Tuesday, January 31, 2012

So Be It

"Fiat:"  an arbitrary decree or pronouncement, especially by a person or group of persons having absolute authority to enforce it: The king ruled by fiat - dictionary.com
The big topic of discussion in the cyberworld today was an interview with Jim Sinclair, who discussed an imminent ruling by ISDA - the board of OTC derivatives rules and enforcement - which would pronounce that any massive haircut in value taken by Greek bondholders would not constitute an event of default.  This is not new information, as it was reported as far back as October that ISDA would make this declaration once the a Greek restructuring occurred.  And it will occur despite the poker game going on, because if Greece defaults, then ISDA will have its fiat powers stripped by market forces when Greek sovereign paper goes offered without any bid (i.e. worthless).  You can hear Sinclair's interview at http://www.jsmineset.com/

What bothered me was that Sinclair made ISDA sound like some dark, mysterious force out there that was largely hidden but imbued with supernatural powers.  ISDA has been around forever.  I used ISDA documents when we would engage in high yield bond swaps with funds like Harvard Investments in order to hide positions from the back office risk Nazis at year-end.  It was de rigeur back then.  It's rampant beyond control now.

The problem with ISDA is that it is governed by the same banks that stand to benefit the most from ISDA rule declarations:  the big banks that have been declared by fiat as "too big to fail" by Team Bernanke/Obama (really, just Team Bernanke, but Obama reads the script off the teleprompter like a good circus animal).   

So, in the Greek bond situation, what you have is a situation where big hedge funds and money market funds have loaded up the boat with short term Greek sovereign paper at high yields (and Italian/Spanish/Portuguese, etc), and bought OTC derivative credit default protection in the even of default.  The way this works, if Greece is unable repay its bonds at a minimum of some small discount to face value, or if Greece defaults outright, the issuer of the credit derivative - the big bank in most cases - has to make the investor whole.  On $10's of billions in Greek debt with credit protection issued, it can get expensive for the big banks.

To make matters even more interesting, there has been been outright speculation on Greek debt in which a hedge fund will bet on a Greek default by buying a fancy derivative from a big bank such that the hedge fund doesn't even have to own any bonds and it will still get paid.  It's like buying a put option on a stock betting it will go down without actually owning the stock.  Again, in the event that Greece has to "restructure" its debt at 30-50 cents on the dollar, or outright defaults, the big banks would have to cough up $10's of billions in "default insurance" payments.

But there's a way around this.  It's called rule by fiat (see the above definition of "fiat").  Since the banks control the rules and procedures of ISDA, if they determine that a Greek restructuring which requires a 50-70% haircut on the debt held by investors is not really a "default" event, so be it.  The Greek bond investor will be coerced into receiving a new bond that will be in the range of 30-50% of the face value of the original bond, thereby getting hammered on its investment, and the big bank who got paid a handsome premium to underwrite default insurance on that paper will get to keep the money it was paid and it will not have to make obligatory restorative payments to the investor.  Isn't it good to be King in a completely fiat system?

The problem with the fiat currency and financial system is that eventually it turns into one giant Ponzi scheme.  The politically/socially correct term for this would be "a fractional banking and financial system."  It's a system based on "full faith and trust."  When the trustworthiness of this system starts to fade, investors will start to move "fiat" money into hard asset currency - that is, gold and silver, the world's oldest and most trustworthy hard asset currency.  It's happening now, only it's a lot more prevalent in the eastern hemisphere countries like China, Russia and India.  In our own backyard, Venezuela demonstrated this movement by recalling nearly 100% of its sovereign gold that was being "safeguarded" by big banks in NY, London and Zurich:  LINK  Hugo Chavez, love him or hate him, is one smart hombre.

Gold and silver are on the cusp of another big explosive move higher.  James Turk in his latest commentary on King World News said it best: 
Regarding gold, I don’t think people realize that gold could explode from current levels.  I think the potential for explosion is there and what you are going to see is not only silver on the move, but you will also see gold smash through the $2,000 level
Here's the LINK.  If you don't understand why Turk makes these comments, re-read my commentary above.  If you still don't understand why, so be it.  Unfortunately, by the time the masses understand this, gold and silver will likely be too high in terms of fiat currency price for them to buy enough to matter.  It is what it is...


  1. Dave,

    Wouldn't this action by ISDA effectively kill the CDS market? Not that would be bad, but why buy insurance if it won't pay off?

    If you can't buy insurance, then interest rates will have to skyrocket to make the risk worthwhile. But rates that high can't be paid by Greece or the other PIIGS so what do you think that will do to the financial system and the governments involved?

    Great blog.

    1. Good questions. I think the CDS market will exist as long as there is an appetite for taking risk and buying insurance against risk. BUT, if they do change the playing field in this situation, I think anyone who buys credit protection is an idiot unless they make sure the terms are air tight.

    2. One more point, I think credit insurance is badly mis-priced - i.e. it should be a lot more expensive and they don't reflect the true cost of the risk involved. As long as Governments bail out the banks on these contract - like with AIG and Lehman - the taxpayers are going to continue to pay the amount by which these deals are underpriced. That's the price of moral hazard.

  2. Dave, I am just a thick-skulled amatuer, so please bear with the stupid question. One of the funds in my 401k is 'High-Yield Bonds.' I do not have the 4th quarter statement in front of me at the moment, however my gut feel is this fund contains quite a bit of toxic European soveriegn debt.

    If you were me, would you dump this fund ASAP?


    1. Mammoth, I wouldn't own anything in the fixed income sector, especially junk bonds. But then again, I wouldn't own anything except gold, silver and mining stocks.

  3. Facebook IPO Is US Intel Operation?

    Facebook, from what we can tell, is a kind of false flag intended to gather huge numbers of users in an environment that will be – at least gently – pro-globalist. Or at least useful to the globalist agenda.

    Why do we believe that Facebook is a kind of false flag? The biggest tip-off in our view is Facebook's astonishing popularity. It's simply another social networking site but it's one that's attracted nearly a billion users. Is it really so much better than other such facilities?

    No ... the barriers-to-entry seem fairly modest to us. What probably differentiates Facebook from other such facilities is not its technology or brilliance but its backers.

    When a company gets this big this fast it seems to us that there are always the powers-that-be lurking close by. In this case, Zuckerberg seems to us to have the requisite pedigree for someone that would be subject to elite cultivation.

    Of course, it's perhaps the luck of the draw as to whether a company grows to the size of, say, MySpace or gets as big as Facebook. But in either case, one is struck by the paucity involved in the actual business model. Facebook's content is furnished by its users – and user information is then resold to advertisers.

    The model is simplicity itself and involves little creative content. This is probably one reason why Facebook is constantly getting into trouble over its privacy policy. The company really has nothing to offer but user-driven data.


  4. I too was sort of surprised with that Jim Sinclair interview. Claiming it to be "breaking news" is really sad because it is pretty much old news by now. Just look at how low Greek CDS is trading, no one even takes it serious because they know ISDA won't call it a default. By this time, most money market funds, hedge funds and banks are totally out of Greek debt and have all written off those loses. That's why some greek bonds trade at 30 cents on the euro. It also seems that besides vulture hedge funds, retail is also toying around with these bonds as they are now only 2nd to Bunds in trading volume in Frankfurt. In the end PSI will be a done deal, vulture funds make a quick buck some retail will get burnt and ISDA saves the big banks from paying out on those CDSs. Of course none of that really makes a diference for Greece since that restructuring only decreases their total debt/GDP some 10 or 15% less. ECB, EFSF and Greek Public Sector have to take a haircut too so Greece can get back on its feet, but that will have to be discussed in the future and no one wants to talk about that now. That's why the euro-crisis is here to stay for a while.

  5. The isda is as legitimate as this guys excuse...

    Mexican official flies with $1.9 million cash in briefcase and backpack
    Veracruz state treasury secretary says money was meant to promote tourism; political rivals allege it was part of secret advertising budget for presidential election


  6. Eating Popcorn during a credit default "event" triggering a major "papering" event is fun.

    My new Blog Dave...enjoy and thanks for all you do.


  7. Great topical post - thx.

    Here is some more - which supports your ISDA thoughts and Jim's and it gets ever more disturbing. I am realizing slowly that there isn't a good solution to this cess pool but a collapse and a totally new system - trustworthy. A small change here and there will not do it and we can't settle for less!. This one now is definitely not trustworthy and the breakdown in confidence is so bright and obvious that its not easily seen. Like the story which goes that natives of the Carribean and Africa coast didn't "see" - recognize - ships when they first appeared on the horizon because they were too foreign.

    Anyway - the incest is plain amazing.


    And make sure to read the link inside the article about Faissola.


    Anyone still supporting this "system" and a gradual change is plain stupid.

  8. Little off topic - but this link has three very important reads. The western policies are boomeranging back.


    First one - "Americans to become sharecroppers in their own country as printed money boomerangs back to the developed world to buy up companies."

    Second - "China Has Begun Buying Up Germany’s Family-Owned Industrial Backbone."

    Third - "China’s investable assets expected to grow 328% to $65 trillion by 2020."

    The last one being very important for Gold and Silver. Specifically because the boomerang comes back via "Fiat trash". The Yuan will not be allowed to strengthen!!!!

  9. Keep believing...

    Blythe Replaces Faissola who is Vice Chairman of ISDA

    Things are getting hairier than hairy. Two days ago we reported that Blythe is taking over for Deutsche Bank’s Michele Faissola as head of the GFMA, and will also retain her role as Head of Commodities at JPMorgan.

    After deeper research and a reader tip, we have uncovered that Michele Faissola is the Vice Chairman of ISDA. Prior to the Blythe’s insertion into the GFMA Chair, effective Feb 1, Michele Faissola was both the head of the GFMA and the Vice Chairman of the ISDA. As you can see from GFMA’s mission statement below, they might as well just be combined into one organization.
    The real story appears to be that we needed to put one of our banksters onto one of these banking oversight committees to smooth over the haircuts which are going to take place with the European Debt Crisis soon and make sure they are carried out exactly according to the wishes of Mr. Dimon and Mr. Blankfien. Michele Faissola with his stellar reputation of working with Italian tycoons/money laundering , must have been told that he was now only going to be responsible for "oversight" of one of the two organizations. Meanwhile, The Morgue puts Asset Number 1 in place to carry out the dirty work.

  10. What about Silver – Alf Field – Febr 2012
    This is mind-blowing stuff for an analyst who did not believe that EW applied to silver!

    We can now attempt to make some price forecasts. Silver, as with gold, is starting intermediate wave 3 of Major THREE, which should be the longest and strongest wave in the bull market. It should certainly be longer than intermediate wave 1 which was the gain from $8.77 to $49.52, or +464%, as shown above.

    Thus the gain in wave 3 of Major THREE should be larger than +464%. It should be a gain of at least 500%. Starting from the $26.39 low, a gain of 500% would produce a target price of $158.34 for silver. That is the number which equates with the $4500 price forecast for gold and produces a silver to gold ratio of 28.4 ($4500 divided by 158.34


  11. On the ISDA "decision" - Its a decision between a rock and a hard place.

    If a default is decided on then the system is stuffed. If it is deemed "not a default" the system is still fucked and confidence and the last bit of credibility and confidence is out, finished, nada left.....

  12. Without integrity there is no confidence...so where is the integrity?

    Caesar Bryan - Tidal Wave of Gold Buying as Confidence Lost

    Caesar had this to say regarding a loss of confidence in the system: “When I started managing gold equities in 1987, gold was in the process of being demonetized. By that I mean central banks were selling. That’s changed. After a long and painful experience, central banks are now adding to gold. With the ‘Great Moderation’ over, people are now beginning to question the money. This is really a very serious situation. Confidence is hard to get and easy to lose, and I hope the authorities are aware of that.”


  13. US-UK gold swap treaty disappears from UN Internet site, reappears at GATA's

    Submitted by cpowell on 07:54AM ET Wednesday, February 1, 2012. Section: Daily Dispatches
    10:56a ET Wednesday, February 1, 2012

    The new essay by GATA consultant Rob Kirby of Kirby Analytics in Toronto, "Manifest Destiny Derailed: Treason from Within," which was published this week at three Internet sites --





    And the German freelance journalist Lars Schall's:


    -- cited the 1981 gold swap treaty between the United States and United Kingdom and included a link to the treaty document posted at a United Nations Internet site:


    Apparently within hours of Kirby's reference to the treaty, the link was disabled at the United Nations Internet site. Whether this is more evidence of the gold price suppression schemers trying to cover their tracks or just coincidence or the result of ever-more-intense solar flares, the gold swap treaty has been posted at GATA's Internet site here:


    Keep your tinfoil hats on tight.

  14. Doug Noland on Global Government Ponzi Finance

    Jim welcomes to Financial Sense Newshour Douglas Noland, Senior Portfolio Manager at Federated Investors Inc. Doug discusses the global credit crisis, and believes the greatest bubble in the history of mankind is ready to unfold.


  15. Corruption in Fascist Business Model

    Few can define fascism. Many cannot recognize it. History provides shocking stories of its past episodes. But its root structural feature is the tight relationship between the state and large corporations of a nation, which permit enormous fraud and lead to grand inefficiency, even while aggression and war accompany its handiwork in an ugly fabric weave. Nowhere is the bond more scummy and corrupt than with the banking industry, not in general but in Wall Street where defense of the USDollar has come. That defense was contracted from the USGovt to Wall Street, whose ties developed into a vast network of corruption. That cozy relationship led to the gutting of Fort Knox and its gold bullion in the 1990 decade of so-called prosperity. The 0% gold leasing resulted in vast speculation schemes, private multi-$trillion profit, and absent collateral for the USDollar itself. The other cozy connection is with the defense contractors, where war generates colossal cash flows, some of which result in kickbacks to Congress.


  16. Everything is tainted..it's truly disgraceful...

    January 31, 2012
    Holder & Obama’s Propaganda is “Belied by a Troublesome Little Thing Called Facts”
    By William K. Black

    The Obama administration’s record of prosecuting elite financial frauds is worse than the Bush administration’s record, which is a very large statement. Syracuse University’s TRAC issued a report on November 11, 2011 entitled “Criminal Prosecutions for Financial Institution Fraud Continue to Fall.”

    Neither administration has prosecuted any elite CEO for the epidemic of mortgage fraud that drove the ongoing crisis. This contrasts with over 1,000 elite felony convictions arising from the S&L debacle. The ongoing crisis caused losses more than 70 times greater than the S&L debacle and the amount of elite fraud driving this crisis is also vastly greater than during the S&L debacle. Bank CEOs leading “accounting control frauds” now do so with impunity from the criminal laws. They become wealthy through fraud and even if they are sued civilly they almost invariably walk away wealthy with the proceeds of their frauds.

    The Obama Administration Prefers Politics and Propaganda to Prosecutions

    In a bid to win support from California officials, Mr. Donovan proposed earmarking $8 billion in aid for beleaguered California homeowners, but that left other state attorneys general incensed, according to an official familiar with the negotiations.”

    The NYT did not make the point, but these facts represent multiple disgraces on the administration’s part that go beyond the substance of deal. First, there is the obvious impropriety of pressuring state attorney generals (AGs) who are Democrats to approve a deal so that the President can claim credit for it in the SOTU. Second, it is disgraceful that HUD Secretary Donovan met separately with Democratic AGs. Prosecutions and suits against banks must have nothing to do with political affiliation. Holding separate meetings with AGs based on their party affiliation brings the entire system into disrepute. Third, the idea of offering California a unique earmark in order to buy AG Harris’ support for a deal is as stupid as it was offensive. The administration thinks that everything is about politics. As a former Department of Justice attorney I regret the administration’s bringing the department into disgrace. I can personally assure the nation that nothing like this ever occurred during the S&L debacle in our prosecutions, civil lawsuits, and agency enforcement actions.

  17. lolol....

    Nobel peace prize jury under investigation

    "Nobel called it a prize for the champions of peace," Heffermehl told The Associated Press on Wednesday. "And it's indisputable that he had in mind the peace movement, the movement which is actively pursuing a new global order ... where nations safely can drop national armaments."

    Since World War II, especially, the prize committee, which is appointed by the Norwegian Parliament, has widened the scope of the prize to include environmental, humanitarian and other efforts.

    For example, in 2007 the prize went to climate campaigner Al Gore and the U.N.'s panel on climate change, and in 2009 the committee cited President Barack Obama for "extraordinary efforts" to boost international diplomacy.

    "Do you see Obama as a promoter of abolishing the military as a tool of international affairs?" Heffermehl asked rhetorically.


  18. Egon von Greyerz

    Von Greyerz also discussed the initiative in Switzerland to get the Swiss franc backed by 20% gold. Egon von Greyerz is founder and managing partner at Matterhorn Asset Management out of Switzerland. Here is what von Greyerz had to say about Alf Field’s call for $158 silver: “Eric, overnight I received an email from my good friend in Australia, Alf Field. To his amazement he found the silver chart, from an Elliott point of view, runs in parallel to the gold chart. His count is now very clear that silver will, in the next move reach $158.”

    When asked about the initiative in Switzerland to back the currency with 20% gold, von Greyerz responded, “We have what is called a gold initiative. So there is a Swiss politician who has started the initiative to have to have the currency backed with 20% gold.

    I just talked to the politician who started this move and he said it’s going very well and he firmly believes they will get the 100,000 signatures that will lead to the referendum. It’s a very interesting initiative and it’s too early to say how successful it will be, but it’s certainly on its way.”


  19. Cuffed Or Bribed?

    A U.S. Justice Department source has told The Daily Caller that at least two DOJ prosecutors accepted cash bribes from allegedly corrupt finance executives who were indicted under court seal within the past 13 months, but never arrested or prosecuted.

    The sitting governor of the U.S. Virgin Islands, his attorney general and an unspecified number of Virgin Islands legislators also accepted bribes, the source said, adding that U.S. Attorney General Eric Holder is aware prosecutors and elected officials were bribed and otherwise compromised, but has not held anyone accountable.

    The bribed officials, an attorney with knowledge of the investigation told TheDC, remain on the taxpayers’ payroll at the Justice Department without any accountability. The DOJ source said Holder does not want to admit public officials accepted bribes while under his leadership.

    Say it isn't so! I mean, c'mon -- there hasn't been anything going on with bribery when it comes to, oh, Jefferson County in Alabama, right? We haven't actually seen municipal officials go to prison while the banksters who booked outsized profits (and after all, for there to be a bribe someone must offer a bribe while someone else receives said bribe) walk around chuckling, right?


  20. Fraudulent Debt = Counterfeit Money

    How is borrowing money based on fraudulent claims of asset value and future income any different from counterfeiting money?

    Let's compare three financial criminals. The first is an old-fashioned counterfeiter who doctors up paper and runs a printing press to produce fake currency.

    The second criminal borrows money based on a fraudulent asset and phantom future income. For example, the criminal might obtain a credit card based on false assets and income, or borrow money against a property that is worth far less than he claims and base his credit on an inflated fantasy income he does not actually receive.

    The third criminal borrows money from the Federal Reserve at zero interest and extends a loan to a fraudulent borrower because a government agency has guaranteed the loan. Whatever income the lender receives is pure gravy, and whatever losses are incurred when the fraud is uncovered are made good by the taxpayer.

    Since our banking system is based on money being borrowed into existence (i.e. fractional reserve), then how is creating money unsecured by either assets or income any different from actually counterfeiting bills? The outcome is identical: money created out of thin air.

    We might also ask: how is writing a derivative based on false claims of asset valuation any different from counterfeiting? Once again the creation of an "asset" that can be sold to unwary investors for cash that is based on fraudulent claims of valuation is the equivalent of counterfeiting currency: both add no productive goods or services to the economy and both are created out of thin air.