Nothing Is But What Is Not*

The events my old colleague and I talked about back in 2002 that we anticipated that would blow our minds are happening now.  ISDA - controlled by the issuing banks - has determined that the Greek bond deal has not resulted in an even of default event though the new bonds being issued will result in about a 35% recovery rate - initially.  When Greece hits the wall again these bonds will be worthless.  And the corruption, fraud and crime at MF Global will go unprosecuted.  Jon Corzine will walk away with little more than slight embarrassment.  In fact, at Wall Street "elitist" cocktail parties, getting away with the theft of billions like this is probably awarded a high degree of social status.  This stuff blows my mind...

*This is a quote from Shakespeare's "Macbeth," Act 1, Scene 3.  For me this famous and much discussed line from the play pretty much encapsulates and describes the realities of our political and economic system.  Let's look at one of Bernanke's comments yesterday from his Humphrey Hawkins testimony.  Bernanke defended the Fed's massive currency swap [sic, bailout] of the EU banking system by stating that "the ECB is well capitalized."  Hmmm...let's take a look at the EU balance sheet (data source from zerohedge, it's accurate].   On a "book" basis after the latest LTRO operation, the ECB has $3 trillion in "assets."  The large portion of these "assets" are direct liabilities of ECB counterparties - national Central Banks and gold lease obligations.  Supporting this garbage is $82.2 billion in net capital.  That's a leverage ratio of nearly 37 to 1.  Banana Republic-esque.  A bona fide mark to market of the ECB "assets" would completely wipe out that net capital and the ECB would be in an unequivocal position of insolvency, but for its ability to print money. Unequivocal.  It certainly is not "well capitalized."  Bernanke stated under oath in front of Congress that the ECB is "well capitalized."  It is not.  Nothing is but what is not.  You can peruse the ECB balance sheet HERE.  Zerohedge has nice leverage chart HERE

Curiously, no one has said anything about the "Gold and gold receivables" asset account on the ECB balance sheet.  The key term is "receivables."  Unbeknownst to many, and in affirmation of the massive Central Bank gold leasing program used to try and keep a lid on the price of gold, several years ago the BIS changed its accounting rules and permitted Central Banks to account for gold leased out as a "receivable" and part of the gold asset account, rather than as a "lease receivable."  Any accountant and financial analyst will tell you that a lease receivable is not of the same quality of asset as the actual asset.  But what is even more deceptive about this re-classification of leased out gold is it eliminates the fact that the gold lease receivable is actually a counterparty liability.  Given the poor credit quality of the EU member banks, the gold lease receivables on the ECB balance sheet are therefore very poor in quality.  They certainly are not worth face value.  Nothing is but what is not...

And one more point about this gold leasing business.  No one really knows for sure how much of the ECB's gold is actually leased out.  Based on the collective observations of several well respected market analysts who have looked at this issue for close to 20 years, it is likely that most of the ECB's gold is leased out.  But lets assume only 1/2 of it is leased and the lessees ultimately default on those leases and are unable to return the gold that was leased out and sold (perhaps some to Venezuela, who recently took physical possession of its 200 tonnes of gold - now you know why).  You can see that the claim that a gold "receivable" can be valued at face value is quite questionable.  For me this underscores that fact that the entire asset quality of the ECB's (and the U.S. Fed's) balance sheet is like not what it appears to be on paper.  Nothing is but what is not...

One more interesting tidbit I want to get out of my "in" box.  Many of you have seen this already but many have not.  A big source of irritation for me has been the way the media, Wall Street and politicians have been focusing everyone's attention on Greece/Europe and making it seem like that's the problem we have.  Keep your eye on the ball, not the shell-game operator.  I think this chart will settle the issue for anyone who cares to look at the truth.  It turns out that on a per capital basis, the United States has the highest amount of debt per capita of any country in the world:  LINK  I think that statistic pretty much speaks for itself and it highlights for me why the real problem facing our system is us.  It turns out the China, the U.S's largest creditor by far, agrees with my assessment.  Per this WSJ article, China is starting to shift its foreign reserves away from the U.S. dollar:  LINK.   We know per the revised TIC data that China dumped over $100 billion in U.S. Treasury holdings in December.  This is not good.  And it further underscores the fact that Bernanke's attempt to deflect the probability of more QE3 yesterday was total bullshit.  I'm still waiting for someone, anyone, to explain to me how the U.S. Treasury can possibly fund the Governmnet's spending in 2012 without a significant amount of money printing...

One last note.  Mission accomplished yesterday.  I surmised that if yesterday's silver hit was just another run of the mill manipulation operation by JP Morgan, that we would see a massive reduction in the open interest of the March silver contract, of which very little would be accounted for by delivery notices.  It turns out that the open interest in silver in total declined by 1039 contracts.  Of that, March silver o/i actually declined by 1081 contracts.  Of that, only 160 of the March decline was accounted for my delivery notices. JP Morgan's silver market operation thus achieved its goal by substantially reducing the amount of silver that might have stood for delivery.  Forget rule of law in this country.  It's dead.  This illegal manipulation will go on until the Comex eventually defaults.  Obama was supposed supposed to reform Wall Street corruption and restore rule of law.  Not only has he NOT fulfilled this campaign promise, he enables the widespread corruption and looting.  Nothing is but what is not...