 Breakdown
Approaches Climax
Jim Willie
CB
Jim Willie CB is the editor of the "Hat Trick
Letter"
Oct 2, 2008
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Pardon the brief and jumpy
style, laced with more emotion than usual. The events of the
last few days have been remarkable, alarming, chaotic, and surreal.
Gonna attend the Toronto gold show hosted by the Cambridge House
this weekend. If you are there, grab my arm and say hello. Let
me know your perspective on the brewing crisis.
HEART ATTACKS & BANK HOLIDAYS
The banking system breakdown
is very far along, but still early. Remember USFed Chairman Bernanke
stated over a year ago that the mortgage problem was contained.
Try not to laugh. The bond crisis is absolute, broad, deep,
and all-inclusive, enough to kill the USTreasurys after it kills
the US banking system. The heart attack signals are with
the LIBOR spreads over USTreasurys, the money market, the TED
spread (Treasury versus EuroDollar), and short-term USTreasurys.
Charts resemble heart attacks and EKG electro-cardiogram monitors.
Many details appear in the October Hat Trick Letter report just
posted. The bank runs have begun in earnest. Nevermind the big
banks for a moment. The smaller ones are entering seizures. The
small and medium sized cities are also entering seizures. Here
are two stories, one about a city and another about the bank
holiday coming.
This from a friend in Seattle:
"I was talking to my neighbor last night. He is in finance
in the county government, King County (Seattle). He said there
are some very secretive budget talks being held, very hush, hush.
Apparently, the county has lost around $200 million of taxpayer
money in toxic paper investments, with huge implications
on the budget. He says he is not privy to the details, but he
is taking a 10-day vacation starting today, because he has nothing
to do since everything is in flux."
This from a friend in Atlanta
with strong banking connections: "Reliable word that
Bank of America branch managers just received a letter or memo
from the USFed instructing them to perhaps be ready for a
one-week universal shut-down of the banking system, including
access to checking accounts, savings accounts and credit cards.
Reliable word has it that BofA bank branches received a shipment
of signs last week, reading "WE'RE SORRY, BUT DUE TO CIRCUMSTANCES
BEYOND OUR CONTROL, WE CANNOT BE OPEN AT THIS TIME."
So the banks are in need of
a respite, a break, a holiday. They need to shore up their positions.
Economists and bankers avoid revealing the consequences of extended
absence of short-term credit supply. Imagine all the supply chain
DELIVERY routes being interrupted for lack of short-term credit,
certain to interrupt the supply of food, gasoline, building materials,
basic household wares, simple hardware, and more. The short-term
credit would certainly also disrupt payroll streams for companies,
inventory supply for retail chains, durable goods purchases by
consumers (like washing machines & refrigerators), the maintenance
of basic machinery (like cars, trucks, computer, communications),
even cash dispensed at ATMachines.
BAILOUT BILL PASSAGE
The Senate passed the Wall
Street bailout bill, by a 3:1 majority. Some sweeteners like
tax cuts and raising the limit to $250k on individual accounts
for bank depositors helped. Some people might think that finally
the banking system can at last receive some meaningful fixes.
Call me a killjoy, but this will accomplish next to nothing as
a banking system remedy. It is more a paper seal to Wall Street
corruption than to ANY solution. If passed by the House, as is
likely, it puts an epitaph on the American badge of legitimacy.
A decade of fraud has been underwritten, sanctioned, and sealed.
Even foreigners might smile at the new & improved bill. Their
impaired bonds can participate in the redemption process. The
only trouble is they might have to accept hot shiny USTreasury
Bonds in return, of certain questionable value.
Still the bill must be viewed
as a giant paper net to catch a giant locomotive train, one that
derailed and then went over the mountainside cliff 500 meters
above and is hurtling downward with acceleration. Gravity is
a bitch, and so is momentum! One should not doubt for a second
that it will do much to halt the downward trajectory. One
should remember that debt solutions accomplish nothing in providing
remedy for debt abuse and damage inflicted by broken debt contraptions.
Nothing is fixed, only accounts have been shifted and names have
been changed. THE BANKING SYSTEM PROCEEDS ALONG ITS OWN CLEARLY
DEFINED PATHOGENESIS, with great momentum and power, which no
human devices can interrupt. The next shock will be why the bill
has not fixed the banking system as Mini-Fuhrer Paulson claimed
it would. The other next shock is why Wall Street will need another
$700 billion within a year. The other other next shock is how
much the AIG and Fannie Mae "INVESTMENTS" a la nationalization
will each cost the USGovt conglomerate an unexpected extra $trillion.
The bailout yesterday enables Wall Street executives to retire
more comfortably, even as some seek asylum or face exile.
The irony of the lifted
depositor insurance is that big financial conglomerates can now
raid the private accounts worth over $100k now, with government
coverage in the bankruptcy courts. The October Hat Trick Letter contains some multi-sided
evidence of USFed open license to use subsidiary accounts toward
the aid of liquidity strains. What constantly leaves me shaking
my head is how intelligent people continue to attribute fair
spirited motives to the system, when it resembles a crime syndicate
more each year. The reason why it resembles one is that it IS
a crime syndicate operating under the USGovt roof. There are
three crime syndicates operating under the USGovt roof, the others
identified in the report this month. Each has had a profound
financial effect on the nation, as in killing its host.
One can make a fine balanced
and credible argument that the Fannie Mae bailout package represented
an aggregate parallel of the simple Trenton New Jersey home loan
fraud. The parallels are argued, with conclusion being the USGovt
bailout was tantamount to abandonment by the mafia gangsters,
who walked away from the $250k loan on the $50 crack house dilapidated
property. Parallels are disturbing, as Wall Street and USGovt
players fill out the example carried to the aggregate. The other
Fannie Mae fraud is the simple bond certificate counterfeit,
just plain paper printing without bother of Wall Street involvement.
That fraud helped to run up the total Fannie Mae fraud past the
$1 trillion mark. Given the sleazy guys who ran Fannie Mae, and
all the protection run for it by politicians averse to reform,
the fraud was quite easy. Who would want to question a shiny
Fannie bond, a device which powered the great housing boom?
FDIC AS NEW I-BANK RAIDER
A new role seems to have come
to the Federal Deposit Insurance Corp. They are the newest
brokers on Wall Street, the new investment bankers, raiders true
to the name. They do not protect depositors any more than
Christopher Cox at the SEC protects stock investors. The FDIC
has minimal funds, most likely co-mingled with the USTreasury
anyway, just like the Social Security Trust Fund. The measly
$45 billion lying around in the FDIC fund would not cover more
than one or two decent sized banks, or one Washington Mutual
or one Wachovia. So what does Sheila Bair do in response? She
defends Wall Street, avoids liquidation by dead banks, and steers
them to the JPMorgan chop shop and slaughterhouse. A great arbitrage
results, as JPMorgan obtains bond assets for nothing, and can
sell them to a stupid captive customer, us taxpayers.
In doing so, several things
happen:
1) JPMorgan obtains the entire
corporate asset kit & kaboodle for next to nothing
2) deposits are used to help
the JPM asset ratios
3) bond assets can be sold
to the USGovt bailout fund
4) senior bond holders for
the dead banks are screwed, receiving a pittance
5) dangerous credit derivatives
are placed in the JPM Garbage Can
6) the Wall Street Consolidation
Plan continues.
The Big 3 Banks are JPMorgan,
Citigroup, and Bank of America. Just how on earth can Citigroup
even consider acquiring Wachovia? Buy it with what? Citigroup
is insolvent. That does not stop the Wall Street firms from spreading
their cancer. Besides, King Cox has a plan, to remove 'Mark to
Market' asset accounting rules. Poof! The US banks are solvent
again. Only trouble is they become Walking Zombies. Couple this
desperate policy change with short stock restrictions, and the
Third World Finances label fits even better, from lack of credibility.
The new Wall Street I-Bank is on the scene. The modern FDIC might
make Michael Milken proud, the junk bond king from Drexel Burnham.
By the way, he only served two of his ten years in prison. Wall
Street does have its privilege. The Wall Street investment bank
model is dead & buried, with the door slamming shut by Goldman
Sachs changing its coat to read bank holding company.
The group likely to initiate
lawsuits is the senior bond holders to the broken banks. They
should have entered an orderly procedure led by the FDIC. They
face ruin when they should salvage something. The FDIC sets up
banks to be raped. The label of pimp is too generous and connotes
too much respect. To think that Sheila Bair at the FDIC is being
praised for her leadership lately is enough to make a bond holder
vomit. These mergers are nothing but disguised 'Chop Shop' rapes.
At least the FDIC receives fees. JPMorgan donated $1.9 billion
to the FDIC cause. By the time the dust clears after the locomotive
crashes, three giant hollow monoliths were be standing, a tribute
to Manhattan, in the Big 3 Banks. Their glass and aluminum fittings
might be in much better shape than the World Trade Center though.
It is doubtful that they possess any gold bullion in basement
vaults. Let's hope the third of these buildings does not suffer
a structural sympathy, only to collapse.
LOOMING TIME BOMBS
Clearly they are AIG with its
raft of Credit Default Swaps, and Fannie Mae with its raft of
mortgages and their bonds. Fannie also has a scad of Interest
Rate Swaps. As explained in past Hat Trick Letter reports, the
quarterly bills payable to JMPorgan and Goldman Sachs might be
considerable on these swaps. The USGovt swallowed two really
big ugly hairy hungry tapeworms, that will possibly each cost
an extra $1 trillion in unplanned expenses. Actually, my
guess is the figure might be conservative. A year ago, when clowns
like Bernanke and harlots on Wall Street were estimating the
entire mortgage fiasco would result in $100 to $200 billion losses,
my figure was $1.5 to $2.0 trillion. As the time bombs go off,
they will do so in dribs & drabs, actually giant dribs &
giant drabs. The costs will take esteemed senators in the august
body of the USCongress off guard.
An interesting thought came
to me tonight as the Senate Bailout Bill was written. Actually,
more sinister than interesting. The Fannie bill, the AIG bill,
and the Wall Street omnibus bill might have been greased by private
bribes. Imagine the hefty $138 billion paid to JPMorgan by the
USFed, ostensibly from counterfeit Dept of Treasury hotmoney,
during the Lehman Brothers failure and confusion, approved by
Bankruptcy Court judge James Peck in Manhattan, all executed
in pre-dawn during the weekend. Sorry, wanted to paint the background
accurately but succinctly. If the 74 senators were each given
$2 million in a basic traditional bribe, located safely in a
Cayman Island account, then the total cost to JPMorgan would
only be $148 million, in the neighborhood of 1 part in 1000 on
that disgusting under-the-table handout of $138 billion. It makes
good business sense in a day and age when rules mean nothing,
when preserving the system is paramount, especially when BS bylines
can be spouted about helping the common man.
RUN ON BANKS, RUN ON BONDS
Those talking perpetual campaign
managers known as USCongressional members, they like to talk
about "the fact of the matter" a lot, as thought they
have some innate ability to recognize facts. Here are some facts.
A broad and deep run is occurring on US banks, small, medium,
large. Banks rely upon deposits and bank equity (stocks and bonds)
to supply themselves with capital. The bank runs strip banks
from their ability to continue operations, at a time when their
stocks have cratered. Stock price declines of over 70% and 80%
are common, the norm, not the exception. Insolvency plus illiquidity
means bankruptcy, without benefit of time extensions. As
Meredith Whitney (the intrepid bank analyst from Oppenheimer)
said in a recent interview, "There are a ton of regional
banks that also face a similar predicament." She correctly
forecasted much bank distress, and expects a flood of FDIC activity
to deal with failing banks.
Europeans have also lost respect
for the US financial leadership, public statements having been
made by the German Finance Minister Peer Steinbrueck to the effect
that the United States has lost its geopolitical leadership mantle.
A powerful reversal in investment flow endangers the US bond
markets. Private flow of money resulted in the movement of
$92.9 billion out of the US in July, after $46.8 billion entered
the nation in June. A profound new trend is in place, whereby
the three major continents of North America, Europe, and Asia
are bringing home money. With a US budget deficit easily eclipsing
the $1 trillion mark this coming year, demands for USTreasury
sales will be left wanting, as USTBonds will be left on the table.
The money printing machines will be the main recourse, as US$
monetary inflation will enter at least one and maybe two new
gears in higher usage.
THE RISK LIES WITH HIGHER USTBOND
YIELDS OFFERED, OR LOWER USDOLLAR EXCHANGE RATES FORCED. Either
way, foreign US$-based bondholders face big losses. The nationalization
demands will quickly force the issue of USTreasury Bond default.
Bear in mind that now 52.7% of USTreasury debt is held by foreigners,
and that proportion is fast rising. At yearend 2007, a hefty
$9.4 trillion in US$-based securities were in foreign hands,
as in liquid assets, easily divested. Risk to foreigner reserve
accounts grows. They recognize their risk of becoming bagholders
of greatly damaged debt paper. Amidst this pressure and isolation,
the US Federal Reserve might simply resign its contractor position
with the USCongress. After all, their balance sheet is decimated.
It is not unlimited. It does have creditors.
The gold price will respond,
as the USDollar faces a trashing. On the other side of this storm,
characterized paradoxically as a USDollar rally at a time of
truly devastated fundamentals, the USDollar will get trashed.
To this end, a shocking admission came from New York City mayor
Michael Bloomberg. He is a bit of a maverick, speaking his mind.
He actually stated, "The next cause for concern in
the battered US economy is whether there will be buyers abroad
for the nation's billions in debt."
USDOLLAR AT RISK, USFED RATE CUTS
SOON
The USDollar is at extreme
high risk. Since its bounce in July, behavior is erratic, volatile,
and fully dependent upon central banks and market rule changes.
The US$ money supply had been steadily growing at a 15% growth
rate, give or take. Expect it to surpass 20% soon, and the US$
to reflect the debased currency from a flood of supply. The United
States will be the first nation to cut interest rates, from desperation
financially and economically. Other nations will eventually follow,
but not right away. The effect few talk about regarding the
mammoth nationalization and bailouts underway is the powerful
jump in price inflation, along with currency debasement.
Both are inevitable, sure to lift the gold price in powerful
steps. The isolation of the US in geopolitical circles, the utter
shock at failed leadership witnessed the world over, the widely
perceived national bankruptcy will translate into shunned USTreasury
auctions and outright divestment of US$-based assets. The only
buyers will be central banks. The USDollar is at very very very
high risk of serious declines, exactly like the US stock markets.
A trump factor has entered
the room. THE USDOLLAR & GOLD WILL SOON RESPOND TO THE FAILURE
OF THE US FINANCIAL SYSTEM, WHICH COULD QUICKLY RESULT IN NATIONAL
EMERGENCY, BANK HOLIDAY CLOSURES, AND TOTAL FRUSTRATION BY BANK
LEADERS, AS NOTHING SUCCEEDS. The Wall Street bailout bill fixes
nothing in bank system structure and integrity and function,
as problems remain intact tragically. The United States controls
the world reserve currency in the USDollar. In Hat Trick This
late summer, my analysis stated that gold must make a difficult
transition from an anti-US$ trade to a hedge against monetary
inflation, a hedge against realized price inflation, and a hedge
against geopolitical risk, even a national US banking collapse.
Some movement has been made on the transition from the tunnel
vision anti-US$ trade. One should keep focus on how the US official
lending rate at 2.0% is more than 3% below the current suppressed
Consumer Price Inflation rate. So money is actually free for
those who can access that rate.
The USDollar increasingly
is being defended by market interference mechanisms of the worst
and most egregiously shameful order, such as a) restrictions
to short financial stocks, even though they are insolvent and
more illiquid by the week, b) calls to eliminate 'Mark to Market'
accounting of bank assets, and c) the trusty Plunge Protection
Team devices used to prop up stocks, bonds, and the US$ itself. The major currencies are all at risk
actually. One contact with international connections recently
wrote me, "The US$ will drop to 2.00 against the EUR
not before long. And then the EUR will crash shortly thereafter."
Many fine analysts expect the USDollar to suffer a severe markdown
as the recent US nationalizations and bailouts are fully digested.
Their forecasts would coincide with the notion that the USTreasury
Bond suffers a severe market interruption like a suspension or
possible default, but then later the euro is victimized by new
global gold-backed currencies. This is a very possible scenario.
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Oct 1, 2008
Jim Willie CB
 Jim Willie CB is the editor of the "HAT
TRICK LETTER"
email: jimwilliecb@aol.com
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Jackass
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Jim Willie CB
is a statistical analyst in marketing research and retail forecasting.
He holds a PhD in Statistics. His career has stretched over 26
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