It Should Be Obvious To Everyone By Now:

The system in this country is in big trouble again and the banking system is at high risk of seizing up like it did in 2008.  There is no question in my mind that Bank of America is on the verge of insolvency and I also believe that there is some truth to the rumor that JP Morgan may be circling around BAC.  A source of mine who provides consulting services to BAC told me this morning that internally BAC has slashed expense and procurement budgets to the bone.  It's obvious that the "non-core" businesses being auctioned off by BAC to raise cash are the businesses being sold because they are the businesses that have a bid in the market.  The majority of BAC's "core" assets are commercial and residential mortgages, "goodwill," and who knows what off-balance-sheet elephant diarrhea (variable interest entities - an Enron specialty, credit default swaps, other toxic waste).

I did a quick glance at BAC's financials and if I ever get the time I will dissect them to the best of my ability.  But essentially BAC has $2.2 trillion in assets.  It also reports $222 billion of book value.  Of this, $80 billion is "goodwill and intangibles."  Henry Blodget rightfully asserted that we can safely assume that $80 billion is worthless.  So partially "adjusted" book value is down to $140 billion.  Also please note that in response to Blodget's quickie liquidity analysis yesterday, the BAC spokesman avoided addressing Blodget's goodwill assumption and instead attacked Blodget's legal problems from the internet bubble era.  THAT confirms that Blodget's assumption is accurate.  And actually it's my assumption now that I'm looking  and I know it's accurate.

So, subtracting goodwill from the asset tally, we're left with $2.1 trillion, of which $139 billion is home equity loans.  Now, in all sincerity, it is likely that BAC's home equity loans are worthless.  But let's assume they could unload them for 50 cents.  That's another $69 billion of impairment, thereby reducing "book" value to $71 billion. Everyone follow me here?  And, I might add, I will bet my last silver eagle that the assumption that BAC's home equity paper is worth 50% of book is true welfare. This asset class in all probability is a big goose egg.

After accounting for home equity, the remaining asset base would be a shade under $2 trillion.  For sake of brevity and simplicity - and given that nearly 50% of the remaining asset base is commercial/residential mortgage paper, let's assume that BAC has over-estimated the book value of its assets by a mere 10%.  Again, if we could sift thru each loan - or even statistically sample the loan pools - I can assure you that using only 10% is giving BAC a free lunch for the next decade.  At any rate, that's another $200 billion of impairment, thereby taking BAC's "book" value to a negative $129 billion.  Conclusion:  BAC is technically insolvent.

Please understand that this analysis does not include any work on the off-balance-sheet garbage, which would only make the case against BAC's solvency worse.  If I can find the time, which will require digging up BAC's 10K plus using the latest 10Q and going thru all of the footnotes with a fine-tooth comb, I'm sure I can make the case that BAC's true net worth is at least double the negative $129 billion estimate.  And even then I can only make some very educated assumptions.  But I can guarantee that the off-balance-sheet mess makes the stated balance sheet look like a walk thru a candy factory at Christmas time.

I actually meant to talk about why the system is in trouble and I got off on this BAC tangent because, in fact, BAC is the poster-child for what is going on beneath surface in our system right now.  The system is even more embedded with fraud, corruption and grand-scale taxpayer theft right now than it was in 2008.  And the economy is in the toilet, per the latest round of economic numbers, most notably housing plus all the regional Fed bank reports.

What's going to happen here is that eventually the Fed is going to have to roll out a massive QE3 program in order to keep the banks from collapsing.  This will include some sort of plan for either the Treasury or JP Morgan to assume responsibility for BAC.  If it's structured like last time around in 2008, expect that JP Morgan will cherry-pick at 10 cents on the dollar any assets that it can make a fortune on based on paying 10 cents, just like it was set up to do with Bear Stearns and Wash Mutual, and the rest of the garbage will be off-loaded on the Taxpayer via the Treasury, Fannie Mae and Freddie Mac.  Back in 2002, one of my original colleagues and I speculated that eventually the Fed/Treasury would use JP Morgan and Fannie Mae/Freddie Mac as conduits to monetize the massive mortgage/housing/debt bubbles that Greenspan was blowing.  I'd say that call looks pretty good right about now.

Anyone pissed off yet?  Don't get pissed, there's nothing you can do about any of the above.  I expect the precious metals market to get very volatile over the next couple of weeks and maybe even into mid-September.  This volatility will work both ways.  What you can do is not get scared off by this and slowly buy the heart-stopping drops in the market and hold onto to what you have when it climbs higher.  Please do not sell what you have.   Dagen McDowell, who's never been accused of being intelligent, was on Fox Business earlier today cheerily proclaiming an end to the gold bubble.  Not only that, CNBC is now overlaying charts of gold on top of a chart of the NASDAQ from 1999-2001 and other miscellaneous bubble market comparisons and suggesting that the gold bubble has popped.  This is coming from a news organization who failed to see the internet bubble and the housing bubble.  And now all of a sudden they have the ability to see a gold bubble?  LOL.  Both of these anectdotes are great indicators that things have yet to get interesting to the upside in the precious metals.

P.S.  Do yourself a favor and check to see if any of the mutual funds you own have a big position in BAC and get rid of those funds.  The obvious ones are the funds run by that dip-shit Bruce Berkowitz at Fairholme Capital Management, who is one of the largest holders and recently (like 30% higher) added to his doomed position.