Hidden Money – Mike Maloney

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Eurozone Banks Stop Lending To Each Other

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The eurozone banks have stopped lending to each other in a clear sign that mistrust has entered the system. We already know that Deutsche Bank is 60 times over leveraged with a massive derivative exposure. As Irish economist Karl Whelan put it best “At any point in time, this thing can blow up”.

euroEUROZONE banks are refusing to lend to peers in other countries in the common currency bloc, signalling a worrying fall in confidence that appears to have worsened since the Cyprus bailout earlier this year, data analysed by Reuters shows.
European Central Bank data shows the share of inter-bank funding that crosses borders within the eurozone dropped by one-third, to just 22.5pc in April from 34.5pc at the start of 2008.

The silent retreat to within national borders is most pronounced in the troubled economies of southern Europe, but is even seen in Germany.

Cross-border inter-bank funding of German banks was down by 11.2pc year-on-year in March, equivalent to banks elsewhere in Europe withdrawing €29.5bn from its biggest economy.

Eurozone banks’ stock of lending to their Greek peers was a startling 68pc lower in April than in the same month a year earlier, equivalent to €18bn withdrawn. In Portugal, the decrease was roughly a quarter.

The ECB figures include lending between separate banks in different eurozone countries and within a single banking group to its cross-border units.

CYPRUS

Faltering confidence may be responsible for the reduction in cross-border lending, due in part to a bailout of Cyprus that closed one of its two main banks.

Lobbyists for the banking industry also say a soon-to-be-finalised EU law making it possible to impose losses, or “haircuts”, on bank creditors could hurt confidence.

“At any point in time, this thing can blow up,” said Karl Whelan, an economist at University College Dublin, warning of a potential spillover on to regular savers.

“We are relying on an absence of panic among depositors while we sit around and work out who to haircut. There is a risk of large-scale deposit withdrawals in Spanish banks, in particular. They are the obvious tinder box.”

A spokesman for the European Central Bank countered that the trend was due to a general shift towards secured lending and funding via retail deposits. Banks were deleveraging, which increases the importance of stable retail deposits. (Reuters)

Source: Irish Independent

ANALYSIS: WHY THE REAL EU FUHRER IS NOW MARIO DRAGHI

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During the week the Telegraph broke the story of how the ESM will be used to bailout broke banks. The article from the Slog explores how all the power now resides with Draghi.

ANALYSIS: WHY THE REAL EU FUHRER IS NOW MARIO DRAGHI.

China’s Credit Bubble Unprecedented

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Whereas China may have helped to save the world in 2008, its ability to help global GDP has slowly been strangled by its own massive debt levels. Corporate and private sector debt has grown out of all proportions severely limiting China’s ability to grow its way out of its debt problems.  It’s not just Western banks we need worry about.

China’s shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned. Fitch warned that wealth products worth $2 trillion of lending are in reality a “hidden second balance sheet” for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses.

The agency said the scale of credit was so extreme that the country would find it very hard to grow its way out of the excesses as in past episodes, implying tougher times ahead.

“The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation,” said Charlene Chu, the agency’s senior director in Beijing.

“There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling,” she told The Daily Telegraph.

While the non-performing loan rate of the banks may look benign at just 1pc, this has become irrelevant as trusts, wealth-management funds, offshore vehicles and other forms of irregular lending make up over half of all new credit. “It means nothing if you can off-load any bad asset you want. A lot of the banking exposure to property is not booked as property,” she said.

Concerns are rising after a string of upsets in Quingdao, Ordos, Jilin and elsewhere, in so-called trust products, a $1.4 trillion segment of the shadow banking system.

Bank Everbright defaulted on an interbank loan 10 days ago amid wild spikes in short-term “Shibor” borrowing rates, a sign that liquidity has suddenly dried up. “Typically stress starts in the periphery and moves to the core, and that is what we are already seeing with defaults in trust products,” she said.

Fitch warned that wealth products worth $2 trillion of lending are in reality a “hidden second balance sheet” for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses.

This niche is the epicentre of risk. Half the loans must be rolled over every three months, and another 25pc in less than six months. This has echoes of Northern Rock, Lehman Brothers and others that came to grief in the West on short-term liabilities when the wholesale capital markets froze.

Mrs Chu said the banks had been forced to park over $3 trillion in reserves at the central bank, giving them a “massive savings account that can be drawn down” in a crisis, but this may not be enough to avert trouble given the sheer scale of the lending boom.

Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis.

“They have replicated the entire US commercial banking system in five years,” she said.

The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. “This is beyond anything we have ever seen before in a large economy. We don’t know how this will play out. The next six months will be crucial,” she said.

The agency downgraded China‘s long-term currency rating to AA- debt in April but still thinks the government can handle any banking crisis, however bad. “The Chinese state has a lot of firepower. It is very able and very willing to support the banking sector. The real question is what this means for growth, and therefore for social and political risk,” said Mrs Chu.

“There is no way they can grow out of their asset problems as they did in the past. We think this will be very different from the banking crisis in the late 1990s. With credit at 200pc of GDP, the numerator is growing twice as fast as the denominator. You can’t grow out of that.”

The authorities have been trying to manage a soft-landing, deploying loan curbs and a high reserve ratio requirement (RRR) for banks to halt property speculation. The home price to income ratio has reached 16 to 18 in many cities, shutting workers out of the market. Shadow banking has plugged the gap for much of the last two years.

However, a new problem has emerged as the economic efficiency of credit collapses. The extra GDP growth generated by each extra yuan of loans has dropped from 0.85 to 0.15 over the last four years, a sign of exhaustion.

Wei Yao from Societe Generale says the debt service ratio of Chinese companies has reached 30pc of GDP – the typical threshold for financial crises — and many will not be able to pay interest or repay principal. She warned that the country could be on the verge of a “Minsky Moment”, when the debt pyramid collapses under its own weight. “The debt snowball is getting bigger and bigger, without contributing to real activity,” she said.

The latest twist is sudden stress in the overnight lending markets. “We believe the series of policy tightening measures in the past three months have reached critical mass, such that deleveraging in the banking sector is happening. Liquidity tightening can be very damaging to a highly leveraged economy,” said Zhiwei Zhang from Nomura.

“There is room to cut interest rates and the reserve ratio in the second half,” wrote a front-page editorial today in China Securities Journal on Friday. The article is the first sign that the authorities are preparing to change tack, shifting to a looser stance after a drizzle of bad data over recent weeks.

The journal said total credit in China’s financial system may be as high as 221pc of GDP, jumping almost eightfold over the last decade, and warned that companies will have to fork out $1 trillion in interest payments alone this year. “Chinese corporate debt burdens are much higher than those of other economies. Much of the liquidity is being used to repay debt and not to finance output,” it said.

It also flagged worries over an exodus of hot money once the US Federal Reserve starts tightening. “China will face large-scale capital outflows if there is an exit from quantitative easing and the dollar strengthens,” it wrote.

The journal said foreign withdrawals from Chinese equity funds were the highest since early 2008 in the week up to June 5, and withdrawals from Hong Kong funds were the most in a decade.

Source: Irish Independent

Matt Taibbi: Everything Is Rigged

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I think we are all beginning to draw the same conclusion as Matt Taibbi.

rollingstoneConspiracy theorists of the world, believers in the hidden hands of the Rothschilds and the Masons and the Illuminati, we skeptics owe you an apology. You were right. The players may be a little different, but your basic premise is correct: The world is a rigged game. We found this out in recent months, when a series of related corruption stories spilled out of the financial sector, suggesting the world’s largest banks may be fixing the prices of, well, just about everything.

You may have heard of the Libor scandal, in which at least three – and perhaps as many as 16 – of the name-brand too-big-to-fail banks have been manipulating global interest rates, in the process messing around with the prices of upward of $500 trillion (that’s trillion, with a “t”) worth of financial instruments. When that sprawling con burst into public view last year, it was easily the biggest financial scandal in history – MIT professor Andrew Lo even said it “dwarfs by orders of magnitude any financial scam in the history of markets.”

That was bad enough, but now Libor may have a twin brother. Word has leaked out that the London-based firm ICAP, the world’s largest broker of interest-rate swaps, is being investigated by American authorities for behavior that sounds eerily reminiscent of the Libor mess. Regulators are looking into whether or not a small group of brokers at ICAP may have worked with up to 15 of the world’s largest banks to manipulate ISDAfix, a benchmark number used around the world to calculate the prices of interest-rate swaps.

Interest-rate swaps are a tool used by big cities, major corporations and sovereign governments to manage their debt, and the scale of their use is almost unimaginably massive. It’s about a $379 trillion market, meaning that any manipulation would affect a pile of assets about 100 times the size of the United States federal budget.

It should surprise no one that among the players implicated in this scheme to fix the prices of interest-rate swaps are the same megabanks – including Barclays, UBS, Bank of America, JPMorgan Chase and the Royal Bank of Scotland – that serve on the Libor panel that sets global interest rates. In fact, in recent years many of these banks have already paid multimillion-dollar settlements for anti-competitive manipulation of one form or another (in addition to Libor, some were caught up in an anti-competitive scheme, detailed in Rolling Stone last year, to rig municipal-debt service auctions). Though the jumble of financial acronyms sounds like gibberish to the layperson, the fact that there may now be price-fixing scandals involving both Libor and ISDAfix suggests a single, giant mushrooming conspiracy of collusion and price-fixing hovering under the ostensibly competitive veneer of Wall Street culture.

The Scam Wall Street Learned From the Mafia

Why? Because Libor already affects the prices of interest-rate swaps, making this a manipulation-on-manipulation situation. If the allegations prove to be right, that will mean that swap customers have been paying for two different layers of price-fixing corruption. If you can imagine paying 20 bucks for a crappy PB&J because some evil cabal of agribusiness companies colluded to fix the prices of both peanuts and peanut butter, you come close to grasping the lunacy of financial markets where both interest rates and interest-rate swaps are being manipulated at the same time, often by the same banks.

“It’s a double conspiracy,” says an amazed Michael Greenberger, a former director of the trading and markets division at the Commodity Futures Trading Commission and now a professor at the University of Maryland. “It’s the height of criminality.”

Even the courts came down on the side of the market riggers, saying it was your fault if you were a victim. Thats like telling someone who got mugged “well you shouldn’t have had money in your pocket in the first place”.

The bad news didn’t stop with swaps and interest rates. In March, it also came out that two regulators – the CFTC here in the U.S. and the Madrid-based International Organization of Securities Commissions – were spurred by the Libor revelations to investigate the possibility of collusive manipulation of gold and silver prices. “Given the clubby manipulation efforts we saw in Libor benchmarks, I assume other benchmarks – many other benchmarks – are legit areas of inquiry,” CFTC Commissioner Bart Chilton said.

But the biggest shock came out of a federal courtroom at the end of March – though if you follow these matters closely, it may not have been so shocking at all – when a landmark class-action civil lawsuit against the banks for Libor-related offenses was dismissed. In that case, a federal judge accepted the banker-defendants’ incredible argument: If cities and towns and other investors lost money because of Libor manipulation, that was their own fault for ever thinking the banks were competing in the first place.

“A farce,” was one antitrust lawyer’s response to the eyebrow-raising dismissal.

“Incredible,” says Sylvia Sokol, an attorney for Constantine Cannon, a firm that specializes in antitrust cases.

All of these stories collectively pointed to the same thing: These banks, which already possess enormous power just by virtue of their financial holdings – in the United States, the top six banks, many of them the same names you see on the Libor and ISDAfix panels, own assets equivalent to 60 percent of the nation’s GDP – are beginning to realize the awesome possibilities for increased profit and political might that would come with colluding instead of competing. Moreover, it’s increasingly clear that both the criminal justice system and the civil courts may be impotent to stop them, even when they do get caught working together to game the system.

If true, that would leave us living in an era of undisguised, real-world conspiracy, in which the prices of currencies, commodities like gold and silver, even interest rates and the value of money itself, can be and may already have been dictated from above. And those who are doing it can get away with it. Forget the Illuminati – this is the real thing, and it’s no secret. You can stare right at it, anytime you want.

We have given the bankers the opportunity to set markets based on their own data.

The banks found a loophole, a basic flaw in the machine. Across the financial system, there are places where prices or official indices are set based upon unverified data sent in by private banks and financial companies. In other words, we gave the players with incentives to game the system institutional roles in the economic infrastructure.

Libor, which measures the prices banks charge one another to borrow money, is a perfect example, not only of this basic flaw in the price-setting system but of the weakness in the regulatory framework supposedly policing it. Couple a voluntary reporting scheme with too-big-to-fail status and a revolving-door legal system, and what you get is unstoppable corruption.

Every morning, 18 of the world’s biggest banks submit data to an office in London about how much they believe they would have to pay to borrow from other banks. The 18 banks together are called the “Libor panel,” and when all of these data from all 18 panelist banks are collected, the numbers are averaged out. What emerges, every morning at 11:30 London time, are the daily Libor figures.

Banks submit numbers about borrowing in 10 different currencies across 15 different time periods, e.g., loans as short as one day and as long as one year. This mountain of bank-submitted data is used every day to create benchmark rates that affect the prices of everything from credit cards to mortgages to currencies to commercial loans (both short- and long-term) to swaps.

The Libor rigging was staggering and the fines when dished out were minor.

Hundreds of similar exchanges were uncovered when regulators like Britain’s Financial Services Authority and the U.S. Justice Department started burrowing into the befouled entrails of Libor. The documentary evidence of anti-competitive manipulation they found was so overwhelming that, to read it, one almost becomes embarrassed for the banks. “It’s just amazing how Libor fixing can make you that much money,” chirped one yen trader. “Pure manipulation going on,” wrote another.

………….

Michael Hausfeld of Hausfeld LLP, one of the lead lawyers for the plaintiffs in this Libor suit, declined to comment specifically on the dismissal. But he did talk about the significance of the Libor case and other manipulation cases now in the pipeline.

“It’s now evident that there is a ubiquitous culture among the banks to collude and cheat their customers as many times as they can in as many forms as they can conceive,” he said. “And that’s not just surmising. This is just based upon what they’ve been caught at.”

Greenberger says the lack of serious consequences for the Libor scandal has only made other kinds of manipulation more inevitable. “There’s no therapy like sending those who are used to wearing Gucci shoes to jail,” he says. “But when the attorney general says, ‘I don’t want to indict people,’ it’s the Wild West. There’s no law.”

After Libor rigging, a new market manipulation is coming to light, interest rate swaps.

The problem is, a number of markets feature the same infrastructural weakness that failed in the Libor mess. In the case of interest-rate swaps and the ISDAfix benchmark, the system is very similar to Libor, although the investigation into these markets reportedly focuses on some different types of improprieties.

Though interest-rate swaps are not widely understood outside the finance world, the root concept actually isn’t that hard. If you can imagine taking out a variable-rate mortgage and then paying a bank to make your loan payments fixed, you’ve got the basic idea of an interest-rate swap.

In practice, it might be a country like Greece or a regional government like Jefferson County, Alabama, that borrows money at a variable rate of interest, then later goes to a bank to “swap” that loan to a more predictable fixed rate. In its simplest form, the customer in a swap deal is usually paying a premium for the safety and security of fixed interest rates, while the firm selling the swap is usually betting that it knows more about future movements in interest rates than its customers.

Prices for interest-rate swaps are often based on ISDAfix, which, like Libor, is yet another of these privately calculated benchmarks. ISDAfix’s U.S. dollar rates are published every day, at 11:30 a.m. and 3:30 p.m., after a gang of the same usual-suspect megabanks (Bank of America, RBS, Deutsche, JPMorgan Chase, Barclays, etc.) submits information about bids and offers for swaps.

……….

The idea that prices in a $379 trillion market could be dependent on a desk of about 20 guys in New Jersey should tell you a lot about the absurdity of our financial infrastructure. The whole thing, in fact, has a darkly comic element to it. “It’s almost hilarious in the irony,” says David Frenk, director of research for Better Markets, a financial-reform advocacy group, “that they called it ISDAfix.”

So what about other market manipulation?

After scandals involving libor and, perhaps, ISDAfix, the question that should have everyone freaked out is this: What other markets out there carry the same potential for manipulation? The answer to that question is far from reassuring, because the potential is almost everywhere. From gold to gas to swaps to interest rates, prices all over the world are dependent upon little private cabals of cigar-chomping insiders we’re forced to trust.

“In all the over-the-counter markets, you don’t really have pricing except by a bunch of guys getting together,” Masters notes glumly.

That includes the markets for gold (where prices are set by five banks in a Libor-ish teleconferencing process that, ironically, was created in part by N M Rothschild & Sons) and silver (whose price is set by just three banks), as well as benchmark rates in numerous other commodities – jet fuel, diesel, electric power, coal, you name it. The problem in each of these markets is the same: We all have to rely upon the honesty of companies like Barclays (already caught and fined $453 million for rigging Libor) or JPMorgan Chase (paid a $228 million settlement for rigging municipal-bond auctions) or UBS (fined a collective $1.66 billion for both muni-bond rigging and Libor manipulation) to faithfully report the real prices of things like interest rates, swaps, currencies and commodities.

All of these benchmarks based on voluntary reporting are now being looked at by regulators around the world, and God knows what they’ll find. The European Federation of Financial Services Users wrote in an official EU survey last summer that all of these systems are ripe targets for manipulation. “In general,” it wrote, “those markets which are based on non-attested, voluntary submission of data from agents whose benefits depend on such benchmarks are especially vulnerable of market abuse and distortion.”

Translation: When prices are set by companies that can profit by manipulating them, we’re fucked.

“You name it,” says Frenk. “Any of these benchmarks is a possibility for corruption.”

The only reason this problem has not received the attention it deserves is because the scale of it is so enormous that ordinary people simply cannot see it. It’s not just stealing by reaching a hand into your pocket and taking out money, but stealing in which banks can hit a few keystrokes and magically make whatever’s in your pocket worth less. This is corruption at the molecular level of the economy, Space Age stealing – and it’s only just coming into view.

Reggie Middelton: Irish Banking System Is The Next Cyprus

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Reggie Middelton has analyized the Irish Banking system and his findings are disturbing. Since 2008 not only were debts hidden and assets double counted for the stress tests but banks have had to pledge all assets to access the TARGET2 system which is completely abnormal. All the while, silence from the Irish media. It looks more and more like Ireland is going to “pull a Cyprus”.

Why Derivatives Get Priority Over Insured Deposits

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When the SHTF the great derivatives bubble will get priority in the US over everything, even insured deposits. What do you think will be left by then? Ellen Brown takes a closer look.

Cyprus-style confiscation of depositor funds has been called the “new normal.”  Bail-in policies are appearing in multiple countries directing failing TBTF banks to convert the funds of “unsecured creditors” into capital; and those creditors, it turns out, include ordinary depositors. Even “secured” creditors, including state and local governments, may be at risk.  Derivatives have “super-priority” status in bankruptcy, and Dodd Frank precludes further taxpayer bailouts. In a big derivatives bust, there may be no collateral left for the creditors who are next in line. 
Shock waves went around the world when the IMF, the EU, and the ECB not only approved but mandated the confiscation of depositor funds to “bail in” two bankrupt banks in Cyprus. A “bail in” is a quantum leap beyond a “bail out.” When governments are no longer willing to use taxpayer money to bail out banks that have gambled away their capital, the banks are now being instructed to “recapitalize” themselves by confiscating the funds of their creditors, turning debt into equity, or stock; and the “creditors” include the depositors who put their money in the bank thinking it was a secure place to store their savings.

The Cyprus bail-in was not a one-off emergency measure but was consistent with similar policies already in the works for the US, UK, EU, Canada, New Zealand, and Australia, as detailed in my earlier articles here and here.  “Too big to fail” now trumps all.  Rather than banks being put into bankruptcy to salvage the deposits of their customers, the customers will now be put into bankruptcy to save the banks.

Why Derivatives Threaten Your Bank Account

The big risk behind all this is the massive $230 trillion derivatives boondoggle managed by US banks. Derivatives are sold as a kind of insurance for managing profits and risk; but as Satyajit Das points out in Extreme Money, they actually increase risk to the system as a whole.

In the US after the Glass-Steagall Act was implemented in 1933, a bank could not gamble with depositor funds for its own account; but in 1999, that barrier was removed. Recent congressional investigations have revealed that in the biggest derivative banks, JPMorgan and Bank of America, massive commingling has occurred between their depository arms and their unregulated and highly vulnerable derivatives arms. Under both the Dodd Frank Act and the 2005 Bankruptcy Act, derivative claims have super-priority over all other claims, secured and unsecured, insured and uninsured. In a major derivatives fiasco, derivative claimants could well grab all the collateral, leaving other claimants, public and private, holding the bag.

The tab for the 2008 bailout was $700 billion in taxpayer funds, and that was just to start. Another $700 billion disaster could easily wipe out all the money in the FDIC insurance fund, which has only about $25 billion in it.  Both JPMorgan and Bank of America have over $1 trillion in deposits, and total deposits covered by FDIC insurance are about $9 trillion. According to an article on Bloomberg in November 2011, Bank of America’s holding company then had almost $75 trillion in derivatives, and 71% were held in its depository arm; while J.P. Morgan had $79 trillion in derivatives, and 99% were in its depository arm. Those whole mega-sums are not actually at risk, but the cash calculated to be at risk from derivatives from all sources is at least $12 trillion; and JPM is the biggest player, with 30% of the market.

It used to be that the government would backstop the FDIC if it ran out of money. But section 716 of the Dodd Frank Act now precludes the payment of further taxpayer funds to bail out a bank from a bad derivatives gamble. As summarized in a letter from Americans for Financial Reform quoted by Yves Smith:

Section 716 bans taxpayer bailouts of a broad range of derivatives dealing and speculative derivatives activities. Section 716 does not in any way limit the swaps activities which banks or other financial institutions may engage in. It simply prohibits public support for such activities.

There will be no more $700 billion taxpayer bailouts. So where will the banks get the money in the next crisis? It seems the plan has just been revealed in the new bail-in policies.

All Depositors, Secured and Unsecured, May Be at Risk

The bail-in policy for the US and UK is set forth in a document put out jointly by the Federal Deposit Insurance Corporation (FDIC) and the Bank of England (BOE) in December 2012, titled Resolving Globally Active, Systemically Important, Financial Institutions.

In an April 4th article in Financial Sense, John Butler points out that the directive does not explicitly refer to “depositors.”  It refers only to “unsecured creditors.”  But the effective meaning of the term, says Butler, is belied by the fact that the FDIC has been put on the job. The FDIC has direct responsibility only for depositors, not for the bondholders who are wholesale non-depositor sources of bank credit. Butler comments:

Do you see the sleight-of-hand at work here? Under the guise of protecting taxpayers, depositors of failing institutions are to be arbitrarily, de-facto subordinated to interbank claims, when in fact they are legally senior to those claims!

. . . [C]onsider the brutal, unjust irony of the entire proposal. Remember, its stated purpose is to solve the problem revealed in 2008, namely the existence of insolvent TBTF institutions that were “highly leveraged and complex, with numerous and dispersed financial operations, extensive off-balance-sheet activities, and opaque financial statements.” Yet what is being proposed is a framework sacrificing depositors in order to maintain precisely this complex, opaque, leverage-laden financial edifice!

If you believe that what has happened recently in Cyprus is unlikely to happen elsewhere, think again. Economic policy officials in the US, UK and other countries are preparing for it. Remember, someone has to pay. Will it be you? If you are a depositor, the answer is yes.

The FDIC was set up to ensure the safety of deposits. Now it, it seems, its function will be the confiscation of deposits to save Wall Street. In the only mention of “depositors” in the FDIC-BOE directive as it pertains to US policy, paragraph 47 says that “the authorities recognize the need for effective communication to depositors, making it clear that their deposits will be protected.” But protected with what? As with MF Global, the pot will already have been gambled away. From whom will the bank get it back? Not the derivatives claimants, who are first in line to be paid; not the taxpayers, since Congress has sealed the vault; not the FDIC insurance fund, which has a paltry $25 billion in it. As long as the derivatives counterparties have super-priority status, the claims of all other parties are in jeopardy.

That could mean not just the “unsecured creditors” but the “secured creditors,” including state and local governments. Local governments keep a significant portion of their revenues in Wall Street banks because smaller local banks lack the capacity to handle their complex business. In the US, banks taking deposits of public funds are required to pledge collateral against any funds exceeding the deposit insurance limit of $250,000. But derivative claims are also secured with collateral, and they have super-priority over all other claimants, including other secured creditors. The vault may be empty by the time local government officials get to the teller’s window. Main Street will again have been plundered by Wall Street.

Super-priority Status for Derivatives Increases Rather than Decreases Risk 

Harvard Law Professor Mark Row maintains that the super-priority status of derivatives needs to be repealed. He writes:

. . . [D]erivatives counterparties, . . . unlike most other secured creditors, can seize and immediately liquidate collateral, readily net out gains and losses in their dealings with the bankrupt, terminate their contracts with the bankrupt, and keep both preferential eve-of-bankruptcy payments and fraudulent conveyances they obtained from the debtor, all in ways that favor them over the bankrupt’s other creditors.

. . . [W]hen we subsidize derivatives and similar financial activity via bankruptcy benefits unavailable to other creditors, we get more of the activity than we otherwise would. Repeal would induce these burgeoning financial markets to better recognize the risks of counterparty financial failure, which in turn should dampen the possibility of another AIG-, Bear Stearns-, or Lehman Brothers-style financial meltdown, thereby helping to maintain systemic financial stability.

In The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences, David Skeel agrees. He calls the Dodd-Frank policy approach “corporatism” – a partnership between government and corporations. Congress has made no attempt in the legislation to reduce the size of the big banks or to undermine the implicit subsidy provided by the knowledge that they will be bailed out in the event of trouble.

Undergirding this approach is what Skeel calls “the Lehman myth,” which blames the 2008 banking collapse on the decision to allow Lehman Brothers to fail. Skeel counters that the Lehman bankruptcy was actually orderly, and the derivatives were unwound relatively quickly. Rather than preventing the Lehman collapse, the bankruptcy exemption for derivatives may have helped precipitate it.  When the bank appeared to be on shaky ground, the derivatives players all rushed to put in their claims, in a run on the collateral before it ran out. Skeel says the problem could be resolved by eliminating the derivatives exemption from the stay of proceedings that a bankruptcy court applies to other contracts to prevent this sort of run.

Putting the Brakes on the Wall Street End Game

Besides eliminating the super-priority of derivatives, here are some other ways to block the Wall Street asset grab:

(1) Restore the Glass-Steagall Act separating depository banking from investment banking. Support Marcy Kaptur’s H.R. 129.

(2) Break up the giant derivatives banks.  Support Bernie Sanders’ “too big to jail” legislation.

(3) Alternatively, nationalize the TBTFs, as advised in the New York Times by Gar Alperovitz.  If taxpayer bailouts to save the TBTFs are unacceptable, depositor bailouts are even more unacceptable.

(4) Make derivatives illegal, as they were between 1936 and 1982 under the Commodities Exchange Act. They can be unwound by simply netting them out, declaring them null and void.  As noted by Paul Craig Roberts, “the only major effect of closing out or netting all the swaps (mostly over-the-counter contracts between counter-parties) would be to take $230 trillion of leveraged risk out of the financial system.”

(5) Support the Harkin-Whitehouse bill to impose a financial transactions tax on Wall Street trading.  Among other uses, a tax on all trades might supplement the FDIC insurance fund to cover another derivatives disaster.

(5) Establish postal savings banks as government-guaranteed depositories for individual savings. Many countries have public savings banks, which became particularly popular after savings in private banks were wiped out in the banking crisis of the late 1990s.

(6) Establish publicly-owned banks to be depositories of public monies, following the lead of North Dakota, the only state to completely escape the 2008 banking crisis. North Dakota does not keep its revenues in Wall Street banks but deposits them in the state-owned Bank of North Dakota by law.  The bank has a mandate to serve the public, and it does not gamble in derivatives.

A motivated state legislature could set up a publicly-owned bank very quickly. Having its own bank would allow the state to protect both its own revenues and those of its citizens while generating the credit needed to support local business and restore prosperity to Main Street.

Source: MaxKeiser

Ollie Rehn – Depositors To Take Hit If An EU Bank Fails Under Planned Law

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Hey, here’s a great idea, let’s make the Cyprus solution official. Ollie Rehn has disclosed that the EU plans to make it official in law for governments to steal your money when banks go bankrupt. Looks like the Dutch Finance Minister wasn’t alone in thinking this was a great idea after all.

(Reuters) – Big bank depositors could take a hit under planned European Union law if a bank fails, the EU’s economic affairs chief Olli Rehn said on Saturday, but noted that Cyprus’s bailout model was exceptional.

“Cyprus was a special case … but the upcoming directive assumes that investor and depositor liability will be carried out in case of a bank restructuring or a wind-down,” Rehn, the European Economic and Monetary Affairs Commissioner, said in a TV interview with Finland’s national broadcaster YLE.

“But there is a very clear hierarchy, at first the shareholders, then possibly the unprotected investments and deposits. However, the limit of 84,890 pounds is sacred, deposits smaller than that are always safe.”

The European Commission is currently drafting a directive on bank safety which would incorporate the issue of investor liability in member states’ legislation.

To secure a 10 billion euro EU/IMF bailout last month, Cyprus forced heavy losses on wealthier depositors. Initially it had also pledged to introduce a levy on deposits of less than 84,890 pounds – even though they are supposedly protected by state guarantees – before reneging in the face of widespread protests.

Source: Reuters

 

Ways Around Cyprus Capital Controls

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It looks like the Cypriot banks are going to be in a lot worse shape when they open than first thought. Cypriot capital controls don’t apply to branches in foreign countries and this is being used by people to withdraw deposits from the struggling banks. This will necessitate a much bigger haircut when the dust settles.

Then this morning the 20%-40% seizure of the depositor’s money, which was the range that had been discussed, was now admitted by the Finance Minister in Cyprus today to be more like an 80% expropriation and a timeline to get any money back of six to eight years. This is, I suspect, because while the banks were closed in Cyprus that they were still open in Greece and Britain so that certain monies crept out during the night, and probably big money, so that the banks in Cyprus are in far worse condition than previously thought or admitted.
 
Then, of course, because the EU Finance Ministers were not going to meet again and re-open this fiasco; more money had to be seized from the depositors. Now the Dutch Finance Minister chaired the meeting on Cyprus. He was the one that directed the entire affair on Cyprus and the template that he revealed was fist denied then admitted, then denied by the ECB and confusion reigned supreme. Now here comes the first pig; the representatives of the Eurozone finance ministries released a document this morning stating that Cyprus was not the template for future bail-outs. I suppose it was initially written in German and translated into English however they must have forgotten to translate it into Dutch. This is because when the Dutch Finance Minister was asked about this document, and he is the Chairman of the Finance Minister group remember; he said he knew nothing about the document.

…………

the banks of Cyprus just re-opened in Greece this morning. I don’t know, the flights from Moscow to Athens must be jammed. There are no capital controls in Greece so you can take out what money you like while the banks in Cyprus are still closed and now subject to capital controls. “Sense” and her brethren “logical,” “rational” and “coherent” must have all departed from Europe in a huff. No one could make this up; no one.

Source: ZeroHedge

UK Citizens Look To Withdraw Funds From EU Countries After Cypriot Decision

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The decision in Cyprus to rob depositors was always going to have a negative outcome. The following story from ZeroHedge should come as no surprise that worried UK expats are looking to move their funds away from countries that have perceived banking weaknesses. We clearly have entered a new era which can only have a positive outcome for precious metals as a way to preserve your wealth from confiscation.

UK’s deVere advisory group reports, “more and more expats in Spain, Italy, Portugal and Greece are now not unreasonably worried for their deposits in these countries,” and are seeing a “surge” in the number of British expats seeking advice about moving funds out of eurozone’s most troubled economies. As EUBusiness reports, “Whether the institutions like it and accept it or not, there is a real risk of a major deposit flight from these countries as people feel their accounts could be plundered next.” It is hardly surprising obviously (as we noted earlier the bid in German bunds) but we fear this escalation in cash exodus from the periphery will increase the need for a broader EU capital control scheme sooner rather than later.

 

Via EUBusiness,

Independent financial advisory company deVere Group on Tuesday reported a “surge” in the number of British expats seeking advice about moving funds out of some of the eurozone’s most troubled economies following the Cyprus bailout deal.

According to deVere Group chief executive Nigel Green, “more and more expats in Spain, Italy, Portugal and Greece are now not unreasonably worried for their deposits in these countries.”

He added: “Over the last week, since the messy deal to bailout Cypriot banks began, our financial advisers in these areas have reported a significant surge in enquiries from expats who are looking to safeguard their funds in other jurisdictions which are perceived to be safer.

Whether the institutions like it and accept it or not, there is a real risk of a major deposit flight from these countries as people feel their accounts could be plundered next.”

Jeroen Dijsselbloem, who heads the Eurogroup of finance ministers, said the costs of bank recapitalisations should not fall on tax payers, but on bondholders, shareholders and, if necessary, uninsured deposit holders.

Source: ZeroHedge

Jim Willie: The Collapse Is At Our Doorstep

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Jim Willie is not one for holding back and in his latest interview with Silverdoctors sums up where the global financial system currently stands. With each passing week the situation worsens. Willie see a global financial collapse now close at hand and the endgame will be triggered by a small-medium sized bank failure in Europe.

The European collapse will ignite a global Gold rush as the only remaining safe haven ultimately ending  USdollar as worlds reserve currency.

  The Doc began by asking the Golden Jackass what will most likely be the trigger event for a complete systemic collapse:

 I don’t think we’re going to see a default as a trigger event in gold or silver. I didn’t say we won’t see a gold and silver default, I said that it won’t be the trigger. There are just too many deep sources for gold that the central banks have access to. I refer to Basel Switzerland, the Roman catacombs, and the BOE, I think they’re pretty close to the bottom of their gold barrel, but they have big powerful friends in Rome and Basel Switzerland.

The trigger is not even going to come from within the US, because it’s just so controlled- the markets are being controlled from multiple different centers, in particular the Federal Reserve and the Treasury Dept, JPM, Goldman Sachs.

It’s just so corrupt to the core, and we’re seeing a blossoming of the fascist business model and the corruption that’s accepted.

Attention should be drawn to Europe. Look at some of the most recent events that are really quite staggering.

The Italian elections kicked out the GSax preppy Mario Monti. I’m surprised that he’s not being thrown off a palace balcony. It’s directly in response to hikes that Monti imposed on property tax to finance the bankers! The Italian people have a much more effective political system than the US!

Italy actually has elected a comedian! This is like electing John Belushi to form a coalition government! Mario Monti is on the way out. What does that mean?

The defense of their dead banks with liquidity lines and property tax hikes will end in the near future!

In Spain you have new high level financial corruption events that have paralyzed the nation at a time when they’ve already seen a string of big financial firm failures!

This at a time where they have 25% unemployment. I think that the likelihood of violence on the streets is greater in Spain than in any other country.

Spain’s bank insolvency and wretched unemployment is causing tremendous distress, and there will be a breaking point there.

Then in France you have Hollande, the leader of the socialist clowns has raised the highest tax brackets to 90%. The resulting capital flight to Scandinavia is astounding, leaving the nation extremely vulnerable.

Then you have the German economic slowdown which is really capturing some attention, which will remove ability and patience of bank rescues.

Then you have the London banks which are joined by French banks in broad deep exposure to Southern Europe. They’ve set themselves up to have their heads cut off.

Recall that the Draghi solutions like LTRO were recently insulted by debt downgrades, which was unprecedented.

Then you have the USFed, which is the only buyer of USTBonds, and the Euro Central Bank as the only buyer of PIIGS Govt Bonds.

Here is a note as to the stress in the system: the European banking system received $1.2 trillion in Dollar Swap funds from the NY Fed in January alone to prop up the ECB banking system.

European banks are collectively much larger than the US banks, but are in suspended animation while the US banks are being supported by narcotics money laundering.

A big European bust is coming. When the European bust events occur, the mad scramble for safety will be on, and they’re not going to be looking for Switzerland any longer because of their Euro peg. A massive rise in the European gold price is coming and it will be staggering, shocking and not reversible. It will ignite a global Gold rush, a massive short covering rally, and powerful 30% to 50% rise in the gold price will come in response to the European collapse.

Following that will come the arrival of the Gold Trade Finance platforms. Gold settlement for trade across the world- primarily though coming out of the East.

In other words, trade involving two parties not involving the US, one of them being an Eastern nation, and they will settle not in dollars anymore, they will settle in gold, and they will have some help from their friends in Turkey.

We’re going to see an end to the USDollar reserve status following these events, and the funeral will have a speech given by the Saudis to bring an end to the Petro-Dollar itself.

You have to look to Europe and not to the US, the US is a joke in regards to crisis, management, propaganda, the ESF, narcotics money laundering, sponsored fraud, it’s just unbelievable what’s going on in the US, it’s not going to be the trigger, the trigger will be Europe.

We have 15 to 20 potential sites to force the breakdown. It’s not just one or two. Every couple months there are a few more potential areas to cause the breakdown. That’s very, very dangerous, and new. We didn’t see that 3-5 years ago. Back in 07 it was really just sub-prime. We have about 12 different areas now which are just as dangerous as sub-prime, and both of them are in Europe.

 

With QE4 and the recent return of NINJA loans as the Fed attempts to re-inflate the housing bubble, The Doc asked Willie whether the Fed would be able to kick the can down the road one more time with one last bubble:

They have 15-20 fingers and toes, but there are just too many different areas that they need to plug.
This real estate bubble is a joke.  There’s no new bubble coming or even on the horizon.  What we’ve got is the US government has sponsored a whole new round of sub-prime mortgages.  Expect instead of the big banks underwriting them, it’s the Federal government.  We have not seen a rebound in demand for housing, even though the 30 year mortgage rate is under 4% and has been for quite a few months.

What’s not shown in the press is that there’s still 10 million homes that are sitting on the bank balance sheets.  They’re called REO’s, and they’re selling their REO’s or short sales, which ARE NOT INCLUDED IN THE CASE SHILLER INDEX! 

It’s a parallel of the discouraged workers no longer included in unemployment!  They’re bringing labor market calculations to the housing market.  They’re not going to revive the housing bubble for a simple reason- there’s not widespread finance available, it’s exclusively coming out of the FHA.  The other reason is that people have a great distrust for buying homes after they saw so many people foreclosed on.  Another reason is that the people don’t have brisk income.
The factors are not there, it’s kind of a lunatic claim to state that the housing market is going to be re-bubbalized.  Not even close, it’s stuck in a depression!

 

 

The Doc asked Jim whether we face a lost two decades like the Japanese, or what type of collapse we face in the US:

 

I said this back when Lehman Brothers fell in the autumn of 2008.  The US is on a path that cannot escape systemic failure and total dependence on the printing press to cover its debt and for a debt default of the US government debt, which will come in the form of a global conference to organize and co-ordinate the debt write down.  There will be US military outside the room to make sure everyone complies.

If the US goes ahead with sequester cuts, they’re talking about $4 trillion over 10 years.  I cannot emphasize how small that is.  But let’s go through some of the points why I believe the collapse is at our doorstep:

The collapse is happening now- it’s no longer ultra-slow motion like 2 years ago.   It’s a new event every few days or weeks.  The pace is quickening.   

The extreme nature of current events is alarming.  Just in the last few months:

The US Fed announces every month their extension of 0% forever (denigrating their own exit Strategy talk).

 $1.2 trillion was doled out by the USFed to European banks in January alone!

We have the Germans demanding repatriation of their official gold account (Allocated Accounts).

We have the Italians electing a comedian like John Belushi to halt the property tax hikes that bail out banks.  This is an insult to their entire political system which experienced that Mario Monti appointment without an election.

We have the London banks recently sponsoring a Chinese Yuan Swap Facility, cow-towing to Asia.  This is unprecedented!  New York will not do such a thing, but London did, which means that London and NY might be at odds!

We have an attack announced on Mali in North Africa to wrest gold & uranium timed when the  Germans asked for repayment of their gold reserves.  The quantities really fit.  There was a suspicious comment by the French and British saying it will be repaid in 7 years.  300 tons over 7 years is approximately what Mali produces in gold that will cover almost exactly the German repayment.  That was organized by France and the US. 

We have the shutdown of the gigantic Mongolian copper & gold mine by Rio Tinto which is an example of resource nationalism. 

We have raids larger and bolder of the GLD inventory that prevents a COMEX default and will produce a bigger price discount vs. the spot for GLD shares.  I think it will go down towards a 20% discount, which will cause alot of problems. 

We have the USFed preparing for QE5 (or rather QE187, as in QE to Infinity). 

We have events like the major central banks losing credibility while engaging in open currency war.  The franchise system of central banks is being questioned.  They’re in battle with each other. 

We have the US facing a fiscal cliff, which forces a quantum leap in job cuts (recession alert).

We have the Japanese ratcheting up the competitive currency devaluations (only USTBond buyer).

We have the Swiss managing their Euro-Franc peg, but suffering losses in Japanese & British bonds.

We have the Russians hosting a G-20 Meeting to coordinate the alternative to US$-based trade.
THEY ARE NOT GOING TO CONTINUE WITH DOLLAR BASED TRADE SETTLEMENTS!  NOT GOING TO HAPPEN!!

We have the emergence of Turkey and soon India as gold trade finance intermediaries.  They’re going to supply 1 of 2 parties engaged in trade with gold so they can make the settlement of the trade. 

We have the Iranian sanctions coming to a conclusion in US acquiescence.  The US is surrendering to the Iranians! 
All these events have occurred just since the new year began less than two months ago!  The pace of extreme events is quickening!

Extreme events have become the norm, putting tremendous additional stress on the system which the boys are trying to manage.  They don’t have enough people, enough resources, enough channels, and they don’t have enough brains to do it.

The managed system cannot succeed, it’s too complex.  They are attempting to work towards a system of total system management, and it’s just not going to work.

A series of climax events is coming very soon.  The changes will be rapid and breath-taking. 

Vast wealth has been moving East the past 3-4 years, and with it great power. 
Look for some seemingly minor bank failure to cause a ripple effect of deeper damage. 
It’s going to involve larger banks tied with commitments such as counter-party contracts or intermediary supply functions, and things are just going to start wrecking. 

I think vast wealth is going to be lost in the US and the West, except by gold and silver owners. 
Owning gold and silver will become harder to do because the rules are becoming stricter.
Those who have set themselves up in the last few years are going to be the big, big winners, and the ones who are bold enough and brave enough to do it now are going to be glad for their actions. 

I have a family member who refused my advice three years ago, and now that family member is facing the conversion of her very large privately managed IRA pension fund into these new special Treasury bonds.  That’s going to cause a real firestorm by the public, and they’re going to wish that they had converted their IRA’s into a gold account.

Source: SilverDoctors

Your Banks Mess Up, But Its Your Fault

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Wolfgang Schauble, Germany’s Finance Minister is not one for holding back when it comes to pointing out the ills of other countries. Schauble has clearly laid the blame for Ireland’s bank collapse at the hands of the Irish. While partly this is true, he neglects the enormous part played by the ECB. It was the ECB’s interest rate decisions which Schauble’s Germany benefited from, that caused credit bingeing countries all their problems. He also neglects the ECB’s decision to force the Irish taxpayer to pay back gambling bondholders and help keep German banks afloat.
If that’s the best analysis Schauble can do regarding Ireland then God help the German taxpayers because I wouldn’t trust this lawyer to run my finances. When it comes to German banks exploding, Schauble’s attitude is, it’s never the banks fault. I woudn’t fancy been forced to bail out German banks along with bailing out the rest of Europe.
Wolfgang Schauble, Germany’s powerful federal minister for finance, has said it is all Ireland’s fault its banks collapsed, plunging the economy into a deep recession, and absolves reckless European bondholders of all blame.

In a frank interview for a new documentary called State Secrets and Bank Bailouts, Schauble dismisses claims that European bondholders should be made share in the responsibility for unsustainably pumping up Ireland’s banking system with billions.

“The cause in Ireland is something Ireland itself created – not Luxembourg, not France, not Germany, but Ireland – and it benefited from it for some time,” Schauble claims.

“Then everyone has to bear the consequences of a wrong-headed policy.”

In the documentary, presenter Harald Schumann, a former editor of Der Spiegel, asks Schauble to publish a list of the bondholders who cashed in from the German-backed decision by the European Central Bank not to make them bear the cost of banking recklessness but instead to shift this bill on to the citizens of peripheral European states like Ireland.

“Why don’t you publish a list of creditors so we can have an informed debate about it?” he asks. Schauble dismisses this view as being “naive.”

“[Banks are] very intermingled. And if one bank is not solvent anymore, then it will immediately trigger doubts about the solvency of the next bank because it may have credit at the other,” Schauble states.

“Everyone should solve their own problems. If everyone swept in front of their own door, the whole neighbourhood would be clean,” the German politician added.

“The Irish were very aware that their banks were less stringently supervised then the German banks,” he said.

Most economic common sense in Ireland unfortunately comes from independent politicians (the mainstream politicians are the best money can buy). In this case Stephen Donnelly easily dismisses Schauble’s argument.

In this major documentary, independent TD Stephen Donnelly disputes Schauble’s views of the Irish crisis, which are widely accepted in Germany.

“The gun was held by the European Central Bank,” Donnelly states, “The suspicion is that the European Central Bank said you will continue to pay these bondholders to whom you owe nothing or we will pull the emergency funding out of your banking system. Thereby collapsing your banking system, thereby collapsing your economy. To me, that is gunboat diplomacy.”

Former finance minister Brian Linehan backed up Donnellys claim before he died stating that Trichet made him bail out the bondholders. Even current finance minister Michael Noonan claims to have the letter from the ECB forcing Ireland to bailout the banks at the taxpayers expense, otherwise emergency liquidity would be withdrawn.

Source: Irish Independent

So How Big Are American Banks?

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It would come as no surprise to anyone that the US’s largest banks use dodgy accounting practises to hide a multitude of sins. The following from Washington’s Blog explores the myth that American banks are much smaller that their european counterparts. Truth is, they are much better at hiding under the existing US accounting standards. Were international standards to apply, the banks may actually be twice the size they claim to be.

When Internationally-Accepted Accounting Methods Are Used, American Banks Are the World’s Largest

We have extensively documented that failing to break up the big banks is destroying America because:

In the face of such overwhelming criticism, apologists for America’s largest banks say that they are smaller than their European and Asian competitors … and that they have to be big to compete.

Current Vice Chair and director of the Federal Deposit Insurance Corporation – and former 20-year President of the Federal Reserve Bank of Kansas City – Thomas Hoenig destroyed that argument earlier this month.

Specifically, Bloomberg reports:

Warning: Banks in the U.S. are bigger than they appear.

That label, like a similar one on automobile side-view mirrors, might be required of the four largest U.S. lenders if Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., has his way. Applying stricter accounting standards for derivatives and off-balance-sheet assets would make the banks twice as big as they say they are — or about the size of the U.S. economy — according to data compiled by Bloomberg.

“Derivatives, like loans, carry risk,” Hoenig said in an interview. “To recognize those bets on the balance sheet would give a better picture of the risk exposures that are there.”

U.S. accounting rules allow banks to record a smaller portion of their derivatives than European peers and keep most mortgage-linked bonds off their books.

***

Using international standards for derivatives and consolidating mortgage securitizations, JPMorgan Chase & Co. (JPM), Bank of America Corp. and Wells Fargo & Co. would double in assets, while Citigroup Inc. (C) would jump 60 percent, third- quarter data show. JPMorgan would swell to $4.5 trillion from $2.3 trillion, leapfrogging London-based HSBC Holdings Plc and Deutsche Bank AG, each with about $2.7 trillion.

World’s Largest

JPMorgan, Bank of America and Citigroup would become the world’s three largest banks and Wells Fargo the sixth-biggest. Their combined assets of $14.7 trillion would equal 93 percent of U.S. gross domestic product last year, the data show.

***

U.S. accounting rules for netting derivatives allow banks to erase about $4 trillion in assets, the data show. The lenders also can remove from their books most mortgages they package into securities, trimming an additional $3 trillion.

Off-balance-sheet assets and derivatives were at the root of the 2008 financial crisis. Mortgage securitizations kept off the books came back to haunt banks forced to repurchase home loans sold to special investment vehicles.

***

The U.S. Financial Accounting Standards Board and the International Accounting Standards Board pledged a decade ago to converge the two bookkeeping systems. After six years of meetings, they remain divided. Proposed rules for how much money banks need to set aside for loan losses may make European and U.S. lenders even less comparable.

***

“Having no uniform standard is challenging for issuers and users,” said John Hitchins, head of U.K. banking and capital markets at PricewaterhouseCoopers in London. “Analysts and investors can’t compare companies’ financials across borders. Banks have to prepare multiple versions of their financial statements in different countries where they have units.”

***

If the banks used international standards for derivatives and consolidated mortgage securitizations, the ratio for JPMorgan and Bank of America, the two largest U.S. lenders, would fall below 4 percent. It would be just above 4 percent for Citigroup and Wells Fargo.

That would make the biggest U.S. banks look no better capitalized, or worse, than European peers such as HSBC at 5.6 percent or France’s BNP Paribas SA at 3.9 percent at the end of last year. It also could require them to raise more capital. Spokesmen for all four banks declined to comment.

***

“The U.S. leverage ratio doesn’t capture off-balance-sheet risks,” said [former FDIC boss] Bair, now chairman of the Systemic Risk Council, a private regulatory watchdog. “Once U.S. banks start publishing the new Basel-mandated ratios, more off-balance-sheet assets will become obvious.”

***

Bair said she favors raising the simple capital ratio as high as 8 percent. Hoenig, the FDIC vice chairman, has called for 10 percent. U.S. regulators are still debating how to implement the rules. Because Basel isn’t an international treaty, each country needs to adopt its own version.

***

Progress on common standards slowed after Mary Schapiro became SEC chairman in 2009 and faced lobbying by companies opposed to what they said would be costly accounting changes, according to four people with knowledge of the discussions who asked not to be identified because the talks were private.

***

After failing to agree on common standards for derivatives netting and consolidation of securitizations, rule-setters are now heading in different directions as they debate how to account for loan-loss reserves.

Source: Washington’s Blog

All Wars Caused By Bankers

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Canada’s Housing Bubble Bigger Than US – But Dont Worry, Its Different This Time

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Every bubble bursts, but when the danger signs are telling you that you have a large housing bubble on your hands you don’t turn around and say

don’t worry there is room to go even higher“.

That’s what CIBC is telling Canadians despite the fact that Canada’s debt to income ratio is now higher than the US experienced in 2006.

Then there is always the “soft landing” mantra that’s trotted out, much like Ireland heard from its bankers before the property crash made it the world’s largest debtor nation. The amazing fact about the Canadian banks is the amount of money in the banks vaults is only $4 billion yet they managed to loan out over $1.5 trillion.  Everyone is else has been taken out by the bankers, its soon to be Canada’s turn.

According to this article, CIBC thinks the huge amount of household debt in Canada and the beginning cracks in the housing bubble are nothing to worry about. The main reason for this benign assessment seems to be that there have been a few other credit and real estate bubbles in the world that have grown even bigger than the US one before it burst. What a relief.

“The news out of Canada’s real estate market isn’t good, but the country will avoid a U.S.-style real estate meltdown, CIBC said Tuesday.

Economist Benjamin Tal said in a report that even recently released data about high levels of Canadian consumer debt isn’t proof that there will be a sudden, big drop in home prices.

“To be sure, house prices in Canada will probably fall in the coming year or two, but any comparison to the American market of 2006 reflects deep misunderstanding of the credit landscapes of the pre-crash environment in the U.S. and today’s Canadian market,” he wrote.

Tal noted that Canada’s debt-to-income ratio has just broken the U.S. record set in 2006, but said other countries have had even higher levels without a crash.

[…]

Tal said home prices in large cities like Vancouver and Toronto are overshooting their fundamentals and will likely slip as sales fall.

“But the Canada of today is very different than a pre-recession U.S., namely as far as borrower profiles are concerned,” he wrote.

“Therefore, when it comes to jitters regarding a U.S.-type meltdown here at home, the only thing we have to fear is fear itself.”

“This time its different!”

It is actually fairly typical to find this type of thinking near the top of a bubble. The people living inside it cannot believe that it could possibly crash. Of course Canada’s economic situation is in many respects ‘different’ from the US economic situation, but that is the case with every slice of economic history. Not one of them can possibly be exactly the same. Nevertheless, one can come to some general conclusions about credit expansion-induced bubbles. Economic laws will be operative whether or not the precise historical circumstances are similar. When Japan reached the height of its bubble in the late 1980’s, it was also widely argued that the overvaluation of stocks and real estate was no reason to worry because Japan was allegedly ‘different’.

The government has taken steps to curb prices but this will only hasten the fall.

Canada’s housing market has begun to cool markedly. As is usually the case, the first sign of trouble is a sharp drop-off in transaction volumes. Existing home sales in Canada were down by 15.1% in September year-on-year. This seems to be the result measures recently introduced by the government that are aimed at slowing down or reversing house price increases. Prices will no doubt eventually follow transaction volumes.

50% or $500 billion of the housing market is at high risk. It doesn’t help that the Government owned CMHC has insured most of the mortgages against default which leaves the taxpayer on the hook.

It is generally held that Canada’s banking system is in ruddy health and not in danger from the extended credit and real estate bubble, mainly because a government-owned organization, Canadian Mortgage Housing Corp. (CMHC)  insures most of the mortgages with down payments of 20% or less. The company also helps fund mortgages by issuing debt and buying mortgage backed securities with the proceeds. 

This kind of thinking has things exactly the wrong way around. It is precisely because such a state-owned guarantor of mortgages exists that the vaunted lending standards of Canada’s banks have increasingly gone out of the window as the bubble has grown. Today some $500 billion, or 50% of Canada’s outstanding mortgages are considered ‘high risk’ according to the Financial Post. Moreover, HELOCs (‘home equity lines of credit’, i.e., the use of homes as ATMs) have grown like wildfire, at loan-to-value rates of up to 80%.

Through CMHC and government guarantees for privately held mortgage insurers Genworth Capital and Canada Guarantee, Canadian tax payers are on the hook for more than C$1 trillion in mortgages.

Source: ZeroHedge

Serfdom Up Ahead?

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An article by Michael Krieger of Libery Blitzkrieg blog sums up the global financial system and what lies ahead if we don’t react now. Krieger makes the point that things are going to get much worse than 2008 and no amount of money printing will work this time. The levels of corruption are staggering and more and more people are awakening which is quite disturbing to the global elite.

The Tipping Point
Serfdom has simply been pushed too far.  Globally.  What we are about to witness, incredibly, is not just a change in the way that one or two countries or even a specific region of the world operates.  No, what we are about to witness is a complete transformation globally, a change that I believe will be incredibly positive and will ultimately free us from the shackles upon the minds of humanity as a species.  The internet has allowed us to connect with one another in a manner never before possible, and this tool has permitted us to blast through the lies of the global elite that is desperately trying to hang on to control.  Whether it was the intention from the outset or not, what globalization has created is a very small class of incredibly wealthy people that are extraordinarily corrupt as a group and also above the law.  They are able to hide enormous amounts of money.  They are able to insider trade.  They are able to deal drugs.  They can do whatever they want, yet if anyone below them does the same they are prosecuted in a manner that resembles Medieval torture.

Many people say to me, “but Mike, aren’t things always corrupt, hasn’t it always been this way?”  To this I answer yes and no.  Of course within any complex societal and political structure there will be elements of corruption.  This is obvious.  However, there are cycles of corruption and degrees.  At some point, particularly toward the end of a cycle where globalization creates this “super corrupt class” of individuals roaming the planet doing as they please with us pawns, you reach a tipping point.  That tipping point has already been reached.  What we are witnessing now all over the world are merely the effects of that tipping point clashing with the corrupt global elite that refuses to budge an inch and reform even though it is in their best interest to do so.  No, they are so arrogant and criminal after decades of doing what they please with zero consequences they would rather attempt to implement a global police state rather than deal with the nightmare of their actions and make the world a better place.  Therefore, it is up to us, as a species, to reclaim what is our birthright.  Freedom.

As I wrote the other day on twitter, what we have today is not Socialism or Capitalism, it is Ponzism.  I am talking on a global level.  Basically every country and every region.  The biggest pitfall we must avoid as a species is allowing the global power structure to pit us against one another.  These guys don’t fight wars, they send you to fight them.  Don’t fall for it.  Their number one trick once things get bad within their own nations is to attempt to create a war.  This checks two very important boxes for them.  First, it creates a distraction for the general public and even makes them think that they are part of a team that needs to be cheered.  It’s like a big football game but with thousands or millions dying on the field.  Second, it allows the government to do pretty much anything they want in the name of “winning the war” or “national security.”  This is exactly why the “war on terror” was the perfect war for a kleptocratic elite.  It is a war with no end, so theoretically they can constantly claim war as an excuse for taking away civil liberties.  The problem for them at the moment though is that the American people are waking up to this scam.  Therefore, a larger and much deadlier war is in their best interests.  If it is in their best interest you can be sure it is in our worse interests. Therefore, we must do everything we can to prevent it.

China
Unless you have been living under an economic rock for the past six months, you are aware that China is in the midst of a serious economic slowdown.  As I have said for years and continue to say, this is not a small bump in the road.  This is a major contraction.  Similar to the U.S., China had a choice in the 2008 slowdown.  They could have taken the hit and moved toward measures to rebalance the economy away from an over emphasis on investment and construction spend and toward consumption, but they did nothing of the sort.  Rather, they doubled down on their prior mistakes and mal-investments in an epic bet on the ponzi economy.  After a brief sugar high, this has now failed.

So with the economy back in steep decline, the authorities fear pumping massive stimulus in as they did four years prior due to their justifiable fears of sparking rampant inflation.  Meanwhile, thanks to social networking, citizens have become more aware of the incredible corruption and theft of their leadership, whether in the political or business world.  They are increasingly acting out about it and it is becoming so blatant that even China’s legendary control of media is unable to direct the plot.  The most recent outburst came from the Foxconn (a major supplier to Apple) factory in Taiyuan, China which employs 79,000 people.  While details are sketchy, most accounts point to the riot, which reportedly involved 2,000 people, being sparked by a fight between security guards and workers.

Of course, China’s leadership was well aware of all of this before the Foxconn incident came onto the scene, so what is a good authoritarian regime to do?  Well, you attempt to direct the rage and angst to an outside enemy.  In this case Japan.  Zerohedge has a great report on the anti-Japanese violence and hatred that burst onto the scene recently.  The link to their piece Postcards from a Furious China really says it all.

Europe
Like the Middle East, the Southern countries of Europe have been in and out of rage now for almost two years.  The most recent explosions onto the streets of Greece and Spain are particularly disturbing since the inept clownish leadership on the Continent had supposedly “solved” the crisis for the third time just a few weeks ago.  Or was it the fourth time?  Really, who’s counting anymore…

Let’s start with Spain.  While Greece is still on fire, Spain is where the real action is due to the size of its economy and the importance it has to the political EU hacks.  Not only were there enormous protests this week in the capital Madrid in reaction to austerity measures, but there is also a very significant secession movement picking up steam in Catalonia.  This isn’t about leaving the euro, this is about leaving Spain!  For those that aren’t aware of Spanish geography, Catalonia is the wealthiest region in Spain and it is where Barcelona is located.  First, we saw enormous protests in Catalonia about a month ago, which I covered here.  Now we see that last night the regional parliament approved a referendum on independence that will apparently be voted on during regional elections on November 25.  Reuters covers the story here.

While this is hugely important, let’s not overlook the massive demonstrations in Madrid this past week.

Now let’s talk Greece.  I think a lot of people brushed off this week’s protests as “oh it’s just the Greeks in the streets again.”  This is a mistake.  These demonstrations were different and here is why.  From the UK’s Guardian:

 
 

In a departure from other mass protests, members of the police force, army, navy and judicial system joined public and private sector employees on the streets. One police officer, who preferred not to give his name, said the Greek state “should feel deep shame” at imposing cuts on the very people whose protection it sought.

Once the people that are being paid to defend the regime start opposing the regime it is game over.  It appears we are there in Greece.  Full article here.

The United States
This is the big one of course.  While we have seen outbursts from the Tea Party and Occupy Wall Street movements ever since the banker coup of 2008, these movements have not been as sustained as demonstrations in other parts of the world.  This is about to change.  I am firmly of the view that the Obama Administration has pulled out every  trick in the book in order to get reelected this year, and that this strategy will probably succeed.  What I think the vast majority of people voting for him as well as investors fail to comprehend is that once this guy gets in and doesn’t need to worry about getting reelected he will leave everyone outside of his puppet masters out in the cold.  You think he has been bad for the poor and middle class so far via his inflationary policies?  Well you haven’t seen anything yet.  I believe there is a decent chance he will push “austerity” on the public as soon as he is reelected.  All the suckers that voted for him will be up in arms and the only ones that will be protected, as usual, will be the crony capitalists that own him.  Even if he doesn’t do this, his other option is merely to keep spending and force The Bernank to print more money.  The cost of living will surge and the poor and middle class will get crushed no matter what.  I covered this in my recent piece “2013: When Money Printing Meets Supply Constraints.”  The American Spring will get going in 2013.

 Just Say No…to War
The writing is on the wall folks.  The global economy is headed back down into depths that will prove worse than 2008, and this time no amount of money printing and propaganda will be enough to hold things together.  TPTB know this.  We need to remember that this isn’t just a battle between the masses within our distinct nations and the 0.01% of oligarchs that have used the past four years to harvest more of our wealth.  This is also a battle between humans collectively and themselves.  We need to grow up as a species and take charge of our destiny.  We need to stop falling for their tricks and fighting their stupid wars while they hide in their castles, parliaments and skyscrapers.  The first thing we need to do is say no.  No more.  It’s time to evolve.

Banks Profit From War

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“The question was how should we manoeuver them into firing the first shot. It was desirable to ensure the Japanese be the ones to do this so that there should remain no doubt as to who were the aggressors.”

– Henry Stimson, Secretary of War. November 1941.

US: Why It Always Ends In War

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After an extraordinary expansion of US debt, war is inevitable. Below will outline a few reasons why? Of course the politicians do what they are told as always by the banking elites. What better way to deal with a broken monetary system than introduce chaos.

ZeroHedge have outlined the reasons why the US would welcome a war right now.

The old war against terror propaganda is losing ground to alternative news and opinion now available because of the Internet Reformation. Frankly, few people believe anything from either the American government or its establishment propaganda outlets and this is a frightening situation to the power elite that rules America.

Due to the growing economic crisis, the government needs to take strong actions that could be violently resisted by large segments of the US population unless a major financial or military crisis can be used as an excuse and cover for coming dictatorial actions. Simply stated, there are not enough police and military in the US to control the population should an insurrection take place. A major war in the Middle East can provide a casus belli for a direct assault against US private wealth, liberties, benefit programs and opposition by the power elite.

For example, the imposition of a military draft will dramatically cut unemployment rates as well as limit inner-city crime and outrage over cuts in domestic spending and welfare. Remember, austerity is needed and a draconian cut in Social Security and benefit programs must be engineered against the 50 percent of the population who receive some type of government benefits.

In addition, gold will need to be confiscated. Forced retirement investment into collapsing dollar denominated Treasury obligations must be required when foreign investors stop buying US debt. Stronger TSA authority, drones and harsh domestic controls will need to be implemented for the duration of the conflict in order to squelch domestic opposition. Taxes must be raised, penalties and fines must be doubled and tripled at the federal, state and municipal levels and finally, severe limitations on freedom of speech and freedom of assembly will be forced on the American people, along with gun control and limited access to Internet news and communications.

Finally, a major, long-term war in the Middle East will provide an excuse for the deferment and rescheduling of US debt obligations owed to nations and governments that oppose the US/Israel war in the Middle East. For the $1 trillion owed to China and many Middle East nations, this is effectively debt repudiation.

China too would benefit from the US going to war.

China wants to see the US weakened long-term as a world power and a major war in the Middle East will do this. They also need a reason to dump US Treasury debt and an excuse to avoid the blame of the coming broader repudiation of US debt. The Chinese people will be justifiably outraged that the Chinese government and central bank accumulated $1 trillion in US debt, although there were legitimate global trading reasons and domestic economic justification for this over-concentration in US debt and dollar obligations.

A Middle East war would avoid direct military action between the US and China while protecting both US and Chinese politicians from the coming Treasury debt repudiation, Chinese dump and global run on the dollar and Treasuries.

Who is going to be the ultimate winner?

Who is guaranteed to win regardless of the outcome of the war and whether it can be contained? The Anglo-American financial elites and the bankers always win every conflict regardless of the military outcome. This is the history of the 20th century and I see no reason that will change now.

Source: ZeroHedge

SA Banks Brought To Court – Monetary System UnConstitutional

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Wow, the banking system around the world is taking a beating. In the last few weeks we have had LieBor, HSBC money laundering, Irish bankers arrests and now in South Africa, the 4 biggest banks and Reserve Banks are to be taken to court because the money lending (fractional reserve lending system that we all use) is fraudulent and unconstitutional.

In what certainly has the hallmarks of a David vs Goliath battle, SA’s four biggest banks and the Reserve Bank have been served with summons to defend themselves against allegations of unconstitutional banking practices.

The papers were served by the sheriff of the court on behalf of the plaintiff, a non-governmental and not for profit organisation, New Economic Rights Alliance (NewERA).

NewERA is asking the High Court to declare SA’s money lending system fraudulent and unconstitutional. The system of loans and credit advancements is an “unfair, self-serving, monopolistic, economic activit[y] that [results in] arbitrary deprivation of property, monetary depreciation and inappropriate conduct,” court papers allege.

According to Scott Colin Cundill, director of NewERA, the action is not financially motivated. “We are not suing for money. We are asking the court to suspend all legal action between the banks and SA citizens, until a full investigation has been undertaken into our banking system.”

FNB, Standard Bank, Absa and Nedbank confirmed receipt of the summons. While Nedbank was still studying the summons, FNB, Absa and Standard Bank confirmed that the matter will be fully defended.

3 practices at the heart of the case. 1 Fractional Reserve banking, 2 Seigniorage, 3 Securitisation.

At the heart of the issue are three trade practices (in particular) conducted by banks. NewERA intends to show that these are unconstitutional.

The first is the fractional reserve banking system. The conventional view of this system is that only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal. This is done deliberately in order to expand the economy by freeing up capital that can be loaned out to other parties. “Our issue with this is that new loans can be created without having the actual cash to back them,” says Cundill.

The second is the process of seigniorage. This is the profit that the SA Reserve Bank (and governments around the world) earn from the difference in the cost of printing money and the face value of that money. “The way in which these notes enter the banking system and therefore the public, and thus how seigniorage is charged, is a very little known or understood process.”

The last matter that NewERA is taking issue with is securitisation. This is the financial practice of pooling various types of contractual debt such as residential home or car loans, repackaging it and selling this consolidated debt to various investors. It was the practice of selling toxic debt, packaged as collateralised mortgage obligations, which triggered the financial crisis in 2008.

NewERA will also argue that the lack of transparency regarding how banks make use of depositors’ money, prevents individuals from making informed decisions when dealing with agreements that affect their financial well-being.

“What we want is the development of co-operative, sound economic principles to ensure that risk and, or fault does not devolve onto the consumer unnecessarily and unconditionally, causing loss of property, investments and value,” says Cundill.

NewERA has 154 members who are joined in the application.

The application is also supported by more than 115  000 people, Cundill says.

The banks have ten days in which to file their intention to defend.

Source: moneyweb.co.za

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