Derivatives Exposure Among US Commercial Banks

I have not looked at this in some time. The amounts are still quite impressive and highly concentrated in a handful of the TBTF banks.

As in the case of LTCM, leverage is a source of income, the higher the leverage, the greater the profits from which you can claim and take your salaries and bonuses.







Here is how things looked in the middle of 2008 Derivates Report June 30, 2008

"My Son...Went Inside There And Basically Saw that the Vault was Empty."

Every day when I think I am going to get a day off from this story, some revelation seems to come out, each as compelling, shocking, and suspicious as the others, but all fitting together in what looks like a nasty picture of reckless behaviour gone wrong developing.

Apparently some banks and brokers had been selling gold and silver which they do not have. We know it happens because Morgan Stanley was caught doing it, and was even charging storage fees from unsuspecting investors.

Do these banks not have auditors? Are the regulators sweeping this under the rug? Are the insiders and their spokespeople correct in just dismissing this as a problem, as was done with the subprime market even by Ben Bernanke himself before it collapsed into a bank run that shocked the financial system?

Now, we have to carefully distinguish between allocated metal, in which one holds a certificate and are assured of a firm ownership of actual metal, and an unallocated holding in which you hold basically a paper claim on metal, for which you may be an unsecured creditor, even if you are paying regular storage fees. But in the cases I am hearing about it is a firmly stated ownership of something that does not exist, and cannot be obtained at current prices.

This is important because although there is always shorting, and some fractional reserve aspect to all banking , even in the case of bullion banking, in this case the proportion or leverage of the selling of the assets starts to look more like a Ponzi scheme than a rational and efficient market. There is a point at which 'speculation' becomes fraud, and the fraud becomes large enough to start risking the health of the bank.

And in our under-regulated and excessively leveraged financial system, that becomes a problem because it all looks to be a pyramid scheme of sorts. JPM alone is holding derivatives with notional values approaching a very large portion of World GDP.

The banks seem to be pointing to bullion supplies elsewhere, such as the LBMA in London, or in this case Hong Kong, and saying, "See if certificate holders demand their bullion, we can easily fulfill their requests." The problem with this is that it appears that they are ALL doing this, overleveraging their supplies, becoming counterparties and potential sources of supply to each other, with few having a full supply of what they say they have.

Make what you will of this. It is important to understand what is stated by the bank or institution on the certificate for bullion that you hold. As outlined above, you might just be an unsecured creditor to an unallocated account. There is no fraud in that, only a risk of actual delivery should you ever ask for it.

I am sure more will be coming out, eventually. But for now this information is barely penetrating the radar of the mainstream media. These fellows may be wrong, but so far no one is denying specifically what they are saying with any persuasive proof. They just seem to be hiding behind secrecy and opaque transactions, saying 'Prove it, prove it.'

As I have stated before, the problem I have with this is the lack of transparency and auditing in these markets, which makes them absolutely ripe for fraud and excessive leverage by the usual suspects in the TBTF banks.

This seems to be exactly what caused the subprime crisis and the bank run in 2008: a lack of liquidity and the mispricing of risk. How can one not be suspicious? We have just seen it happening, even though the herd behaviour is to simply ignore it because it is too alarming, too inconvenient.

Let the truth come out. Let justice be done.

Have we learned nothing?

Today's FCIC Hearings: What a Disappointment

This morning when I tuned to Bloomberg's coverage of the Financial Crisis Inquiry Commission hearings, I thought Richard Belzer was questioning Alan Greenspan.

Mr. Belzer is an American actor, famous for his portrayal of a rather tough policeman, Detective John Munch, in the Law and Order series.

Alas, it was only Phil Angelides, the chairman of the FCIC.



It would take a Richard Belzer to pry the truth out of Greenspan, that fox.

Cox: Don't you even wonder why?
Munch: Why what?
Cox: Why he lied.
Munch: I'm a Homicide Detective. The only time I wonder why is when they tell me the truth.

Well, here comes a little emotional satisfaction. Jim Grant is reacting to the testimony now, and is just excoriating Greenspan's testimony as 'exculpating nonsense.'

If they are going to stage these shows for the public, that purport to actually achieve something, some progress towards the truth, perhaps they should hire famous actors to do the questioning.
The politicians and bankers are good enough actors to portray themselves.

This might be a commercially viable idea. If it becomes a hit reality show all I ask is a small creative fee, not nearly the amount that Sarah Palin is asking.

Entertainment is always good for filling the gaps that reality leaves.

What the American people voted for was this:



But what they got was this:



And even worse, this:

For Warren Mosler: A Primer on the Difference Between Honesty and Fraud

Warren Mosler is "an economist specializing in monetary policy and running for Senator Dodd's Senate seat in the November elections." He has written the following piece for the Huffington Post. He is so incredibly off the mark that I thought a bit of correction to that spin might help his thinking before he hits the campaign trail.

Mr. Mosler. I have been following this case closely. No one at GATA, or anyone else looking at the state of the regulatory climate in Washington and the quality and tarnished reputation of US markets, is complaining about the normal sort of trading that has been going on 'for thousands of years.' Most of the people with whom I have spoken and questioned are seasoned traders with a profound understanding of the commodity markets, and equity markets, and derivatives.

What many people are complaining about is fraud. In this case fraud can loosely be defined as doing something and then lying about it. Saying you did not do something, or disguising the nature of what you have been doing, can turn even a prima facie benign action into a fraud, depending on the intention and degree.

Many people around the world are not complaining that the US has lent out its gold, and the 'depositories are filled with paper,' which may some day be replaced by gold again. Although they do point out that it will be replaced at MUCH higher prices if their suspicions are correct. They are pointing out that government officials have said repeatedly that they have never lent it out in the first place but refuse to submit to audits and transparent accounting. And if it did occur, such lending may be of questionable legal status, which is why so many have denied it has occurred. Only the Congress can allow for the attachment of binding claims to sovereign assets. Have they? And if, in exercising some new presidential prerogative, the executive has done so, where is the public disclosure? Where is the law?

And further, in the case of commercial entities like the TBTF bullion banks JPM and HSBC, they are not complaining about short selling that is backed by physical metal, duly paid and accounted for. They are asking questions about what appear to be enormous naked short positions against silver, questionable ownership and claims to collateral, and naked shorting by banks using public funds and powerful influence over the regulators, with selling patterns indicating the intention of manipulating the price in order to gain from it. Sound familiar? It seems as though this has been the very basis of the US financial system since the repeal of Glass-Steagall.

Although your essay contains a number of factual errors, this does stand out as a particularly misleading statement:

"If you hold gold, lending it is a way to make extra money with very little risk."

Tell that to the miners like Barrick that took a multi-billion dollar bath on their hedge book. Derivatives and transactions involving naked shorting and selling the same thing multiple times are never, ever relatively riskless or easy. There is always the real risk of the mispricing of risk and miscalculation of probability, and counterparty failure, which at times can reach the point of becoming systemically risky, as we most recently have seen in the case of AIG et al. This is the story of all bubbles and bank runs. Reckless leverage and mispricing of risk.

Janet Tavakoli sounded the alarm that a short squeeze in gold could bring JPM and the banks to their knees, and risk the global markets again. JPM is dealing in trillions of derivatives exposure, with a leverage that is breath-taking. To dismiss the complaints and concerns about this is as reckless as some of the more outlandish assurances made by Greenspan,and then Bernanke, just prior to the credit crunch about the housing bubble.

In the end the Fed had Paulson come running to Congress pleading for $780 billion in taxpayer money with no strings attached, or face a complete and utter meltdown, riots and martial law. Oh well, and tra la, today is a new day, and back to gorging on risk again, eh? Not to worry.

At the end of the day its about honesty. And playing by the rules, the same rules for everyone. Its about justice, for all, and not just the powerful few. Not privatizing outlandish profits, and then socializing the mispricing of risk that is at the heart of the imbalances creating those outsized profits for a few in the first place. That is the very basis of fraud, and it requires secrecy and regulatory annulment to flourish.

"The very word 'secrecy' is repugnant in a free and open society; and we are as a people inherently and historically opposed to secret societies, to secret oaths, and to secret proceedings." John F. Kennedy

So thank you for the primer on gold lending. I see you have also read the primer about answering the question you wish you had been asked, rather than the one which you have been asked, in order to divert the conversation away from something you do not wish to discuss at all.

Huffington Post
A Primer on Gold Lending

"Recently there have been a lot of what I believe to be gross misconceptions regarding the lending of gold and the absence of actual gold in various gold depositories. I'm writing this to clarify the lending process itself and the further ramifications of gold lending...

GATA (Gold Anti-Trust Action Committee) is complaining that the US govt. has lent gold and is therefore artificially keeping the price of gold lower than it would otherwise be. There is some truth to the idea that lending keeps spot gold prices lower than otherwise, as it keeps the spreads between spot an forward prices 'in line' but you can just as easily say that lenders selling spot and buying forward keep the forward prices higher than otherwise, giving gold producers a better price than otherwise.

So all that gold 'missing' from depositories is in the form of cash in the depositories and contracts to buy gold in the forward markets. And with gold being produced in large quantities for untold years into the future it's hard to say for sure that there isn't enough gold coming to market over that time to satisfy the demand. In fact, market theory would say the continuously changing clearing price means there is always exactly the right amount."

P.S. OMG, I cannot believe you resorted to the 'efficient market hypothesis' to attempt to prove that market fraud cannot exist, given all that has happened over the past ten years. That is truly embarrassing. Even Chris Dodd knows better than that. That prompted me to take a look at your CV. Word of advice. Peter Schiff is going to hammer you in the unlikely event you agree to debate him, unless you tighten up your thinking a bit.

"So all that gold 'missing' from depositories is in the form of cash in the
depositories and contracts to buy gold in the forward markets. And with gold
being produced in large quantities for untold years into the future it's hard to
say for sure that there isn't enough gold coming to market over that time to
satisfy the demand. In fact, market theory would say the continuously
changing clearing price means there is always exactly the right amount."

Like Daniel Drew said, "He who sells what isn't his'n, Must buy it back or go to prison." And it seems that lately the price the financiers have had to pay to buy it back, and make good on their promises, is punishingly higher than they have reserved, arranged or accounted for, especially when calculating their salaries and bonuses. This is the undercurrent of the frauds that have been perpetrated in this brave New World of innovative financing and dodgy derivatives and bonuses paid on the if-come. And the public is being forced to make up the difference and pay the price, for the good of the system, don'tcha know. And they are not even allowed to ask 'why?'