Forget Greece/Europe. To begin with, California alone is a bigger problem than the "PIIGS" less Spain, collectively. Then throw in Illinois. With Greece/Italy, we know what the Too Big To Fail Bank exposure is "on balance sheet." And it doesn't look nearly as bad as that of the European banks. HOWEVER, can someone please tell me what the "off-balance-sheet" exposure is? We don't know. What we do know is that the credit default swap and general derivatives holdings of TBTF's have gone up substantially since 2008. This is largely an unregulated market and the accounting for it is largely hidden from sight, using off-balance-sheet accounts for which there is very little regulation and oversight - and almost no enforcement of that which is actually in place. This off-balance-sheet "stuff" is what caused the de facto bank collapse in 2008.
This brings me to Morgan Stanley, the stock chart of which I have been watching for several weeks now, as it has performed even worse than its comparable banking rivals, like Goldman, JPM and Citi. I saw an article last week which shed some light on this, and I didn't save it so I don't have a link, but it turns out that, including its off-balance-sheet exposure, Morgan Stanley is technically hugely insolvent if you were to do an honest mark-to-market valuation of its balance sheet. And then there's this news out from the Financial Times which cites hedge funds who are pulling their business from Morgan Stanley:
Morgan Stanley’s stock fell more than 10 per cent and the price of credit insurance on its debt rose to the highest level since early 2009 as nervousness around the bank caused some hedge fund clients to reduce their exposure, people familiar with the matter said.Here's the LINK Recall that in 2008, this was one of the red flags with Bear Stearns before it collapsed. The reason you don't want your account with Morgan Stanley, or any big bank for that matter, if it collapses is that these banks take your securities and hypothecate them to banks, who lend them money against your securities. In other words, broker/dealers use your securities as a source of liquidity and short term funding. They can, in fact, leverage your property up to 140%. SIPC doesn't cover the kind of numbers this game is played with by hedge funds. So any hedge fund that doesn't want to stand in line and wait for their turn in the liquidation line will pull their funds from Morgan Stanley, thereby making MS scramble for liquidity. It's an ugly, irreversible spiral once it's set in motion.
To circle back to my opening paragraph, IF in fact there is a run starting on Morgan Stanley, this could easily set off the kind of domino effect created by the Bear Stearns collapse in 2008, on whom the plug was pulled in March 2008. But we didn't see the full effect of the behind-the-scenes damage until AIG collapsed and the former Goldman Sachs CEO who was Treasury Secretary jammed through the bailout of Goldman, et al.
I honestly believe that, short of a massive new printing program rolled out by the Fed and the ECB, we are going to see a systemic collapse that will dwarf that of 2008. Here's a little color to back my view from the Telegraph UK, which is probably the most objective source of mainstream media in the anglo world: LINK
All of the problems in 2008 were either completely "papered over" and discharged or overtly and not-so-overtly shifted to the balance sheet of the U.S. Treasury aka the Taxpayer. None of the sources of the problems were fixed and many have become even more severe, such as the derivatives and bad asset problem. What's even more severe is the counter-party default risk, which is why hedge funds are leaving Morgan Stanley. This is the "tell-tale heart", in my view. Interestingly, and before I saw the FT piece on MS today, I was discussing with a colleague about how for some reason this concept of "counter-party risk" has escaped the attention of the media and bubblevision gurus, when in fact it should be one of the main areas of focus for anyone making a serious attempt to either clean up the system or avoid disaster.
Given that no one will ever clean up the system short of complete collapse, here's what you can do to insulate yourself as best as possible. Make sure your brokerage accounts are with non-bank brokers who don't do much in the prime broker area. Charles Schwab and Fidelity would be my suggestion. Second, move as much of your paper (cash) wealth as possible into gold and silver that either you safekeep yourself or you know damn well is not being hypothecated or used in some fractional scheme, like GLD, SLV, Kitco, Monex, etc. If you're worried about gold, please read this commentary from the CEO of Seabridge Gold, who succinctly explains what happened over the last two weeks and why gold actually doing what it's supposed to be doing: LINK