not in numbers large enough to notice.
The presstitute media attributed the drop in the headline unemployment rate (U3) to 7.7% from 7.9% to the happy jobs report. But Rex Nutting at Market Watch says that the unemployment rate fell because 130,000 unemployed people who have been unable to find a job and became discouraged were dropped out of the U3 measure of unemployment. The official U6 measure which counts some discouraged workers shows an unemployment rate of 14.3%. Statistician John Williams’ measure, which counts all discourage workers (people who have ceased looking for a job), is 23%.
In other words, the real rate of unemployment is 2 to 3 times the reported rate.
Nutting believes that the U3 unemployment rate has become too politicized to have any meaning. He suggests using instead the work force participation rate. This rate is falling substantially, reflecting the discouragement that occurs from inability to find jobs.
John Williams (shadowstats.com) says that distortions in seasonal factor adjustments overstate monthly payroll employment by about 100,000 jobs. The jobs data that is not seasonally adjusted shows about 1.5 million fewer jobs in the economy.
In a recent communication, statistician John Williams (shadowstats.com) reports that the rigged official annual rate of consumer inflation (CPI) of 1.6% is in fact, as measured by the official US government methodology of 1990, 9.2%. In other words, the rate of inflation is 5.75 times greater than the reported rate. If Williams is correct, the interest rate on bonds is extremely negative.
Over the years the official measure of inflation has been altered in two ways. One is the introduction of substitution for what formerly was a constant weighted basket of goods. In the former measure, if a price of an item in the basket (index) rose, the CPI rose by the weight of that item in the basket.
In the substitution-based measure, if a price of an item in the basket goes up, the item is removed from the basket, and a cheaper item is put in its place. For example, if the price of New York strip steak rises, the new CPI will substitute the price of a cheaper cut.
In this new measure, inflation is held down by measuring not a fixed standard of living but a declining standard of living.
The other adjustment used to restrain the measure of inflation is to re-classify many price rises as “quality improvements.” Price rises declared to be quality improvements do not translate into a higher measure of inflation. In other words, if a product rises in price, the price increase or some portion of it can be assigned to improved quality, not to a rise in component or energy costs. As the incentive is to hold down the inflation measure in order to save money for the government on Social Security cost-of-living-adjustments, quality improvements are over-estimated.
Consumers have to pay the higher prices, and as incomes, except for the 1 percent, are not growing, higher product prices, regardless of whether they are or are not quality improvements, mean a lower standard of living for the 99 percent.
The understated new measure of inflation allows the government to show real GDP growth and thus the end of the December 2007 recession, and it allows the government to show in the latest report real retail sales again matching the pre-recession level. However, when measured correctly, as by statistician John Williams, the true picture of retail sales shows a steep decline from 2007 through 2009 and bottom bouncing since.
The reason real retail sales cannot recover is that real average weekly earnings continues its downward path. Earlier in this new century, the lack of income growth for the bulk of the US population was masked by a rise in consumer debt. Americans borrowed to spend, and this kept the economy going until the point was reached that consumers had more debt than they could service.
John Williams report of real average weekly earnings shows that Americans are taking home less purchasing power than they did in the 1960s and 1970s.
Reflecting the dollar’s loss of purchasing power, the price of gold and silver in dollars has risen dramatically during the Bush and Obama regimes.
For the last year or two the Federal Reserve and its dependent banks have operated to cap the price of gold at around $1,750. They do this by selling naked shorts in the paper speculative gold market.
There are two gold markets. One is a market for physical possession by individuals and central banks. The rising demand in the physical bullion market points to a rising price for gold.
The other market is the speculative paper market in which financial institutions bet on the future gold price. By placing large amounts of shorts, this market can be used to suppress price rises in the physical market. The Federal Reserve, which can print money without limit, can cover any losses on its agents’ paper contracts.
It is important to the Federal Reserve’s low interest rate policy to suppress the bullion price. If the prices of gold and silver continue to rise relative to the US dollar, the Fed cannot keep the prices of bonds high and interest rates low. If the dollar is widely perceived to be declining in value in relation to gold, the price of dollar-denominated assets will also decline, including bonds. If the dollar loses value, the Fed loses control over interest rates, and the US financial bubble pops, with hell to pay.
To forestall armageddon, the Fed and its dependent banks cap the price of gold.
The Fed’s fix is temporary, and as the Fed continues to create ever more dollars, the price of gold will eventually escape the Fed’s control as will interest rates and inflation.
The Fed has produced a perfect storm that could consume the US and perhaps the entire Western world.
Dr. Roberts was Assistant Secretary of the US Treasury for Economic Policy in the Reagan Administration. He was associate editor and columnist with the Wall Street Journal, columnist for Business Week, and the Scripps Howard News Service. He has had numerous university appointments. His latest book, The Failure Of Laissez Faire Capitalism And Economic Dissolution Of The West, is available online.
http://www.paulcraigroberts.org/2013/03/10/staring-armageddon-in-the-face-but-hiding-it-with-official-lies-paul-craig-roberts/
Nice article Cork!
Gold & Silver ETF’s: Inflows, Outflows & Fuzz
Gold Silver Worlds | March 12, 2013 |
A lot has been written in the past few weeks about the gold outflows from the GLD ETF. Not the same attention has been accredited to the larger silver inflows in the SLV ETF.
As our readers know meantime, our focus is on the facts, not the noise. We did some quick checks on the figures and collected the following data.
Physical gold held in trust by GLD, publicly available on the site of the trust, over the past month:
March 11th: 39,762,083.81 ounces
March 1st: 40,313,649.35 ounces
Feb 15th: 42,534,954.30 ounces
When look at what the other ETF’s are doing, the latest data are provided by the weekly Standard Bank Research report, published on Monday March 11th and shows data including the previous week.
As all these data show, there is indeed an outflow of physical holdings by the GLD ETF: 6% in one month. It is noteworthy, but it is not significant (although it could become in the future). The decrease is slowing down; the pace of the outflows was significantly higher in the second half of February, which is not strange given the aggressive price takedown. On the total long term, the decrease in the total ETF physical holdings is barely visible on the chart, and just one of the many “corrections” in the past years.
What about silver? Well the physical silver held in trust by SLV has increased significantly over the past month. The publicly available data on the site of the trust show the following increase:
March 11th: 342.292.222,100 ounces
March 1st: 342.433.205,000 ounces
Feb 8th: 335,858,876.200 ounces
The total physical holdings of all ETF’s combined stand at the highest point ever!
What was all the fuzz about?
http://goldsilverworlds.com/gold-silver-general/gold-silver-etfs-inflows-outflows-fuzz/
Van Eck files to launch redeemable U.S. gold, silver ETFs
NEW YORK, March 7 | Thu Mar 7, 2013
(Reuters) - U.S. asset manager Van Eck Global has filed with the Securities and Exchange Commission to launch two gold and silver exchange-traded funds that will allow investors to redeem their shares for physical precious metals.
The two new products will add to Van Eck's line-up of commodities-focused ETFs, including its Gold Miners ETF and the Junior Gold Miners ETF and mutual funds.
Van Eck filed its regulatory papers late on Monday.
While holdings of major silver ETFs have hovered near all-time highs on strong interest by private investors, gold ETF holdings have recently fallen sharply due to a better global economic outlook.
Most precious metals ETFs do not allow their shareholders to take physical delivery, and those that do often charge a higher management fee to offset the extra costs related to physical redemption.
There are currently about 20 major global gold- and silver-backed ETFs, and dozens other exchange-traded products backed only by the good faith of banks and brokerages.
Similar to the proposed Van Eck ETFs, Canada's Sprott Inc operates a basket of precious metals exchange-traded funds that allow investors to redeem their shares for physical metals.
http://www.reuters.com/article/2013/03/07/gold-etf-vaneck-idUSL1N0BZH7E20130307
A Moment of Clarity
Theodore Butler | March 11, 2013 - 9:38am
This is excerpted from the weekly review of March 9, 2013 -
Every once in a while, someone utters a statement that suddenly galvanizes the issue at hand. In the fable “The Emperor’s New Clothes,” Hans Christian Andersen tells of two weavers who convince the emperor that their special clothing for him is invisible only to those unworthy. When the emperor parades in front of his subjects wearing the special clothing, a child cries out the obvious, “he isn’t wearing any clothes at all.” That’s the first thing that came to my mind when I read of the US Attorney General’s words before a Senate hearing this week.
Asked why the government hadn’t pursued criminal charges in a case where a large bank admitted to money laundering for drug interests, Attorney General Eric Holder said: “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.” A senator admitted to being stunned by the frankness of the response. While Mr. Holder’s no-nonsense answer got the widespread attention it deserved, it should have resonated most loudly with silver investors, or at least with readers of this service.
In a blinding moment of clarity, the answer to the whole “why isn’t the CFTC doing anything about the silver manipulation and JPMorgan’s stranglehold on the price” question flashed for all to see. Mr. Holder’s words couldn’t be any clearer and fit perfectly with the now-consensus view held by those who know that JPMorgan is manipulating the price of silver. The reason the CFTC is allowing JPMorgan to continue with their illegal behavior in silver is because the bank is too damn big and powerful to rein in for fear of the unintended consequences. Not only is this the most plausible explanation for the hands off treatment for JPM, countless specific facts unique to silver also reinforce this view.
There is no reason for a US federal agency that spends four and a half years investigating a simple question about market concentration not to find the answer, other than intent not to find it. Clearly, the CFTC won’t conclude the silver investigation because of the fear that charging JPMorgan with criminal charges for manipulating the price of silver could have extremely negative consequences for the bank that could radiate throughout the financial system. Throw in that certain guarantees and assurances were most likely given to JPMorgan by the US Government at the time of their assumption of Bear Stearns’ concentrated short position and the most plausible explanation becomes more obvious. I never represented that this manipulation business was anything but a very serious circumstance being played out at the very top of the financial and regulatory food chain. It’s hard to imagine the Attorney General’s words being more applicable than to the silver price manipulation by JPMorgan.
I had this discussion with a friend the other day when the story first broke and he raised the obvious point that this would seem to extend the life of the silver manipulation indefinitely. After all, if the regulators were reluctant or afraid to force JPMorgan to cease manipulating silver, then that gives the green light for JPM to do so forever. I can understand that sentiment. Understand, yes. Accept? No. While I think that the growing general awareness that some banks are too big to fail or even be sued and, specifically, that JPMorgan is manipulating the price of silver would argue for a quicker end to the manipulation than otherwise, but that’s different than the main point I would make.
Many conclude that the termination of the silver manipulation will arrive only in some long from now timeframe, given the power of JPMorgan and the regulators’ temerity in confronting the biggest of the too big to sue banks. Often, this sentiment is aligned with thoughts that so as the government’s ability to create money and debt appears unlimited; so can JPMorgan sell unlimited amounts of paper silver contracts short to control the price. This is an easy analogy to make and brings me to my main point, namely, there is a world of difference between the creation of new money and the creation of new short silver contracts. The key is in knowing why they are different.
I agree and stipulate that JPMorgan has always sold as many new short contracts as it found necessary to cap and contain the price of silver. We’ve seen stark proof of this on two recent prior occasions, on the two-month $10 silver rally from the end of 2011 and in the $8 silver rally from last summer into early winter. On both occasions, JPMorgan, as the sole new short seller, single-handedly stopped each silver rally from progressing further. And truth be told, I can’t rule out JPMorgan not being the sole new silver short seller on the next price rally. That’s precisely the most important consideration for the future price of silver. So, what I’m saying is that yes, the dirty rotten crooks at JPMorgan have single-handedly stopped silver in its tracks in the past and may do so again. But I am also saying JPMorgan can’t do it forever and maybe not even once again, because of something else.
The something else concerns the specific nature of the instrument through which JPMorgan is controlling and manipulating the price of silver. By selling short heretofore unlimited quantities of COMEX silver contracts to control the price is, at the same time, also obligating the bank to the actual delivery of physical metal, under very easy to imagine circumstances. The Federal Reserve can buy $45 billion a month in securities or $450 billion worth, the consequences of which are impossible to determine with accuracy. On the other hand, the short sale of a regulated commodity futures contract that calls for physical delivery at the option of the buyer has an easy to determine outcome if that commodity moves into a physical shortage. COMEX silver is such a physical delivery futures contract.
What this means is if silver does move into a pronounced physical shortage, something I see increasing signs of, then it will only be a matter of time before cash physical silver buyers begin to demand actual physical delivery on COMEX futures contracts. That’s because the COMEX has ascended to the pinnacle of the silver pricing world. Along with that silver pricing ascendency has evolved unintended consequences (why are there always unintended consequences for things that shouldn’t have occurred in the first place?). For COMEX silver contracts, one unintended consequence is that most silver market participants, including industrial users and large investors, know that in a pinch, they can get physical delivery by accepting and paying in full for actual metal on a futures contract.
Yes, I know that only a very small percentage (1% to 3% or less) of all futures contracts on physical commodities ever end in actual delivery. Left unsaid is that’s because only in a very small percentage of the time is a physical commodity ever in an actual shortage. In an actual physical commodity shortage it must be expected that, depending on price, there will be a great demand for delivery for the item in a shortage and an equally great reluctance by futures contract sellers to make delivery; otherwise there would be no shortage to begin with. This is the problem in silver, namely, that the biggest short seller, JPMorgan, has driven the price so low that, if a physical silver shortage develops, you can be sure many more buyers of silver futures contracts will demand physical delivery and expose JPM’s inability to deliver. Of course, we’ll only learn this after the fact when JPMorgan proves incapable of delivering physical silver. That’s when the federal regulators and the crooked self-regulators at the CME will pronounce that a special problem has suddenly emerged that necessitates a contract default. The truth is that the problem already exists today in JPMorgan’s crooked concentrated short position and the only thing that must emerge is recognition of a physical shortage. In a play on the expression “it’s all over but the shouting,” in silver, it’s all over but the shortage.
That we have come to the point in this country where the leading federal law enforcement official acknowledges that the Department of Justice is reluctant to file criminal charges for fear of the fallout explains why the CFTC has not cracked down on JPMorgan in silver. But that explanation has nothing to do with what will occur when the silver shortage hits with full force. Nothing that the Attorney General, the CFTC, JPMorgan or any other entity in the world says or does will deter the worldwide buying force that will rush into silver when the shortage is exposed.
One final note – there has been increasing talk of a silver and gold shortage leading to a COMEX contract default of some type. I don’t know where this talk of a gold shortage comes from. Gold is not industrially consumed and that makes it virtually impossible for it to develop into an actual physical shortage. I understand that silver and gold are manipulated in price by virtue of COMEX game playing, but I think it’s important to distinguish between the two based upon the facts. Yes, gold can go higher, even much higher than I anticipate, but a physical shortage is a completely different animal. It is the prospect of a silver shortage that lies behind my switch from gold to silver mantra.
Ted Butler
http://www.silverseek.com/commentary/moment-clarity-10196
Perth Mint: "We're Not Seeing Any Fear or Selling Action From Our Clients"
March 8, 2013 | By Tekoa Da Silva
I had the great opportunity this week to connect with Bron Suchecki, head of analysis and strategy at The Perth Mint Australia. It was a fascinating interview, as The Perth Mint refines 10% of world gold production and stores over $3.5 billion dollars worth of vaulted precious metals on behalf of clients.
Starting out with a little history on the Perth, Bron explained that,“The British Government needed a branch in Perth, because there was so much gold coming out of the Western Australian gold fields, [and] it was just impractical to ship the raw dore from the mines over to the royal mint in the UK. [So] that’s how we started, and refining gold and making coins is a core thing that we’ve done our entire existence.”
In speaking to the sheer volume of the Perth’s business flow, Bron said, “We refine all of Australia’s gold production, and in addition, we [handle] local countries’ production, and a fair bit of scrap as well. That’s give us around 300 tonnes a year of physical gold flow to our business…[and] we hold around $3.5B [of vaulted metals]…mostly in gold and silver.”
One of the more fascinating items Bron commented on, was the amazing perspective the Perth has, in terms of being in the “Asian corridor”, and being able to literally watch order flow coming into the mint from India and China.
In terms of what those Asian buyers are doing right now, Bron said, “The interesting thing about the Indian market particularly, is that they are very canny buyers. They will desert the market if prices move up, [but] will come back in when the prices correct…When they feel the gold price has formed a new base…they’ll see that as the new bottom, they’ll buy that bottom, and they’ll demand returns. [That's when] we have bullion banks calling us up desperate to get kilo bars.”
He further explained that with Asian buyers, “When the price spikes, the demand dries up quite quickly…that contrasts a lot with what we see as a retail client mentality—which is when the price is going up they buy, because they like to go with the trend and need to feel confident that the trend is in their favor, and when the price starts to fall—they sell…[So] the Indian and Asian buyers are more canny, and really operate in reverse.”
When asked about the current concerns of clients representing over $3.5B worth of vaulted metals, Bron said, “On the depository side of the business…across the board we’re not seeing any rush to buy with the price dropping down into the $1500 range—but nor are we seeing any selling. I think that’s quite positive. It tells me that [they're] very much strong hands, and are not selling on this price weakness. They’re not fazed by it…[so] from our clients we’re not seeing any fear or selling action.”
Bron also explained that while central banks fully comprehend the strategic importance of gold—they will never speak about it overtly: “I think that people underestimate that central bankers actually understand why they hold gold…no matter what they may say publicly—when Ron Paul asked Ben Bernanke, ‘Why do you hold gold?” and he said, ‘It’s tradition’…that was laughable. He couldn’t say why he really held it. He didn’t want to say, ‘This is the last asset, that in the case of war when nobody will accept our fiat currency, I can use this gold to buy xyz.’ He wasn’t going to say that, because he didn’t want to give gold that credibility…So I really don’t believe that a central bank or a government would be silly enough…to [sell or] encumber their metal.”
—–
This was a fascinating interview with a top expert at one of the world’s leading gold organizations. It is an absolute “must-listen” for precious metals investors and students of monetary matters.
To listen to the interview, left click the following link and/or right click and “save target as” or “save link as” to your desktop:
>>Interview with The Perth Mint’s Bron Suchecki (MP3)
To learn more about The Perth Mint visit: PerthMint.com.au
Enjoy the interview? Please support the site by sharing this URL page link with friends, family, and your favorite chat forum.
Thanks,
Tekoa Da Silva
Bull Market Thinking
http://bullmarketthinking.com/perth-mint-were-not-seeing-any-fear-or-selling-action-from-our-clients/
Commodities 'supercycle' will last another 15 years: JP Morgan
Anthony Halley | March 7, 2013
JPM Natural Resources Fund manager Neil Gregson is confident that a "third great [commodities] supercycle is underway."
The basic idea is that the emerging world still has a lot of commodity intensive growth ahead.
Countries like India and China have closed the gap considerably between themselves and the developed world over the past generation. Despite recent slowdowns in emerging market growth, this catch up process, according to Gregson, will last at least until 2030.
Urbanisation in India is projected to double over the next 15 years. If this happens, a total of 590 million Indians would be city dwellers by 2030.
Gregson says that in order to accommodate this rural exodus, "India would have to build between 700 million and 900 million square metres of residential and commercial space and around 350-400km of subway every single year – 20 times the rate seen over the past decade."
Forecasts by Scotiabank commodity market specialist Patricia Mohr support Gregson's claim, at least for the near future. Mohr lists a number a market factors that will support a general upward trend in base metal and agricultural commodities prices over the next two years:
* Increased momentum in global economic growth in the second half of 2013.
*Massive infrastructure investment, particularly in China. China is also on track to meet its ambitious public housing construction targets.
*China's shift towards greater domestic consumption, in particular of motor vehicles.
*Restocking of raw materials after widespread liquidation and deferred orders in 2012.
*Strong oil prices underpinned by geopolitical risk in the Middle East and maintenance of North Sea oil.
*Lumber and panel board rallies on the back of a nascent US housing recovery (especially with tight supply of building materials in Canada and the US).
*Historically high grain and oil seed prices as a result of droughts in the US Midwest and in parts of Russia.
*Mining project delays that are tightening supply.
Source: Patricia Mohr, Vice-President, Economics & Commodity Market Specialist at Scotiabank (Powerpoint presentation from the 2013 AMEBC Roundup conference in Vancouver, Canada)
http://www.mining.com/commodities-supercycle-will-last-another-15-years-jp-morgan-85593/
The Fed Balance Sheet: What is Uncle Sam's Largest Asset?
Mar 8 2013, 07:07
Doug Short
Note from dshort: I've updated the quiz based on yesterday's Q4 Flow of Funds release. Hint: The correct answer is the same as it was for the last quiz, just more incredible.
Pop Quiz! Without recourse to your text, your notes or a Google (GOOG) search, what line item is the largest asset on Uncle Sam's balance sheet?
A) U.S. Official Reserve Assets
B) Total Mortgages
C) Taxes Receivable
D) Student Loans
The correct answer, as of the latest Flow of Funds report is ... Student Loans.
The rapid growth in student debt has been an ongoing topic in the financial press. One stunning chart that continues to haunt me illustrates the rapid growth in federal loans to students since the onset of the great recession. Here is a chart based on data from the Flow of Funds Table L.105, which shows the federal government's assets and liabilities.
(Cont...)
http://seekingalpha.com/article/1258671-the-fed-balance-sheet-what-is-uncle-sam-s-largest-asset
Ben Bernanke's Diabolical Plan To Turn Mortgage-Backed Securities Into Pristine Collateral
Mar 7 2013
Gary A
I wrote an article on Business Insider a long time ago showing how the TBTF banks wanted all mortgages guaranteed going forward. Ben Bernanke has a plan to force this reality upon the American government.
In the Knights of the Round Table, the magicians could turn lead into gold. That is exactly what Ben Bernanke wants to do, and it could cause massive uncertainty going forward, or bring in a period of financial bliss.
The Fed is buying most of the Mortgage-Backed Securities [MBS]. There is no large market for securitization of mortgages but the big banks, and therefore the Fed, want that market rekindled. So does the IMF, because investors are demanding risk free mortgage backed securities this time around. There won't be any bogus AAA rated mortgages being sold to unsuspecting investors this time.
So, here is the plan to turn lead into gold. The Fed is purchasing the MBS en masse. The Fed is expanding its balance sheet into dangerous territory. If interest rates rise, the only way that the Fed will get out alive is to be able to unwind the MBS on its balance sheet. Otherwise, clearly, the U.S. government will either have to bail out the Fed or the Fed will withhold interest payments to the treasury. Or both of these could happen.
The Fed will have the U.S. government in a hostage situation. Or if taking hostages is too strong for you, then it is a simple case of blackmail.
Just as Henry Paulson held Congress hostage in September, 2008, so will Ben Bernanke hold Congress hostage one more time. The question is, will he have to crash the stock market to do so.
I have written about the squeeze in collateral that is good, pristine, perfect, you know like treasury bonds of nations that have good credit ratings. That good collateral is in short supply and the need for good collateral is increasing as banks seek to protect themselves from weakened balance sheets going forward.
That is where the alchemy comes in. Either the MBS are turned to gold or Ben Bernanke will crash the stock market in a big way in order to force the U.S. government to spend more and create more treasury bonds. It is far less messy to just turn the MBS into pristine collateral.
That point won't be lost on Congress, most likely.
So then, what will this do to main street? Well, it is already causing massive speculation in housing and prices are being driven up, first by the private equity people, and now by others who are fearing rising interest rates.
But with regard to main street, there is a major risk, a major flaw in Bernanke's plan. In order for these private equity guys to make a big return on rentals, rents will have to go up. Wages are not going up so rents will not go up without a lot more empty houses being the result.
Jobs in the construction industry and the peripheral industries will be created, and I am sure that is the goal of Magician Ben. However, the cost of living will rise as an unintended consequence, and this could have a profound negative effect on the economy.
And as interest rates rise, that is when the banks will make money on all the houses they are squirreling away. Lending will return, most likely with teaser rates since the Ponzi can't continue without main street Joe getting a loan.
So, the real world economy could cause the U.S. government to be on the hook for a lot of "pristine" MBS. I am wondering, without a crystal ball, if that will undermine the quality of the treasuries of the U.S. government at some point. That seems like a big risk for the government to take on, but of course, it will seem like a smaller risk to Congress than the stock market crashing by 60 percent.
I look forward to comments on my predictions. This has to be a learning process and we are indeed entering uncharted waters where putting a ribbon on a pig is all that is needed to create a pretty pig. It seems like a big fraud to me in a nation where wages don't rise.
But when you are a magician who has the ear of the court of rulers and Knights, fraud becomes way too big to prosecute.
Unfortunately, free market price discovery does not seem to be that important to someone with a magic wand in his hand.
And for any of you who doubt what I am predicting, we have the fact that Ben Bernanke has already telegraphed a new housing bubble.
Thanks to Mike Whitney I have this quote from Ben:
"Federal Reserve Chairman Ben S. Bernanke said the Fed will take action to speed growth and a rebound in a housing market facing obstacles ranging from too-tight lending rules to racial discrimination….Bernanke said while tighter credit standards after a collapse in the subprime mortgage market were appropriate, "it seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery."… Bernanke said housing-finance authorities have taken steps to "remove barriers to the flow of mortgage credit" and referred to efforts by the Federal Housing Finance Agency and by Fannie Mae and Freddie Mac to clarify rules surrounding mortgages that go into default.
The millennials (Gen Y) could be sucked into this Ponzi housing scheme, but the NAR Cheerleaders won't be able to take David Lereah's mantle and make the argument that real estate always goes up and you will be able to refinance down the road.
But we can't on the other hand, count desperate Ben out, since he is committed to buying a lot more MBS, in open-ended fashion, and will have to get rid of them someday.
Possible investment strategies based on Bernanke's goals focus around the banks and residential real estate with caution.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
http://seekingalpha.com/article/1256121-ben-bernanke-s-diabolical-plan-to-turn-mortgage-backed-securities-into-pristine-collateral
great article al44!
"Tug of War" as Asians Buy Gold But ETF Investors Sell, Precious Metals "Could Be Hit If They Decouple from Surging Stocks"
6 March 2013
BullionVault
The Dollar price to buy gold hovered around $1575 per ounce Wednesday morning in London, in line with last week's close, as dealers in Asia reported an increase in demand for physical bullion, in contrast with exchange traded funds, which have continued to see selling, in what one analyst calls a "tug of war" between physical buying and ETF selling.
"Short-term, gold should drift lower to the short-term support line at $1569/65 or even to the previous low at $1555," say technical analysts at Societe Generale.
"Initial support is at 1564.88," adds UBS.
"A break below [that level] would expose $1556.50, the June 28 low and then $1533.70, the May 16, 2012 low."
Gold in Sterling hovered just below £1045 an ounce for most of this morning, slightly down on the week, while gold in Euros stayed below €1210 an ounce.
Silver meantime hovered around $28.70 an ounce, very slightly up on the week, while other commodities were similarly flat. Stock markets extended yesterday's gains, in contrast with major government bond prices which fell.
"We remain somewhat cautious on gold and silver," says INTL FCStone analyst Ed Meir.
"They could be hit by a downward reversal if and when markets start to decouple from the surging equity markets."
Stock markets in Europe extended yesterday's gains this morning after several major indices closed at multi-year highs Tuesday.
In London, the FTSE 100 posted its highest close since January 2008 yesterday, while over in the US the Dow saw a new all-time record close and the S&P 500 closed at its highest level since October 31 2007, less than 2% off its all-time record close set earlier that month.
Tuesday saw the release of service sector purchasing managers' index data for a number of economies, which indicated better-than-expected conditions in the US, UK and Eurozone.
"Looking forward," says a note from Credit Agricole, "[stock market] sentiment could get further support from data this week as the {Federal Reserve's] Beige Book today will probably show that employment continued to grow ahead of Friday's jobs report."
The latest US nonfarm payrolls figure and unemployment rate are due to be published this Friday.The consensus forecast among analysts is for an addition of 160,000 jobs last month, with the unemployment rate expected to stay at 7.9%.
Later today, the privately-produced ADP Employment report is due to be released at 08.15 EST.
Outflows from the world's biggest gold exchange traded fund, the SPDR Gold Trust (ticker: GLD), continued yesterday for the eleventh day running, taking the total volume of gold held to back GLD shares to its lowest level since November 2011.
"It is really a tug of war between ETF selling and physical buying right now," says Yuichi Ikemizu, head of commodity trading, Japan, at Standard Bank.
"We have seen quite good physical demand from China and Southeast Asia, but the ETF selling has put a lid on gold prices."
In China, the most popular forward contract on the Shanghai Gold Exchange continued to trade a t a premium of around $20 an ounce compared to the international wholesale gold price Wednesday.
"We are seeing strong and growing support for gold from the physical market," say Standard Bank commodity strategist Marc Ground, "as evidenced by our Standard Bank Gold Physical Flow Index, which places a floor at around $1560 an ounce."
"If the buying from China, Indonesia and Thailand continues, it will not be very easy to get physical supply," one dealer in Singapore told newswire Reuters this morning.
South Korea's central bank bought 20 tonnes of gold last month, taking its total gold reserve to 104.4 tonnes, 1.5% of overall reserves, it said in a statement.
"As the gold purchase aims to diversify the foreign exchange portfolio over the long haul, gold prices' short-term volatility have not been considered," said Lee Jung, head of the Bank of Korea's investment strategy team.
February also Russia and Kazakhstan continue to buy gold.
Get the safest gold and silver at the lowest price possible on BullionVault...
BullionVault, 06 Mar '13
http://goldnews.bullionvault.com/buy-gold-030620131
That's his signature and it gets even better;
I own physical gold, silver, a few goats and an unwavering cynicism towards those in power.
A couple of great posts today basserdan!
Think Gold ETF Outflows Are Big? Look At The S&P
Mar 4 2013
Tom Luongo
There's been a lot of talk about the big redemption from the SPDR Gold Trust ETF (GLD) that occurred on February 20. More than $1.06 billion was removed from the fund that day. I'm less interested in one day's worth of selling than I am in a pattern of behavior. And on balance, a lot of money has come out of GLD in the past two weeks, ~5% of AUM. But it's a funny thing about ETF flows. While money has been flowing out of the non-physical gold ETF, one of the real physical gold ETFs, The Market Vectors Gold Miners ETF (GDX), has seen its AUM expand by 3%. Moreover, if we look at the rest of the market since the beginning of the year we'll see that the big loser is not GLD but rather the SPDR S&P 500 ETF (SPY).
Index Universe has a fantastic tool that lets you look at ETF flows between any two dates. It's one of my very favorite research tools. For this analysis I am going to skip the first week of 2013 because a lot of aberrant behavior is noted in many of the bond ETFs as massive draw downs happened all across the maturity curve there. I note, with irony, that not one word of this ever made it onto the front page of Bloomberg or Yahoo! Finance. Gee, I wonder why? Go to the link above and set the time frame for the beginning of January and you'll see what I'm talking about. Bonds (IEI) were sold and emerging markets (EEM) were bought. Huge one-week flows into those ETFs heavily skew the year-to-date results.
For this article I'm more interested in seeing what the trends are after the drama from the fiscal cliff was past. So, looking at the fund flows from January 10, until March 1, makes more sense to get an idea of where money is flowing in this current equity rally.
Top 10 Inflows Top 10 Outflows
(Chart in article)
Notice anything interesting? I certainly do. The three U.S. equity ETFs have had bigger outflows as a % of assets under management (AUM) than GLD. This is not to say that GLD's data is bullish or anything. It's not, even from a contrarian point of view. But, if it's not bullish for GLD than it certainly isn't bullish for the U.S. equity indices. Let's take this one step farther and note that all types of corporate paper -- HYG, LQD and JNK -- have seen substantial outflows as well.
On the other hand looking at the inflows is also very interesting. A lot of these are very small funds by size and that's what is interesting, a rotation out of large-cap equity and paper and into real estate (IYR) and natural resources (GUNR), low volatility (USMV) and income (VIG). There is a lot of defensive posturing and yield-seeking in the list of top inflows. While overbought asset classes, which have become low-yield, dominate the list of top outflows.
In this case GLD is actually the exception. Given what we know about the rate at which Gold is being accumulated by private investors and central banks, the outflows from GLD could easily be stakeholders looking to take delivery in some way. It's well known that there is an open conduit between the vaults housing GLD's gold - and I'm being generous to the idea that GLD actually has much physical gold backing it -- and those of the COMEX.
Physical off-take on the COMEX in February has been abnormally high, more than 40 tons were served. And as of February 28, there is another 4.6 tons spoken for versus the non-delivery March contract. And since we know that Asian buying has been strong and is looking to increase in the near future, these redemptions from the GLD could be yet another manifestation of physical gold flowing from West to East.
In other words, like most indicators, ETF flows can mean different things to different types of vehicles. If I were heavily exposed to equities, which I'm not, then I would be very worried about these fund flows in conjunction with an insider selling ratio approaching 50:1, according to TrimTabs, real wages after inflation contracting in the face of higher taxes and falling bond yields on European stability worries as we approach the all-time high on the S&P 500.
Additional disclosure: I own some physical gold, silver and some baby dairy goats
http://seekingalpha.com/article/1243361-think-gold-etf-outflows-are-big-look-at-the-s-p?source=email_rt_article_title
Think Gold ETF Outflows Are Big? Look At The S&P
Mar 4 2013
Tom Luongo
There's been a lot of talk about the big redemption from the SPDR Gold Trust ETF (GLD) that occurred on February 20. More than $1.06 billion was removed from the fund that day. I'm less interested in one day's worth of selling than I am in a pattern of behavior. And on balance, a lot of money has come out of GLD in the past two weeks, ~5% of AUM. But it's a funny thing about ETF flows. While money has been flowing out of the non-physical gold ETF, one of the real physical gold ETFs, The Market Vectors Gold Miners ETF (GDX), has seen its AUM expand by 3%. Moreover, if we look at the rest of the market since the beginning of the year we'll see that the big loser is not GLD but rather the SPDR S&P 500 ETF (SPY).
Index Universe has a fantastic tool that lets you look at ETF flows between any two dates. It's one of my very favorite research tools. For this analysis I am going to skip the first week of 2013 because a lot of aberrant behavior is noted in many of the bond ETFs as massive draw downs happened all across the maturity curve there. I note, with irony, that not one word of this ever made it onto the front page of Bloomberg or Yahoo! Finance. Gee, I wonder why? Go to the link above and set the time frame for the beginning of January and you'll see what I'm talking about. Bonds (IEI) were sold and emerging markets (EEM) were bought. Huge one-week flows into those ETFs heavily skew the year-to-date results.
For this article I'm more interested in seeing what the trends are after the drama from the fiscal cliff was past. So, looking at the fund flows from January 10, until March 1, makes more sense to get an idea of where money is flowing in this current equity rally.
Top 10 Inflows Top 10 Outflows
(Chart in article)
Notice anything interesting? I certainly do. The three U.S. equity ETFs have had bigger outflows as a % of assets under management (AUM) than GLD. This is not to say that GLD's data is bullish or anything. It's not, even from a contrarian point of view. But, if it's not bullish for GLD than it certainly isn't bullish for the U.S. equity indices. Let's take this one step farther and note that all types of corporate paper -- HYG, LQD and JNK -- have seen substantial outflows as well.
On the other hand looking at the inflows is also very interesting. A lot of these are very small funds by size and that's what is interesting, a rotation out of large-cap equity and paper and into real estate (IYR) and natural resources (GUNR), low volatility (USMV) and income (VIG). There is a lot of defensive posturing and yield-seeking in the list of top inflows. While overbought asset classes, which have become low-yield, dominate the list of top outflows.
In this case GLD is actually the exception. Given what we know about the rate at which Gold is being accumulated by private investors and central banks, the outflows from GLD could easily be stakeholders looking to take delivery in some way. It's well known that there is an open conduit between the vaults housing GLD's gold - and I'm being generous to the idea that GLD actually has much physical gold backing it -- and those of the COMEX.
Physical off-take on the COMEX in February has been abnormally high, more than 40 tons were served. And as of February 28, there is another 4.6 tons spoken for versus the non-delivery March contract. And since we know that Asian buying has been strong and is looking to increase in the near future, these redemptions from the GLD could be yet another manifestation of physical gold flowing from West to East.
In other words, like most indicators, ETF flows can mean different things to different types of vehicles. If I were heavily exposed to equities, which I'm not, then I would be very worried about these fund flows in conjunction with an insider selling ratio approaching 50:1, according to TrimTabs, real wages after inflation contracting in the face of higher taxes and falling bond yields on European stability worries as we approach the all-time high on the S&P 500.
Additional disclosure: I own some physical gold, silver and some baby dairy goats
http://seekingalpha.com/article/1243361-think-gold-etf-outflows-are-big-look-at-the-s-p?source=email_rt_article_title
This Year’s Subsidy to Wall Street is Equal to the Amount of This Year’s Sequester Cuts
By Eric Zuesse
Global Research, March 01, 2013
Washington's Blog
Since we’ve bailed out the 10 largest banks $83 billion this year alone, should they give it back to us by paying into the U.S. Treasury the amount of this year’s sequester? After all, it’s the same amount.
On February 20th, Bloomberg News editors headlined, “Why Should Taxpayers Give Big Banks $83 Billion a Year?” and issued the first-ever thorough and current analysis of the taxpayer-subsidy to the Wall Street mega-banks. They found that this subsidy is $83 billion this year, but they made no note of the fact that this amount is only $2 billion less than this year’s sequester cuts are estimated to be, so that all that would need to be done, in order to avoid those cuts, would be to have those mega-banks that we bail out every year forego their subsidy from taxpayers, for just one year. Unfortunately, this would be easier said than done.
That $83 billion subsidy this year is, according to Bloomberg’s, also approximately the amount of profits that those banks are “earning” this year. So, if the mega-banks wouldn’t refund it out of what we gave them last year, then they could just refund it by paying to us – who, after all, bailed out their stockholders enormously in 2009 – the “profits” that they made this year.
The editors at Bloomberg News (hardly a bunch of populists) calculated this $83 billion figure based upon their analysis of the figures in a sadly ignored but rigorous study that had been done by IMF economists, a study that had been issued months back, in May 2012, and which was titled “Quantifying Structural Subsidy Values for Systemically Important Financial Institutions.” As Bloomberg’s editors summarized the reason for this ongoing federal subsidy: “The banks that are potentially the most dangerous can borrow at lower rates, because creditors perceive them as too big to fail,” due to the special Government backing for too-big-to-fail (TBTF) institutions.
The taxpayer-funded annual subsidy to these TBTF banks has never before been calculated as to its actual annual dollar-value, but this rigorous IMF study finally provided the means for doing that. Bloomberg’s summarizes: “What if we told you that, by our calculations, the largest U.S. banks aren’t really profitable at all? What if the billions of dollars they allegedly earn for their shareholders were almost entirely a gift from U.S. taxpayers?”
“The top five banks – JP Morgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. – account for $64 billion of the total subsidy, an amount roughly equal to their typical annual profits.”
This $83 billion, in other words, is the current value of the annual subsidy received by America’s 10 mega-banks, from our Government’s special treatment of them as “Systemically Important Financial Institutions” (i.e., fully guaranteed by U.S. taxpayers, irrespective of the normal $250,000-per-account limit in savings and checking accounts), or TBTF institutions, which the other 7,053 (out of the total 7,063 FDIC-insured) banks are not – other banks can fail without destroying the U.S. economy. In a certain sense, these are the banks where the super-rich can enjoy FDIC protection without that $250,000-per-account limit, and can even gamble under the protection of that comforting umbrella.
The Dallas Federal Reserve has issued a superb study showing that even at the peak of the crash, when the highest percentage of loans were in arrears, which had occurred around January 2010, only around 3% of loans were in arrears at banks that had “less than $1 billion” in assets, whereas banks that had “over $250 billion” (and only 12 banks are in that august category) were experiencing around 12% of loans in arrears. The following chart on page 7 of the Dallas Fed’s study showed that the 2008 crash was virtually entirely a Wall Street (or mega-bank) phenomenon:
The big-ten banks are the ones that benefited from that $83 billion handout this year, and, as was noted, they did so because they are TBTF. Because these banks (basically the top line there) are TBTF, their top executives can have them engage in, essentially, high-risk gambling (such as “no-doc” or “liars” loans) with the vast sums that are under their command, since the people who buy stock in these banks know in advance that if these high-risk bets fail, then U.S. taxpayers (we) will eat their losses. Consequently, the only incentive for CEOs of these banks is to increase their bank’s size even more, so as to increase their bonuses even bigger, since these executives don’t really need to worry about risk (except as a PR issue, perhaps, but they hire PR people – including politicians – to deal with that).
When Wall Street got bailed out to the tune of trillions of dollars by the U.S. Treasury, and the Federal Reserve (and with Fannie Mae, and Freddie Mac serving as a conduit between them and Wall Street), this left very little remaining for the Government to spend on the rest of the economy, such as infrastructure and education (the kinds of things that we supposedly pay taxes for), which might be why the recovery has been so slow, from the 2008 crash that was caused by Wall Street’s federally-insured gambling with the trillions that they control of everybody else’s money. If so, then this sequester is a result of Wall Street’s failed bets: instead of cutting back on the subsidy to Wall Street, the politicians in Washington have chosen to cut back on government services to the public. Politicians like Barack Obama and his team, and the George W. Bush team before them, and all of the supporters of TBTF in Congress, made the basic choice to subsidize the mega-banks instead of the needy or the deserving, and this is also why the “Top 1% Got 93% of Income Growth as Rich-Poor Gap Widened” under Obama. It really is a plutocracy; that’s precisely the way today’s USA is functioning – no doubt about it.
There were other possible ways of dealing with the 2008 crash than to continue to throw trillions of dollars at Wall Street, but that is what “our” Government did, and continues to do, because, essentially, this is what the super-rich pay them to do.
Bloomberg’s $83 billion/year finding here is so vast that it suggests that the U.S. is a crony-capitalism, hardly an authentic capitalism. The “cronies” are these giant Wall Street firms and their “counterparties” (namely, each other, plus Fannie & Freddie and the government officials and lobbyists, who all serve Wall Street), and also the stockholders and bondholders in these huge financial institutions: the mega-banks that would otherwise be “cleaned out” but for the TBTF backing they receive from U.S. taxpayers. We’re getting reamed by Wall Street and K Street, and this is the first estimate of the actual circumference of that reaming. The Dallas Fed’s study says that this reaming must stop, and that, despite what the Federal Reserve itself says, the mega-banks must be broken up. The easiest way to do that might be for Congress to pass a law that prohibits the largest ten banks from participating in the FDIC. That would transform the entire financial system, but Wall Street would hate it because it would yank their honey-pot.
Because Wall Street’s Mayor Michael Bloomberg made his roughly $20 billion fortune by serving the mega-banks, this editorial from Bloomberg News constituted remarkable news, in and of itself.
One other study of “Valuation in Systemic Risk at U.S. Banks During 1974-2010” found that the taxpayer-subsidy was $300 billion in 2008 but supposedly near zero after 2009. Matt Levine linked to that study on 7 May 2012 under the optimistic headline “Markets Are Telling Us That Too Big To Fail Is All Better.” The editors at Bloomberg ignored that study. The financial expert Yves Smith, when I called to her attention that that study, which she had relied upon, zeroed-out the megabanks’ systemic risk after 2009, wrote in reply, “I didn’t realize they were doing this using bank equity volatility as the proxy. He did not make clear how he was going to do about it in the talk. Methodologically, that’s crap.” So, Bloomberg’s editors have issued the only reliable study that has ever been done on the size of this important subsidy.
Bloomberg’s editors were courageous to do this, and they are already getting flak for having done it. On February 24th, they issued a follow-up, “Remember That $83 Billion Bank Subsidy? We Weren’t Kidding,” and explained in more detail how they had calculated this $83 billion sum. They explained why the $83 billion estimate was far likelier an underestimate than an overestimate.
Anyway, this subsidy is a major problem, probably at least as big as the sequester, which it might have helped to cause.
On February 28th, Yves Smith posted at her “Naked Capitalism” website, “Occupy the SEC, Frustrated With Regulatory Defiance of Volcker Rule Implementation Requirements, Sues Fed, SEC, CFTC, FDIC and Treasury,” and she linked to a new legal filing in the Eastern District of New York “over the failure of the relevant financial regulators to issue a Final Rulemaking as stipulated in Dodd Frank.” She summarized what the evidence clearly showed: “Not only are the[y] out of compliance [with the Dodd-Frank Act’s Volcker Rule provision for these regulators to draft rules restricting the mega-banks from gambling with investors’ money], they [the regulatory agencies over the mega-banks] appear to have no intent of finalizing the Volcker Rule.” She went on to say: “Much of the public still fails to understand the degree to which the ruling classes no longer represent their interests. Oh, they may resent the banks, and they may also hate Congress, but most people deeply need to believe they live in a system that is fair and where business and political leaders (some if not all) still deserve respect and admiration.”
Meanwhile, click here to find out why Republicans want the sequester, even though economists, the International Monetary Fund, and even the Congress’s own research service (the Congressional Research Service), have amply warned that it will be destructive to the nation.
Comment by Washington’s Blog: President Obama says that sequestration is the GOP’s fault. But Bob Woodward and YouTube reveal that Obama supported sequestration from day one.
Read potential solutions to the sequestration debate.
- See more at: http://www.globalresearch.ca/this-years-subsidy-to-wall-street-the-amount-of-this-years-sequester-cuts/5324725#sthash.gdHr29FD.dpuf
This Year’s Subsidy to Wall Street is Equal to the Amount of This Year’s Sequester Cuts
By Eric Zuesse
Global Research, March 01, 2013
Washington's Blog
Since we’ve bailed out the 10 largest banks $83 billion this year alone, should they give it back to us by paying into the U.S. Treasury the amount of this year’s sequester? After all, it’s the same amount.
On February 20th, Bloomberg News editors headlined, “Why Should Taxpayers Give Big Banks $83 Billion a Year?” and issued the first-ever thorough and current analysis of the taxpayer-subsidy to the Wall Street mega-banks. They found that this subsidy is $83 billion this year, but they made no note of the fact that this amount is only $2 billion less than this year’s sequester cuts are estimated to be, so that all that would need to be done, in order to avoid those cuts, would be to have those mega-banks that we bail out every year forego their subsidy from taxpayers, for just one year. Unfortunately, this would be easier said than done.
That $83 billion subsidy this year is, according to Bloomberg’s, also approximately the amount of profits that those banks are “earning” this year. So, if the mega-banks wouldn’t refund it out of what we gave them last year, then they could just refund it by paying to us – who, after all, bailed out their stockholders enormously in 2009 – the “profits” that they made this year.
The editors at Bloomberg News (hardly a bunch of populists) calculated this $83 billion figure based upon their analysis of the figures in a sadly ignored but rigorous study that had been done by IMF economists, a study that had been issued months back, in May 2012, and which was titled “Quantifying Structural Subsidy Values for Systemically Important Financial Institutions.” As Bloomberg’s editors summarized the reason for this ongoing federal subsidy: “The banks that are potentially the most dangerous can borrow at lower rates, because creditors perceive them as too big to fail,” due to the special Government backing for too-big-to-fail (TBTF) institutions.
The taxpayer-funded annual subsidy to these TBTF banks has never before been calculated as to its actual annual dollar-value, but this rigorous IMF study finally provided the means for doing that. Bloomberg’s summarizes: “What if we told you that, by our calculations, the largest U.S. banks aren’t really profitable at all? What if the billions of dollars they allegedly earn for their shareholders were almost entirely a gift from U.S. taxpayers?”
“The top five banks – JP Morgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. – account for $64 billion of the total subsidy, an amount roughly equal to their typical annual profits.”
This $83 billion, in other words, is the current value of the annual subsidy received by America’s 10 mega-banks, from our Government’s special treatment of them as “Systemically Important Financial Institutions” (i.e., fully guaranteed by U.S. taxpayers, irrespective of the normal $250,000-per-account limit in savings and checking accounts), or TBTF institutions, which the other 7,053 (out of the total 7,063 FDIC-insured) banks are not – other banks can fail without destroying the U.S. economy. In a certain sense, these are the banks where the super-rich can enjoy FDIC protection without that $250,000-per-account limit, and can even gamble under the protection of that comforting umbrella.
The Dallas Federal Reserve has issued a superb study showing that even at the peak of the crash, when the highest percentage of loans were in arrears, which had occurred around January 2010, only around 3% of loans were in arrears at banks that had “less than $1 billion” in assets, whereas banks that had “over $250 billion” (and only 12 banks are in that august category) were experiencing around 12% of loans in arrears. The following chart on page 7 of the Dallas Fed’s study showed that the 2008 crash was virtually entirely a Wall Street (or mega-bank) phenomenon:
The big-ten banks are the ones that benefited from that $83 billion handout this year, and, as was noted, they did so because they are TBTF. Because these banks (basically the top line there) are TBTF, their top executives can have them engage in, essentially, high-risk gambling (such as “no-doc” or “liars” loans) with the vast sums that are under their command, since the people who buy stock in these banks know in advance that if these high-risk bets fail, then U.S. taxpayers (we) will eat their losses. Consequently, the only incentive for CEOs of these banks is to increase their bank’s size even more, so as to increase their bonuses even bigger, since these executives don’t really need to worry about risk (except as a PR issue, perhaps, but they hire PR people – including politicians – to deal with that).
When Wall Street got bailed out to the tune of trillions of dollars by the U.S. Treasury, and the Federal Reserve (and with Fannie Mae, and Freddie Mac serving as a conduit between them and Wall Street), this left very little remaining for the Government to spend on the rest of the economy, such as infrastructure and education (the kinds of things that we supposedly pay taxes for), which might be why the recovery has been so slow, from the 2008 crash that was caused by Wall Street’s federally-insured gambling with the trillions that they control of everybody else’s money. If so, then this sequester is a result of Wall Street’s failed bets: instead of cutting back on the subsidy to Wall Street, the politicians in Washington have chosen to cut back on government services to the public. Politicians like Barack Obama and his team, and the George W. Bush team before them, and all of the supporters of TBTF in Congress, made the basic choice to subsidize the mega-banks instead of the needy or the deserving, and this is also why the “Top 1% Got 93% of Income Growth as Rich-Poor Gap Widened” under Obama. It really is a plutocracy; that’s precisely the way today’s USA is functioning – no doubt about it.
There were other possible ways of dealing with the 2008 crash than to continue to throw trillions of dollars at Wall Street, but that is what “our” Government did, and continues to do, because, essentially, this is what the super-rich pay them to do.
Bloomberg’s $83 billion/year finding here is so vast that it suggests that the U.S. is a crony-capitalism, hardly an authentic capitalism. The “cronies” are these giant Wall Street firms and their “counterparties” (namely, each other, plus Fannie & Freddie and the government officials and lobbyists, who all serve Wall Street), and also the stockholders and bondholders in these huge financial institutions: the mega-banks that would otherwise be “cleaned out” but for the TBTF backing they receive from U.S. taxpayers. We’re getting reamed by Wall Street and K Street, and this is the first estimate of the actual circumference of that reaming. The Dallas Fed’s study says that this reaming must stop, and that, despite what the Federal Reserve itself says, the mega-banks must be broken up. The easiest way to do that might be for Congress to pass a law that prohibits the largest ten banks from participating in the FDIC. That would transform the entire financial system, but Wall Street would hate it because it would yank their honey-pot.
Because Wall Street’s Mayor Michael Bloomberg made his roughly $20 billion fortune by serving the mega-banks, this editorial from Bloomberg News constituted remarkable news, in and of itself.
One other study of “Valuation in Systemic Risk at U.S. Banks During 1974-2010” found that the taxpayer-subsidy was $300 billion in 2008 but supposedly near zero after 2009. Matt Levine linked to that study on 7 May 2012 under the optimistic headline “Markets Are Telling Us That Too Big To Fail Is All Better.” The editors at Bloomberg ignored that study. The financial expert Yves Smith, when I called to her attention that that study, which she had relied upon, zeroed-out the megabanks’ systemic risk after 2009, wrote in reply, “I didn’t realize they were doing this using bank equity volatility as the proxy. He did not make clear how he was going to do about it in the talk. Methodologically, that’s crap.” So, Bloomberg’s editors have issued the only reliable study that has ever been done on the size of this important subsidy.
Bloomberg’s editors were courageous to do this, and they are already getting flak for having done it. On February 24th, they issued a follow-up, “Remember That $83 Billion Bank Subsidy? We Weren’t Kidding,” and explained in more detail how they had calculated this $83 billion sum. They explained why the $83 billion estimate was far likelier an underestimate than an overestimate.
Anyway, this subsidy is a major problem, probably at least as big as the sequester, which it might have helped to cause.
On February 28th, Yves Smith posted at her “Naked Capitalism” website, “Occupy the SEC, Frustrated With Regulatory Defiance of Volcker Rule Implementation Requirements, Sues Fed, SEC, CFTC, FDIC and Treasury,” and she linked to a new legal filing in the Eastern District of New York “over the failure of the relevant financial regulators to issue a Final Rulemaking as stipulated in Dodd Frank.” She summarized what the evidence clearly showed: “Not only are the[y] out of compliance [with the Dodd-Frank Act’s Volcker Rule provision for these regulators to draft rules restricting the mega-banks from gambling with investors’ money], they [the regulatory agencies over the mega-banks] appear to have no intent of finalizing the Volcker Rule.” She went on to say: “Much of the public still fails to understand the degree to which the ruling classes no longer represent their interests. Oh, they may resent the banks, and they may also hate Congress, but most people deeply need to believe they live in a system that is fair and where business and political leaders (some if not all) still deserve respect and admiration.”
Meanwhile, click here to find out why Republicans want the sequester, even though economists, the International Monetary Fund, and even the Congress’s own research service (the Congressional Research Service), have amply warned that it will be destructive to the nation.
Comment by Washington’s Blog: President Obama says that sequestration is the GOP’s fault. But Bob Woodward and YouTube reveal that Obama supported sequestration from day one.
Read potential solutions to the sequestration debate.
- See more at: http://www.globalresearch.ca/this-years-subsidy-to-wall-street-the-amount-of-this-years-sequester-cuts/5324725#sthash.gdHr29FD.dpuf
This Year’s Subsidy to Wall Street is Equal to the Amount of This Year’s Sequester Cuts
By Eric Zuesse
Global Research, March 01, 2013
Washington's Blog
Since we’ve bailed out the 10 largest banks $83 billion this year alone, should they give it back to us by paying into the U.S. Treasury the amount of this year’s sequester? After all, it’s the same amount.
On February 20th, Bloomberg News editors headlined, “Why Should Taxpayers Give Big Banks $83 Billion a Year?” and issued the first-ever thorough and current analysis of the taxpayer-subsidy to the Wall Street mega-banks. They found that this subsidy is $83 billion this year, but they made no note of the fact that this amount is only $2 billion less than this year’s sequester cuts are estimated to be, so that all that would need to be done, in order to avoid those cuts, would be to have those mega-banks that we bail out every year forego their subsidy from taxpayers, for just one year. Unfortunately, this would be easier said than done.
That $83 billion subsidy this year is, according to Bloomberg’s, also approximately the amount of profits that those banks are “earning” this year. So, if the mega-banks wouldn’t refund it out of what we gave them last year, then they could just refund it by paying to us – who, after all, bailed out their stockholders enormously in 2009 – the “profits” that they made this year.
The editors at Bloomberg News (hardly a bunch of populists) calculated this $83 billion figure based upon their analysis of the figures in a sadly ignored but rigorous study that had been done by IMF economists, a study that had been issued months back, in May 2012, and which was titled “Quantifying Structural Subsidy Values for Systemically Important Financial Institutions.” As Bloomberg’s editors summarized the reason for this ongoing federal subsidy: “The banks that are potentially the most dangerous can borrow at lower rates, because creditors perceive them as too big to fail,” due to the special Government backing for too-big-to-fail (TBTF) institutions.
The taxpayer-funded annual subsidy to these TBTF banks has never before been calculated as to its actual annual dollar-value, but this rigorous IMF study finally provided the means for doing that. Bloomberg’s summarizes: “What if we told you that, by our calculations, the largest U.S. banks aren’t really profitable at all? What if the billions of dollars they allegedly earn for their shareholders were almost entirely a gift from U.S. taxpayers?”
“The top five banks – JP Morgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. – account for $64 billion of the total subsidy, an amount roughly equal to their typical annual profits.”
This $83 billion, in other words, is the current value of the annual subsidy received by America’s 10 mega-banks, from our Government’s special treatment of them as “Systemically Important Financial Institutions” (i.e., fully guaranteed by U.S. taxpayers, irrespective of the normal $250,000-per-account limit in savings and checking accounts), or TBTF institutions, which the other 7,053 (out of the total 7,063 FDIC-insured) banks are not – other banks can fail without destroying the U.S. economy. In a certain sense, these are the banks where the super-rich can enjoy FDIC protection without that $250,000-per-account limit, and can even gamble under the protection of that comforting umbrella.
The Dallas Federal Reserve has issued a superb study showing that even at the peak of the crash, when the highest percentage of loans were in arrears, which had occurred around January 2010, only around 3% of loans were in arrears at banks that had “less than $1 billion” in assets, whereas banks that had “over $250 billion” (and only 12 banks are in that august category) were experiencing around 12% of loans in arrears. The following chart on page 7 of the Dallas Fed’s study showed that the 2008 crash was virtually entirely a Wall Street (or mega-bank) phenomenon:
The big-ten banks are the ones that benefited from that $83 billion handout this year, and, as was noted, they did so because they are TBTF. Because these banks (basically the top line there) are TBTF, their top executives can have them engage in, essentially, high-risk gambling (such as “no-doc” or “liars” loans) with the vast sums that are under their command, since the people who buy stock in these banks know in advance that if these high-risk bets fail, then U.S. taxpayers (we) will eat their losses. Consequently, the only incentive for CEOs of these banks is to increase their bank’s size even more, so as to increase their bonuses even bigger, since these executives don’t really need to worry about risk (except as a PR issue, perhaps, but they hire PR people – including politicians – to deal with that).
When Wall Street got bailed out to the tune of trillions of dollars by the U.S. Treasury, and the Federal Reserve (and with Fannie Mae, and Freddie Mac serving as a conduit between them and Wall Street), this left very little remaining for the Government to spend on the rest of the economy, such as infrastructure and education (the kinds of things that we supposedly pay taxes for), which might be why the recovery has been so slow, from the 2008 crash that was caused by Wall Street’s federally-insured gambling with the trillions that they control of everybody else’s money. If so, then this sequester is a result of Wall Street’s failed bets: instead of cutting back on the subsidy to Wall Street, the politicians in Washington have chosen to cut back on government services to the public. Politicians like Barack Obama and his team, and the George W. Bush team before them, and all of the supporters of TBTF in Congress, made the basic choice to subsidize the mega-banks instead of the needy or the deserving, and this is also why the “Top 1% Got 93% of Income Growth as Rich-Poor Gap Widened” under Obama. It really is a plutocracy; that’s precisely the way today’s USA is functioning – no doubt about it.
There were other possible ways of dealing with the 2008 crash than to continue to throw trillions of dollars at Wall Street, but that is what “our” Government did, and continues to do, because, essentially, this is what the super-rich pay them to do.
Bloomberg’s $83 billion/year finding here is so vast that it suggests that the U.S. is a crony-capitalism, hardly an authentic capitalism. The “cronies” are these giant Wall Street firms and their “counterparties” (namely, each other, plus Fannie & Freddie and the government officials and lobbyists, who all serve Wall Street), and also the stockholders and bondholders in these huge financial institutions: the mega-banks that would otherwise be “cleaned out” but for the TBTF backing they receive from U.S. taxpayers. We’re getting reamed by Wall Street and K Street, and this is the first estimate of the actual circumference of that reaming. The Dallas Fed’s study says that this reaming must stop, and that, despite what the Federal Reserve itself says, the mega-banks must be broken up. The easiest way to do that might be for Congress to pass a law that prohibits the largest ten banks from participating in the FDIC. That would transform the entire financial system, but Wall Street would hate it because it would yank their honey-pot.
Because Wall Street’s Mayor Michael Bloomberg made his roughly $20 billion fortune by serving the mega-banks, this editorial from Bloomberg News constituted remarkable news, in and of itself.
One other study of “Valuation in Systemic Risk at U.S. Banks During 1974-2010” found that the taxpayer-subsidy was $300 billion in 2008 but supposedly near zero after 2009. Matt Levine linked to that study on 7 May 2012 under the optimistic headline “Markets Are Telling Us That Too Big To Fail Is All Better.” The editors at Bloomberg ignored that study. The financial expert Yves Smith, when I called to her attention that that study, which she had relied upon, zeroed-out the megabanks’ systemic risk after 2009, wrote in reply, “I didn’t realize they were doing this using bank equity volatility as the proxy. He did not make clear how he was going to do about it in the talk. Methodologically, that’s crap.” So, Bloomberg’s editors have issued the only reliable study that has ever been done on the size of this important subsidy.
Bloomberg’s editors were courageous to do this, and they are already getting flak for having done it. On February 24th, they issued a follow-up, “Remember That $83 Billion Bank Subsidy? We Weren’t Kidding,” and explained in more detail how they had calculated this $83 billion sum. They explained why the $83 billion estimate was far likelier an underestimate than an overestimate.
Anyway, this subsidy is a major problem, probably at least as big as the sequester, which it might have helped to cause.
On February 28th, Yves Smith posted at her “Naked Capitalism” website, “Occupy the SEC, Frustrated With Regulatory Defiance of Volcker Rule Implementation Requirements, Sues Fed, SEC, CFTC, FDIC and Treasury,” and she linked to a new legal filing in the Eastern District of New York “over the failure of the relevant financial regulators to issue a Final Rulemaking as stipulated in Dodd Frank.” She summarized what the evidence clearly showed: “Not only are the[y] out of compliance [with the Dodd-Frank Act’s Volcker Rule provision for these regulators to draft rules restricting the mega-banks from gambling with investors’ money], they [the regulatory agencies over the mega-banks] appear to have no intent of finalizing the Volcker Rule.” She went on to say: “Much of the public still fails to understand the degree to which the ruling classes no longer represent their interests. Oh, they may resent the banks, and they may also hate Congress, but most people deeply need to believe they live in a system that is fair and where business and political leaders (some if not all) still deserve respect and admiration.”
Meanwhile, click here to find out why Republicans want the sequester, even though economists, the International Monetary Fund, and even the Congress’s own research service (the Congressional Research Service), have amply warned that it will be destructive to the nation.
Comment by Washington’s Blog: President Obama says that sequestration is the GOP’s fault. But Bob Woodward and YouTube reveal that Obama supported sequestration from day one.
Read potential solutions to the sequestration debate.
- See more at: http://www.globalresearch.ca/this-years-subsidy-to-wall-street-the-amount-of-this-years-sequester-cuts/5324725#sthash.gdHr29FD.dpuf
Futures brokers say CFTC rule could threaten their business
It would be an "industry-killing rule"
By Silla Brush
February 16, 2013 •
Futures brokerages say a proposed U.S. rule meant to protect customers’ money in a collapse like MF Global Holdings Ltd.’s bankruptcy may end up driving clients from the market and companies out of business.
Brokerages would be severely harmed by a Commodity Futures Trading Commission requirement that they set aside additional money to cover customers’ collateral deficits, the Futures Industry Association and two Chicago firms, Rosenthal Collins Group LLC and RJ O’Brien & Associates LLC, have told the agency.
The change would mean that some brokerages “will not be able to survive,” and may cost the industry and clients tens of billions of dollars, Mike Dawley, a Goldman Sachs Group Inc. managing director, said at a CFTC roundtable Feb. 5. “We can’t underestimate and under-appreciate how big of a deal that is,” Dawley said.
“If it were to survive, it would be an industry-killing rule,” Joe Guinan, chairman and chief executive officer of Advantage Futures LLC, said yesterday in a telephone interview.
Public comments are due by today on the proposal, which is part of a series of regulatory changes designed to increase confidence in the futures industry after MF Global collapsed in 2011 and reported a shortfall of $1.6 billion in customer funds. Russell Wasendorf Sr., founder and CEO of Peregrine Financial Group Inc., was sentenced Jan. 31 to 50 years in prison after being convicted of stealing more than $215 million from customers of that failed brokerage.
Ensuring Segregation
The CFTC measure, released in November, includes tougher auditing standards and disclosure of brokerage risks to clients. The rules also describe how self-regulatory organizations including the National Futures Association and CME Group Inc. should monitor brokerages to ensure customer funds are segregated.
To protect customer funds, the CFTC proposed a change in how collateral is kept. Futures customers back their trades by putting up collateral, which can be kept in a commingled account. When a position moves against them, clients must post additional collateral. Futures brokerages typically demand collateral at the beginning of the day, which is then posted during the course of the day.
Under the proposal, futures brokerages must at all times of the day keep so-called residual interest in an account to cover all deficits from their customers. The CFTC said the proposal would avoid the potential that brokerages would use end-of-day balancing to “obscure a shortfall.”
That change would tie up additional capital and would probably lead to increased costs for clients, according to the brokerages.
‘Jeopardizing’ Model
“This is a capital- and liquidity-intensive business with very low returns,” Gary DeWaal of consulting firm Gary DeWaal and Associates LLC and former general counsel at Newedge USA LLC, said in a telephone interview said yesterday. “The CFTC is jeopardizing the existence of the model.”
The rule would lead brokers to increase capital or margins to be current with the regulation at all times, Theodore L. Johnson, president and CEO of Frontier Futures Inc., a brokerage based in Cedar Rapids, Iowa. The impact of the rule “may be to force a number of small to mid-sized” brokers out of the market, Johnson said yesterday in a letter to the CFTC.
The proposal will hurt brokerages not affiliated with banks and those that have farmers and ranchers as customers, Rosenthal Collins executives said in a letter dated Feb. 12.
Non-bank brokerages had “little interest” in taking on MF Global customers who were farmers or ranchers, Leslie Rosenthal, managing member, J. Robert Collins, managing member, and Scott Gordon, chairman and CEO, said in the letter.
The CFTC hasn’t set a date to complete the regulation.
Bloomberg News
http://www.futuresmag.com/2013/02/16/futures-brokers-say-cftc-rule-could-threaten-their