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.