New Silver Fund

Silver Bullion Trust, an all silver fund from the CEF/GTU closed-end fund group, has its roadshow going on now.

Initially it will only be available in Canada. It will trade on the TSX to start, then on the AMEX once it has risen to $75 million of assets which is a similar process used in the introduction of GTU.

It will trade in Canada in both U.S. and Canadian dollars.

The initial offering is reported to be for up to $200 million, so the $75 million threshold could be met immediately depending on the bid size of the deal.

It is expected to price at around US $10 (1 share + 1 $10 warrant) by July 29th.

This could be a interesting alternative to SLV and to CEF for those who wish to invest more heavily in silver.

Paper, Scissors, Gold

As you may have heard recently, the Comex has asserted their right under their rules to deliver the equivalent paper interest in Exchange Traded Funds such as GLD in lieu of the delivery of physical bullion for those standing for delivery under the rules of the commodity exchange.

Is GLD really the same as physical bullion?

"...it appears that a lot of investors believe and trust that investing in GLD is the same thing as buying physical gold bullion. A close reading and analysis of the GLD Prospectus, however, reveals that investing in GLD is drastically different from owning gold. This analysis will show why GLD is nothing more than another form of a derivative security which is loaded with counter-party default risk."
Owning GLD Can Be Hazardous to Your Wealth

Here is a recent statement from Dennis Gartman who most often derides those he calls 'goldbugs.'

"To finish, we do agree that recent decisions to allow for the "delivery" of ETF shares in the stead of actual physical gold against a futures position does cause us some concern. Indeed, it causes us some very real concern, for if we stand for delivery of wheat we expect to receive wheat, not paper. The same holds true for delivery processes on the COMEX, and if GATA and the "Bugs" have a complaint it is this new decision by the COMEX. On this, we’ll grant that the "Bugs" have something to complain about." Dennis Gartman in The Gartman Letter

We have often said that when the real crisis of liquidity comes, and the final flight to safety from the credit bubble collapse begins in earnest, the exchanges will alter the rules to allow for cash and paper settlement of claims for bullion, which they cannot or will not be able to deliver at the agreed upon prices.

This is what makes the current structure of the short positions held by a few banks on the precious metals exchanges a 'racket,' a type of Ponzi scheme where the same thing is sold repeatedly with no means of satisfying the aggregate of the claims and ownership.

We are sure the Comex is "well capitalized," and will continue to be so, even as it is rocked by de facto delivery failures and the substitution of more paper to back up the general failure of paper.

The wheels of justice grind slowly but they grind exceedingly fine.

CIT Called "Well-Capitalized" Even As It Teeters on Bankruptcy

This underscores the charade that is the Fed and Treasury stress testing. There is a cloak of accounting fraud covering many US financial institutions, even as their value soars on paper and the public continue to be robbed of their savings.

The Fed and Treasury are using their current position as de facto crisis regulators of US financial insitutions and pseudo-banks to cover up the deep problems of regulatory failure and financial fraud, largely their responsibility as the overseers of US credit and monetary policy and the financial system during the credit bubble.

They seem to have taken on the role of the Ratings Agencies in perverting their stewardship to serve the Wall Street bankers.

The Fed should not and cannot be allowed to obtain any more power over the US regulatory process. That they even resist a fair and honest audit of their lendings of public monies is an insult to our Republic.

Until the banks are restrained, and balance restored to the economy, and the financial system reformed, there can be no sustained recovery.

Bloomberg
CIT Group’s ‘Capital’ Was All Talk, No Trousers
by Jonathan Weil
July 15, 2009 21:00 EDT

July 16 (Bloomberg) -- Even as CIT Group Inc. teetered near collapse this week, neither the company nor its overlords at the Federal Reserve Board ever backed off their official position that the struggling lender was “well capitalized.”

Coming from the world’s most powerful central bank, that designation used to mean something about a company’s financial strength and ability to absorb losses. Not anymore.

Investors watched yesterday as yet another major financial- services company angled for a government bailout -- this time unsuccessfully -- while still sporting U.S. banking regulators’ highest capital rating. It’s a sure thing CIT won’t be the last.

Even the regulators say their capital standards are broken. Just last month, in an 88-page report outlining its regulatory overhaul plans, the U.S. Treasury Department wrote: “Most banks that failed during this crisis were considered well capitalized just prior to their failure.”

It was only last December that the Fed’s board of governors voted unanimously to let CIT become a bank-holding company, making the commercial lender eligible for federal rescue funds and allowing it to borrow from the Fed’s discount window. In doing so, the Fed said CIT would be well capitalized once it received its $2.3 billion of bailout money from the Treasury’s Troubled Assets Relief Program, which CIT got later that month.

CIT’s bosses, led by Chief Executive Officer Jeffrey Peek, had been touting the company’s well-capitalized status repeatedly ever since, in financial filings and investor presentations. In reality, whatever capital CIT possessed existed only in its executives’ heads -- literally.

Accounting Standards

The problem here is with the accounting standards as much as the government’s capital rules. Consider this disclosure from the footnotes to CIT’s latest annual report. As of Dec. 31, CIT said the fair market value of its loans was $8.3 billion less than the value it was using on its balance sheet. Loans at the time were about two-thirds of its $80.4 billion of total assets.

By comparison, New York-based CIT had $7.5 billion of so- called Tier 1 regulatory capital as of Dec. 31, and $8.1 billion of shareholder equity. Take away the inflated loan values, and CIT’s capital and equity would have been less than zero. CIT hasn’t said what its loans’ market values were as of March 31.

The craziest part is that the difference in the loan values came down to nothing more than CIT executives’ state of mind. (And the Fed's and the FASB's tacit endorsement of this accounting fraud on investor - Jesse)

Had CIT classified the loans as “held for sale,” the accounting rules would have required the company to carry them on its balance sheet at their cost or market value, whichever was lower. By labeling almost all its loans as investments instead, CIT got to avoid writing them down to market values.

Say the Word

So, for capital purposes, the only difference between an insolvent CIT and a well-capitalized CIT was a mere utterance by management that it planned to keep holding the loans. No wonder so many zombie banks continue to roam the country. All they have to do is wish away their ruin, and the rules let them.

There is one catch. As CIT said in its annual report, it’s allowed to classify loans as investments only if it “has the ability and intent” to hold them “for the foreseeable future or until maturity.” Otherwise, it must book the market losses.

It’s hard to see how CIT’s management could believe the company still has the ability to keep holding onto its loans now. Not with more than $3 billion of reported losses in the past eight quarters, a looming cash crunch, and its debt trading in the bond market as if the company might fail. A CIT spokesman, Curt Ritter, declined to comment.

Not Making Sense

Think how arbitrary these accounting labels are. A declining asset doesn’t stop falling in value just because its owner intends to keep it. Nor, if you were applying for a loan today, would a bank value your collateral based on what you think it might be worth someday after the economy rebounds. Its value would be what you could sell it for now.

Back on Dec. 22, when it approved CIT’s application to become a bank-holding company, the Fed released a nine-page statement explaining its rationale. While the Fed said its board considered “all facts of record,” nowhere in that document did it discuss the possibility that CIT’s loans might not be worth what the company’s balance sheet said, or that CIT might lack the ability to hold them for as long as it claimed.

The current capital rules “simply did not require banking firms to hold enough capital in light of the risks the firms faced,” the Treasury Department said in its report last month. The financial crisis, it said, “has demonstrated the need for a fundamental review of the regulatory capital framework.”

That review, to be led by the Treasury Department, won’t be completed until the end of this year. Whatever form the new rules take, the report said they must be “credible and enforceable.”

What a welcome change that would be.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

Derivatives Crisis: More Bailouts On Deck?

The derivatives market is about as ugly as it gets, and puts a new edge on 'too big to fail, to big to exist."

The banks want to keep the game going because it suits their current model of taking risks, making huge bonuses, and writing off the losses to the public.

It remains to be seen if the Obama Administration has what it takes to regulate and rein in the banks. While Larry Summers and Tim Geithner are on the team the answer is probably 'no.'

One thing which strikes us as odd in this Bloomberg article is the emphasizing of stimulus as a source of future crisis. All things considered two trillion in stimulus across the globe is a relative drop in the buck-et compared to what the bank bailouts are costing in direct and indirect taxation on the real economy. Bloomberg seems to be crusading against anyone but the bigh banks getting public money, so perhaps it is not surprising.

As you know, CIT is deeply troubled, and most likely heading towards some sort of managed bankruptcy. The company is said to be holding counter party risk with many banks including Goldman Sachs. The rally may be based on strong rumours of an imminent bailout for CIT. The word on the Street is that Geithner and Summers caved again after a few key phone calls.

Let's see how the Obama Administration handles yet another financial institution brought low by bad risk management in pursuit of outsized profit.

Wall Street and their demimonde in the government and the media hate stimulus packages designed to assist the ordinary Joe, even if all it does is ease the pain during a steep downtrend (which was caused by the financial sector). They hate it, unless there is a way to charge fees in its distribution, and turn it into a profit-making venture for them where they derive most if not all of the benefits.

The dollar and the US bond are taking it repeatedly on the chin. As are most of the US public and the holders of its debt.

The timeframe Mr. Mobius has for the next major crisis is way out on the far edge of any projection we think is probable by quite some distance. Its not clear that it really matters, given the significant hurdles facing the economy this year.

Let's see how the Boys handle the burgeoning Commercial Real Estate, Pension, and Stage Government crises. I think they may very well precede the derivatives coup de grace, and several of them are big enough to be show-stoppers, if not triggers for a larger systemic meltdown.

Until the banks are restrained, and the financial system is reformed, and balanced is restored to the economy, there will be no sustained recovery.

The Obama team is incompetent, and probably worse. Its a great disappointment. They are showing all the wrong moves on the economy.

All the charts included here are from our friends at ContraryInvestor.

Bloomberg
Mobius Says Derivatives, Stimulus to Spark New Crisis
By Kevin Hamlin (Beijing)

July 15 (Bloomberg) -- A new financial crisis will develop from the failure to effectively regulate derivatives and the extra global liquidity from stimulus spending, Templeton Asset Management Ltd.’s Mark Mobius said.

“Political pressure from investment banks and all the people that make money in derivatives” will prevent adequate regulation, said Mobius, who oversees $25 billion as executive chairman of Templeton in Singapore. “Definitely we’re going to have another crisis coming down,” he said in a phone interview from Istanbul on July 13.

Derivatives contributed to almost $1.5 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg. Global share markets lost almost half their value last year, shedding $28.7 trillion as investors became risk averse amid a global recession.

The U.S. Justice Department is investigating the market for credit-default swaps, Markit Group Ltd., the data provider majority-owned by Wall Street’s largest banks, said July 13.

Mobius didn’t explain what he thought was needed for effective regulation of derivatives, which are contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather. The Bank for International Settlements estimates outstanding derivatives total $592 trillion, about 10 times global gross domestic product.

Looming Crisis

“Banks make so much money with these things that they don’t want transparency because the spreads are so generous when there’s no transparency,” he said.

A “very bad” crisis may emerge within five to seven years as stimulus money adds to financial volatility, Mobius said. Governments have pledged about $2 trillion in stimulus spending.

The Justice Department’s antitrust division sent civil investigative notices this month to banks that own London-based Markit to determine if they have unfair access to price information, according to three people familiar with the matter.

Treasury Secretary Timothy Geithner last week urged Congress to rein in the derivatives market with new U.S. laws that are “difficult to evade.” He said strong capital requirements were the key.

Geithner repeated President Barack Obama’s call to force “standardized” contracts onto exchanges or regulated trading platforms, and regulate all dealers.

Credit Freeze

The plan to regulate the derivatives market is part of a wider overhaul of financial industry rules meant to prevent any possibility of a repeat of last year, when the collapse of Lehman Brothers Holdings Inc. and American International Group Inc. froze credit markets and worsened the global recession.

In the Senate, Agriculture Committee Chairman Tom Harkin, an Iowa Democrat, is pushing for legislation that would require all over-the-counter derivatives trades be traded on regulated exchanges, not just standardized ones as the Obama administration is seeking.

U.K. banks will be forced to curb trading activity that helped cause the global financial crisis, Britain’s top financial regulator said last month, while stopping short of seeking to separate their lending and securities units.

“Banks have lobbied hard against any changes that would make them unable to take the kind of risks they took some time ago,” said Venkatraman Anantha-Nageswaran, global chief investment officer at Bank Julius Baer & Co. in Singapore. “Regulators are not winning the battle yet and I’m not sure if they are making a strong case yet for such changes.”

Mobius also predicted a number of short, “dramatic” corrections in stock markets in the short term, saying that “a 15 to 20 percent correction is nothing when people are nervous.”

Emerging-market stocks “aren’t expensive” and will continue to climb, Mobius said. He said he favors commodities and companies such as London-based Anglo American Plc, which has interests in platinum, gold, diamonds, coal and base metals.

In China and India, Mobius sees value in consumer-oriented stocks and banks, he said.