Tuesday, November 1, 2011

The U.S. Banking System Is More Leveraged Now Than In 2008

Before I get into what the title is about, I wanted to comment on the MF Global situation.  By now I'm sure most of you have read/heard that about $700 million in customer funds are missing from MF.  Legally, a brokerage firm is required to segregate its customer funds from all other capital/balance sheet items.  This is one of the golden rules in the securities industry.  This is supposed to be accounted for on a daily basis and reported weekly to regulators.  My best guess is that Jon Corzine used customer funds to shore up the capital accounts at MF in order to avoid having credit lines pulled and to deflect regulator scrutiny. I can't think of any other reason those funds would be unaccounted for.  And now I would bet that those commingled funds went down the drain with the other bad bets that destroyed MF. 

Corzine is a scumbag.  He ran the Government bond desk when I worked at Goldman Sachs in the late 1980's. I was in the fixed income division and was, on occasion, peripherally in strategy meetings he was leading.  I can recall vividly thinking, "here's the kind of guy who would trade his mother for a nickel."  Corzine is emblematic of the blood-sucking greed and corruption that has enriched many connected to Wall Street. Corzine should spend time in jail for this situation at MF.  Unfortunately, through his political and business careers, he has made plenty of friends in high places, including many in key positions in the Obama administration, who will make sure he walks from all of this with nothing more than a slightly bruised ego.  Oh, he will take away another $12 million from MF based on his compensation  agreement as he walks out the door and hands the entire multi-billion dollar bailout tab to U.S. Taxpayers.

I will just add to this that if MF Global/Jon Corzine was commingling customer funds with non-customer funds, I would bet a lot of money that all of the big brokerage firms/banks are doing this.  You still trust those gold/silver ETFs and other paper products being sold by your broker/adviser?  I wouldn't trust ANY securities firm that is owned by a banking parent or has banking operations (that would be all of the big ones).

Just as I suspected, the big Wall Street banks have a significantly higher exposure to the European banking crisis than is apparent from the "on balance sheet" disclosures.   Bloomberg reports this morning that U.S. banks have $518 billion in credit default swaps (CDS) on European sovereign and corporate debt. That number increased by $81 billion in the 1st half of this year. JP Morgan, Goldman, Morgan Stanley, Bank of America and Citigroup write 97% of a CDS in the U.S.  This data is reported to the Bank of International Settlements (BIS - the "central bank" of all central banks) but does not show up in the balance sheet numbers reported by the banks and marketed by Wall Street as being "fortress balance sheets."  It shows up somewhat opaquely in the footnotes but is largely off-balance-sheet and unregulated.  The regulations that are in place go unenforced.  I got into an argument with a Wall Street meathead salesman a couple months ago who challenged my call that the U.S. banks were in much worse shape than reported.  Looks like I was right and he's still a meathead.  Here's the report:  LINK

Despite the fact that these banks will say that they have arranged "net out" hedges against the CDS that they've underwritten, here's the bottom line:  "The payout risks are higher than what JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc, the leading CDS underwriters in the U.S., report."  The reason for this is "counterparty risk."  That is exactly the risk that torpedo'd AIG and technically bankrupted Goldman Sachs in 2008.  These banks may well have their CDS bets hedged, but if the bank/insurance company/hedge fund/MF Global on the other side of the trade defaults, the hedge incinerates and the big bank is left completely exposed.  That is, until the Fed and the Treasury come to the rescue and print money and use Taxpayer funds to bail out the big banks who underwrite these CDS trades.

At the end of the day, the big Wall Street banks are in even worse shape than they were in 2008 and their balance sheets are more highly leveraged.  The only "CHANGE" that 2008 accomplished was the putting in place of the mechanisms for these banks to better hide their fraud and ponzi schemes and the further impoverishment of the middle class taxpayer who has been sold out by the politician(s) that gave him "HOPE," as said politicians ended up shifting the entire burden of Wall Street's nuclear cesspool onto the public.

There is one way to at least insulate your wealth from this poisonous garbage going on in our financial system:  physical gold and silver.  Note: Not ETFs of any kind.  Not Morgan Stanley, Monex or Kitco unallocated, pooled gold accounts.  Not GLD, SLV, CEF or GTU (PHYS and PSLV are fine but only if you have the $100s of thousands required to turn in your shares and receive the actual bars).  Gold/silver do not have any counterparty risk - any "promise" to pay by anyone.  When you own gold and silver, you own the world's oldest currency and most time-tested reliable wealth preservation vehicle.  If you own the paper your adviser sells to you that claims to be backed by gold, you don't own gold - period.


  1. Thanks for this piece Dave. I am watching the Greek meltdown today as sort of a prelude.

  2. Dave,

    When a firm says they reduce and net out their exposure through hedges and taking collateral...who or what determines the value of that "collateral"?..Is their a standard? or is it like mark to make believe...just wondering if those reduced exposures are realistically determined as the linked story cites ms cfo explanation. Thanks.


  3. (Dave)

    Dante, the "collateral" depends on the nature of the swap agreement and what is being "hedged." If you own a Greek bond and buy credit default insurance from me, my "collateral" would be anything on my balance sheet that is unencumbered that I might need to honor your insurance if Greece defaults. For all intents and purposes this would be cash. Greec defaults, your bond is worth 50 cents so I owe you the difference between 50 and par on the notional amount. If I don't have the liquidity to honor the claim, you are out the money you paid for the insurance AND you are out on the amount of the claim. You become a creditor to me.

    As we see with what Bank of America did in moving $57 trillion derivatives from it's Holding Company to its retail banking sub, derivatives creditors stand in the food line in bankruptcy AHEAD of depositors. It was a "clever" albeit fraudulent way of pushing the derivatives liability onto the FDIC aka the Taxpayer.

    Our system is so fucked all you can do laugh and enjoy what you can while you can, as much as you can...

  4. "Our system is so fucked all you can do laugh and enjoy what you can while you can, as much as you can..."

    Isn't that's what George Carlin said too?

    Anyhow I guess, if the banks which are all interconnected have these CDS marked down as assets in their book, all we need is one domino to take the whole thing down...

  5. Dave,
    Thanks for your appropriate post today.I have a question.

    My 401K is rolled into IRA and is all in PHYS with Fidility and Vanguard. I am not US citizen and since returned back to my native country.

    Also my retirement fund is not so much, to qualify for physical delivery.

    Looking at your todays piece, I have no choice but to leave it as it is and be on mercy of US regulators.

    Do you recomend any other option ?
    (Withdrawing any money for next 10 years is not an option for me at this time)
    Thanks in advance,

  6. (Dave)

    PHYS is fine because it is backed 100% by gold and the prospectus has all the safeguards in place to enable Sprott to make sure the gold being safekept is kept in an allocated bin. The only downside for you is that you end up with cash when you sell instead of physical gold, but it's better than owning GLD thinking you have gold and then waking up one day to find gold up $300 and GLD down 50%.

  7. Dear Dave,

    supposing that GLD, SLV, CEF, GTU = 0


    which note would you give to GOLDMONEY from 0 to 10 ?

    Thank you


  8. (Dave)

    i haven't really studied exactly how goldmoney works but I know Turk is the next best thing in terms of trustworthiness to having the gold in your hands. i think the big advantage to goldmoney is that it holds the gold in an international account so that if you decide to leave the U.S. and relocate you don't have to worry about getting your gold out.

    I'd say it's 9 - i say 9 only because when i have gold in my hand, i can use it today if need be. I assume with goldmoney there might be timing logistics, but i don't know.

  9. "There is one way to at least insulate your wealth from this poisonous garbage going on in our financial system: physical gold and silver."

    Yes, that is most definitely correct, gold and silver.

    However, make sure you have the necessary provisions to stay alive to thrive, first, so you'll have the clarity to put to good use those PM's.

    What is wealth, anyway, if your health does not serve you? So many, many sick Americans out there don't even know they're state of health.

    When IT comes, it's going to be nasty.

    "Ring around the rosie,
    a pocket full of posies.
    Ashes, ashes,
    we all fall down."

    This is no drill.

  10. Dave,
    Thank you for your clear and useful answer.


  11. Rocking, Top Notch Rant! Corzine has always been a spine tingler (wrong kind) for me. Thanks for all the scoop and perspectives valuable guidance. Sweet to have this level contacts to share. Kudos to them

    Kansas Crude

  12. Dave, Which securities firms do not have banking operations or owned by a banking entity? Thank you!

  13. Dave - I am interested in investing in your hedge fund. Where can I get more information? Thank you.

  14. (Dave)

    Hi, thanks for the inquiry. Send my partner, Dean, an email at dean@goldenreturnscapital.com

    Mention me and he can get you set up with a temporary login for our website and some other information.

    We invest in physical gold and silver, primarily 1 oz. gold/silver eagles, maple leafs and austrian philharmonics and in mining stocks, with an emphasis on juniors. The metal is safe-kept at an independent depository in Delaware. When an investor cashes out, they have the option of taking delivery of their pro rata share of the bullion (which is why we invest in the 1 oz. coins). Right now we're about 65% bullion/35% stocks, but will likely reallocated closer to 50/50 over the next 3 months.

  15. Riddle me this...why do I get Santa images for Corzine when I google him? I'm thinking I should get the grinch. That fat motherscracther should burn in hell. Excellent blog (Tebow analysis excepted).

  16. (Dave)

    LOL. Tebow is either a really intriguing development project or one of the biggest first round busts ever. Right now he's looking like the latter.

    Either way, when is the last time a player generated this much discussion for several weeks in a row?

  17. Ponzi would be proud Dave

  18. Dave - Any thoughts you can share on Royal Canadian Mint's ETR?

  19. (Dave)

    Ya. It's the same garbage as GLD only packaged under a different name. The most positive difference is that the Sponser and the Custodian are one and the same - the RCM. To begin with, you need to own $200k worth of shares (at issue price) in order to redeem the shares for gold. If you don't have money for that, you just own paper gold once again.

    BUT, check this out - from the prospecus:

    The gold bullion underlying the ETRs will
    be stored by the Mint on an unallocated basis, such that the gold bullion owned by an ETR Holder will not be held separately from the other unallocated gold bullion held at the Mint, including the unallocated gold bullion underlying other ETRs

    The withdrawal of gold by the Mint to pay fees will reduce the amount of gold represented by each ETR on an ongoing basis

    There's a bunch of other risks disclosed in the part of the prospectus that brokers and invetors never read. For instance, the Mint can suspend your ability to redeem shares for bullion.

    I may blog on this, because it's maybe a little better than GLD but not much.

  20. Thanks a lot Dave. Making my job frickin easier, yep. I got accounts in PHYS where investors can't hold bars.

  21. Dave check it out...QE Never really stopped


  22. MF Global Bankruptcy vs Utility Banking & Reform

    We need utility banking. MF Global CEO Jon Corzine, Former CEO of
    Goldman Sachs- Senator-Governor, knows the program.. He wins, you lose.
    You might have lost some money in the TIAA CREF pension fund or
    perhaps his firm may have allegedly dipped into your client funds to
    cover highly leveraged speculations (and possibly derivatives). Jon
    Corzine may be illustrative of our government dysfunction where the
    regulators are afraid to rock the boat and our congressmen are bought
    off and paid for as they move into the revolving door between business
    and government. Utility banking is a simple concept.. you put your
    money in and its safe from speculation.