what a week

What a week

For the readers who like to read my spanish versions, please take note that I posted a spanish version last Thursday. The Friday action is not yet included. However it includes my feelings and some information I thought to be important
http://themusingsoffritz-espanol.blogspot.com/

Well dear reader until Friday the title of this blog would have been “Domino stones falling”. With Paulsons and Bernankes action last Friday this Domino effect seems to be halted, at least for some time. Before we go a bit into more details, following an overview from www.prudentbear.com

Just when you thought you'd seen it all... Yet how wild could it have been with the Dow down only 0.3% (down 14.1% y-t-d) and the S&P500 up 0.3% (down 14.5%)? Amazingly so. The Transports gained 0.5% (up 11.6% y-t-d), and the Morgan Stanley Cyclicals added 0.2% (down 13%). The Utilities were hit for 3.3% (down 17.6%), and the Morgan Stanley Consumer index declined 2.5% (down 7.4%). The broader market rallied sharply. The small cap Russell 2000 jumped 4.7% (down 1.6%), and the S&P400 Mid-Caps gained 2.1% (down 6.2%). The NASDAQ100 declined 1.2% (down 16.3%), and the Morgan Stanley High Tech index dipped 0.9% (down 16.4%). The Semiconductors rallied 3.7% (down 18.2%); the Street.com Internet Index added 0.6% (down 10.4%); and the NASDAQ Telecommunications index gained 0.6% (down 9.7%). The Biotechs were little changed (up 2.8%). Financials were unbelievably volatile and ended the week up big. The Broker/Dealers jumped 7.6% (down 31%). The Banks surged 16.3%, slashing y-t-d losses to 6.8%. With bullion rocketing $108 higher, the HUI Gold index rallied 11.5% (down 20.9%).

And as usual
What’s hot and what not from the Wall Street Journal online version



Well dear reader the past week we have seen the domino stones falling. Lehman in Chapter 11. Merrill Lynch taken over by Bank of America. AIG only surviving thanks to dictatorship, oups I should use the official version conservatorship. Morgan Stanley and Wachovia to be merged. Washington Mutual on the way out. HBOS taken over by Lloyds TSB. Well I would say quite a change in just 6 days (Monday to Thursday). It really seemed like the music stopping at ever faster intervals and whenever it stopped at least one chair was missing and at least one entity had to leave the game. Yes a game it was. The game played for many years, creating something out of nothing or thin air. Take one dollar and leverage it out to several hundred of dollars using highly sophisticated derivatives that finally nobody really understood. What the heck, there were many people who earned nicely doing so what worry me. Well as you know dear reader I have been warning on an ongoing basis that the casino called derivative market has grown to such a size that risks have grown in such a way that they cannot be controlled anymore. Has the day of reckoning arrived? What will the outcome be? I do not know but my guess is, that for many the outcome will be not nice and not to their liking.

Well anyway since last Friday it seems that everything looks much brighter again. It seems that our world has changed to be a much better place to be. But has it really? Has it really changed to the good or have we only postponed some hardship?
On Saturday I saw on a newspaper front page a picture of Paulson and Bernanke in a Superman Dress. The headline was “The Team that saved the world”. Is it really so? Have they saved the world or only Wall Street? Is Wall Street really over the hill?
Well dear reader to me it seems that Friday’s action did only and solely buy some more time. However I must say that the money spend to do so is incredibly or maybe outrageously high and be assured that it will cost a multiple of what we are told. To me it seems that everybody is happy that the patient having had a serious heart attack is not dead yet and hopes are high that the patient will recover fairly well. Maybe it will be so but I guess there is no way than keeping the patient on oxygen and connected to all other machines and bottles need to keep the patient alive. The smallest error will lead to a fallback immediately.

Well the heart attack seems to be under control but how about the cancer called derivatives or speculation, that has grown to such an extent that any cure is practically impossible?



Taking over all the toxic waste from the financial institution does not make the waste disappear. Well it makes it disappear from the balance sheets of the financial institutions but not from the universe or the market. Somebody will have to pay. Who will it be? Does the action really save a bankrupt financial system? Maybe, but only maybe. Well maybe the action helps the CDS Market as the banks that are saved for the moment might not enter into a Credit default situation and therefore no payments will be due. But anyhow, apart from the CDS there are still many more derivatives outstanding. What about them? Remember that the notional amount of the outstanding derivatives is one quadrillion?

Or a thousand trillion or 1,000,000,000,000,000 (If I forgot to put a few zeros, please forgive me, there are already so many zeros that I get dizzy).

Remember as well that one quadrillion is several times the world production of a whole year. Thinking about it makes me dizzy too. Imagine funds, several times the world GDP, being used to play the monopoly or speculation game in the casino called markets. Incredible indeed.

So what shall we do? Shall we just be happy and go on as nothing really happened? Shall we celebrate? Or might it be the moment to muse?

Well dear reader, everybody of course can celebrate the supposedly good news as it pleases. Asked what I would do, I would let you know that I believe it to be the time to muse not only about my or our financial situation but as well about topics that are a lot more profound. I would muse if what I do is right now the right thing to do or not. Is it the right way to do it? As a business holder I would certainly muse if I would have to make changes or not. In that sense I refer to 2 past musings where I mused about it.

If interested, click on the below links and scroll down to the end of each post.

http://themusingsoffritz.blogspot.com/2008_05_11_archive.html

http://themusingsoffritz.blogspot.com/2008_05_25_archive.html


Well, although throughout this year we have been several times at crucial moments and maybe last Friday was only the culmination of it, I do not believe that the world ends tomorrow or maybe soon. No, I certainly do not believe that but I still believe that we will have some rough time ahead. Why do I believe that to be the case? Well we have not yet eliminated all these excesses built up over the last 2 to 3 decades. Going back to “normal” whatever that means will need a lot more.

That means that on one side I do not see that with what was decided on Friday we will automatically be back to normal. I simply cannot see how everything now could be well. What has been done, or maybe we should say be proposed and will be done, is only move trash from one side to another side. The trash however still smells bad and rots along. Will there be less waste? I doubt it. Why? Well as now all the companies in trouble know that Mama (mother state) will always be there to help its kids (well educated or not, rebels or not, thieves or not) it does not make sense to be careful. Let’s go on with all the party or maybe orgy is the better word and don’t worry or bother. Mother will be there to help. So we might see mountain of trash or waste see increase considerably over time until…

Well until Mama gets it heart attack and needs help. But who will bailout or help Mama?

Well dear reader as always, any situation, harsh or not, has its opportunities. I am convinced that we will come across a couple of excellent opportunities over the coming months.




So the question now, is of course, what this Friday’s action means. To be honest my guess is as good as anyone’s guess. Right now it looks like we will see a lot more printing (creating) of money, which could lead to hyperinflation, as, expected by some very sophisticated market observers. The cash however might stick with the financial institutions and will not find its way into the economy that is in dire need of cash in order to drive. If the economy will not see this cash the economy will suffer. That means we possibly will see worldwide recession (please do not forget that the US has been in a recession for the past 8 years, if one takes the real numbers and not the massaged or manipulated statistics). So we might see a combination of both. A hyperinflation and rising prices for all goods that are needed (water, food, energy and so on) and a deflation on other items. Maybe it is too early for a qualified guess. Before going to the information found on the net, a comment from my side.

Last week I wrote
Quote
Are you ready and in a safe shelter? I do hope so. Do you hold physical gold? I do hope so. It does not matter if the prices are low (I would be a buyer if I would hold liquid funds). In gold we trust! No change in that sense.
Unquote

Well when writing the above, of course I did not know that only two days later the gold price would jump up more than 12% in one single day. That is something that did not happen over the past 8 years and possibly not over the past 28 years. This move up so fast and strong, of course came as a surprise to me too. However, as mentioned a couple of times, I truly believe that in this crisis one has to hold an important gold position. If the domino stones around you are falling or if we are lucky and the falling of the domino stones are postponed for the moment being, it is without doubt important to have something with real value. Something that was not created out of thin air.

I am of course more than glad that my call of buying gold at 740 being a low risk entry point did work out that well. Again the move up just 3 days later was a surprise because it came faster than expected but being able to buy gold at USD 740 an ounce is a bargain. What next? Well gold gets close to strong resistance levels in the area of 890 to 900 USD per ounce. Let's see what's going to happen.

Silver
Well silver shot up too. Silver should be above USD 18 per ounce at least. So silver is still way undervalued. An explosive move up is in the cards.

Now let’s go to the comments found on the net

First a video to watch
THEY WANT MAMA TO MAKE IT ALL BETTER! Rep Kapture


http://www.youtube.com/watch?v=mbD62gNi9WE&eurl=http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=385x192505

and another video, congressman Ron Paul

http://www.infowars.com/?p=4698

The Street Doesn't Look So Shiny Anymore
Washington Post: This is going to end with "either riots in the streets or a bloodbath"
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/19/AR2008091902809.html

Hoping a Hail Mary Pass Connects
http://www.nytimes.com/2008/09/20/business/20nocera.html?_r=1&8dpc&o

It was the end of the worst week for financial markets since 1929, and Treasury Secretary Henry M. Paulson Jr. looked sleep-deprived.


September 19 - MarketNews International: "U.S. Senator Jim Bunning today issued the following statement regarding the Treasury Departments bailout of Wall Street. 'Instead of celebrating the Fourth of July next year Americans will be celebrating Bastille Day; the free market for all intensive purposes is dead in America. The action proposed today by the Treasury Department will take away the free market and institute socialism in America. The American taxpayer has been misled throughout this economic crisis. The government on all fronts has failed the American people miserably. My great grandchildren will be saddled with the estimated $1 trillion debt left in the wake of this proposal.'"

Rescue Plan for Funds Will Come at a Cost
http://www.nytimes.com/2008/09/20/business/20fund.html?ref=business

The Straw That Broke the Camel’s Back
http://www.grandich.com/docs/alert_09-20-08.pdf


The day „it“ happened
Over the last 12 months there have been a number of times when informed people thought "this is it." Well if today and this past weekend aren't "it", I don't know what is. We now have multiple large banks fighting for their lives and a 10 day disruption in gasoline supplies coming out of the Gulf Coast, both on the heels of the government nationalizing $5 trillion in mortgages and the Big Three automakers all letting it be known that they're going to need government bailouts as well. And that's before we even get to the crisis in Georgia over the BTC pipeline, the war in Nigeria MEND declared, or the rapidly collapsing climate.

Well dear reader we are certainly at a point of recognition. It may take a few weeks, even months, for the smoke to clear but I suspect that once it does, people will look back on mid-September as the day "it" happened.


Wilbur Ross sees about 1,000 bank closures: report
http://www.reuters.com/article/americasMergersNews/idUSBNG26894920080915

By Ambrose Evans-Pritchard
The Telegraph, London
Thursday, September 18, 2008

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/09/18/ccambr...

The global credit system came close to total seizure yesterday. Key parts of the derivatives market shut down and a panic flight to safety depressed the yield on three-month US Treasury bills to almost zero for the first since the Great Depression in 1934.

The closely-watched TED-spread measuring stress in the interbanking lending market rocketed to 238 as the share prices of Morgan Stanley, Goldman Sachs, Citigroup, Wachovia, and Bank of America all went into a tailspin yesterday.

The collapse in investor confidence is a harsh verdict on the judgment of the US Federal Reserve, which chose to ignore market pleas for a rate cut to halt what amounts to a modern-era run on the banking system. Almost none of the current Fed governors have market experience. Most are academic theorists.

The Fed had hoped that a targeted $85 billion (L47 billion) bailout for insurance giant AIG -- on onerous terms -- would be enough to stabilize the banks after the weekend failure of Lehman Brothers. Instead it set off a cardiac arrest at the heart of the credit system.

Bernard Connolly, global strategist at Banque AIG, said the Fed and the Treasury were doing too little, too late, to stave off disaster. Interest rates need to be cut immediately and dramatically, while Washington must prepare for a wholesale takeover of large parts of the lending system along the lines of the Scandinavian bank rescues in the early 1990s.

"Unless there is a very rapid change of mind, depression -- with all its horrors and consequences -- will be inevitable. The judgment that letting Lehman's go would not create systemic risk depended, if it was ever going to be anything other than ludicrous, on very rapid action to shore up the financial system. Instead, Hank Paulson seems to be adding to the risk in the system," he said.

"We fear that a virtual nationalisation of the financial system will now be necessary," he said.

America's Reserve Primary Fund suspended withdrawals after shareholders pulled out almost $40 billion in two days on news of its heavy exposure to Lehman's debt. The move came as the fallout from Lehman's collapse spread worldwide. Japan's Nikkei wire said Japanese banks would suffer almost $2 billion of losses on Lehman's bond defaults.

Russia suspended trading the Moscow bourse after the Micex index crashed 24 percent in two days. Officials promised $44 billion to support the banking system.

As Washington bails out one financial institution after another, investors have begun to doubt the long-term credit-worthiness of the US itself.

The cost of insuring against default on 10-year US Treasuries jumped to an all-time high of 30 basis points yesterday, as measured by the credit default swaps (CDS) on the derivatives markets. Germany is at 13, and France is 20.

"This is historically significant because we have never seen anything like it before," Daniel Pfaender, sovereign credit strategist at Dresdner Kleinwort.

"What we don't know yet is whether this a liquidity issue or whether it reflects the credibility of the US financial system."

The Treasury's rescue of the mortgage giants Fannie Mae and Freddie Mac has added $5.3 trillion in liabilities to the US government. It almost doubles the national debt (under IMF definitions), at least on paper.

The Fed has now added a further $85 billion in debt for AIG. While the sums are manageable so far, what worries investors is the likely avalanche of insolvencies yet to come.

The Federal Deposit Insurance Corporation has already exhausted half its capital cleaning up after the collapse of IndyMac. It may need half a trillion dollars of fresh money to cope with the 120-odd lenders on its sick list. Professor Nouriel Roubini from New York University warns that several hundred banks will go under before this hurricane has exhausted its fury.

John Chambers, head of sovereign ratings at Standard & Poor's, said America's AAA grade is safe for now. The Fannie/Freddie bailout is not comparable to ordinary state debt. It is backed by housing collateral, mostly based on prime mortgages.

"In the worst-case scenario, the losses from Fannie and Freddie will be 2.5 percent of GDP. This is not to belittle the unprecedented actions of the last two weeks.

"For the US to lose its AAA we would have to see the sort of financial distress that occurred in the Nordic countries. It could get that bad. There's no God-given gift of a AAA rating. The US has to earn it like everyone else," he said.

Charles Dumas from Lombard Street Research said America's dependence on foreign money would carry a high price. "The ultimate test will be whether this seriously jeopardizes the reserve currency role of the US dollar. China finances the US government. So as long as the Chinese are willing to accept an annual loss of 15 percent on their holdings of US bonds in real yuan terms, this can go on, but the decision lies in Beijing. What is clear is that it will take the US decades to pay this off," he said.

Hans Redeker, currency chief at BNP Paribas, says the US debt scare is vastly overblown. America's total government debt is 48 percent of GDP on IMF measures, compared to 57 percent for Germany, 94 percent for Japan, and 108 percent for Italy.

"The debt levels are nothing compared to Europe, even after Fannie and Freddie. America still has great leeway," he said.

"We think the next phase of this crisis is going to be a repatriation story as American investors bring their money back from frontier markets. The US broker dealers were 60 times leveraged and now they need to take assets back onto dollar balance sheets."

Albert Edwards, global strategist at Societe Generale, said Washington's serial bailouts are the inevitable result of the credit bubble of preceding years. "This was all baked in the cake long ago. What we have seen so far is just a dress rehearsal for the deep recession that is coming. America is going to be losing 500,000 jobs a month. That is when we will see interest rates go to zero. The deficit will be covered with printed money as it was in Japan. The endgame will be helicopters full of cash dropped by Ben Bernanke," he said.


Following the link to an excellent overview of the actual situation. Especially how the CDS market works is very well described
http://finance.yahoo.com/banking-budgeting/article/105785/Worst-Crisis-Since-1930s-With-No-End-Yet-in-Sight

Telegraph.uk.com
Financial crisis: Default by the US government is no longer unthinkable
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/09/21/ccliam121.xml

Well holding US Treasury bonds is not that good an idea anymore. Flight to safehaven made the T Bills, T Notes and T Bonds go up in price and down in yields this week. But is holding Treasury bonds or bills or notes still save? Well definitely not as safe as it was in the past (I must confess that I never considered the Treasuries as save with all the liabilities that or outstanding)?


From www.lemetropolecafe.com
(subscription recommended)
There are no markets anymore, just interventions
Remarks by Chris Powell, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
GATA Goes to Washington -- Anybody Seen Our Gold?
Hyatt Regency Crystal City Hotel, Arlington, Virginia
Friday, April 18, 2008
Comrade Paulson’s platoon sure is making GATA look as credible as can be about market intervention. Can there be one nitwit out there now who (outside of imbecile Jon Nadler) doesn’t realize the extent to which the price of gold has been manipulated? Once again the US Government sat on the price of gold today to defuse how much the US looks like the old Soviet Union, or Communist China, at the moment. Shoot the Messenger it is once again … and that is with US interest rates rising sharply, the euro leaping .0172 to 1.4473, and crude oil rising $6.67 per barrel to $104.55.
The bottom line … never thought I would hear this from Planet Wall Street:

"FREE MARKET CAPITALISM IS DEAD," One Of The Muppets On CNBC
To think China might be more of a free market country than the US. GOOD GRIEF! Hey, it's not only me...
Senator Bunning Says Paulson Acts Like Socialist, Should Resign

Source: Sept. 9 (Bloomberg)
Senator Jim Bunning said Treasury Secretary Henry Paulson, by rescuing Fannie Mae and Freddie Mac, is acting like China's finance minister and both Paulson and Federal Reserve Chairman Ben S. Bernanke should step down.
``I sincerely believe that Henry Paulson and Ben Bernanke should resign,' said Bunning, a Republican from Kentucky on the Senate Banking Committee. ``They have taken the free market out of the free market.' ...
Well I mentioned before that the free markets are dead. The following fact is worrisome indeed. As mentioned before only market interventions anymore.


Well dear reader the following piece of information confirms that the free market is dead
In order to help push up the equity markets and to try to solve the credit crisis issue for the moment being, they decided to stop short selling.
Please read on

The SEC has issued a ban on short selling.
If you short any of a list of 799 stocks they published this morning, from today until Oct. 2, you will, effectively, be committing a crime. Seriously. And the SEC isn’t talking naked shorting or some other controversial method. No shorts, period.
Of course, every one of the 799 stocks has serious financial exposure or credit risk buried in its balance sheet. They are the stocks that should be shorted… run by management teams that deserve market bruises more than any others.
Forget about all that rhetoric the U.S. government has been spewing for years about spreading -- by force, if necessary -- liberty and free markets in Arab states. Forget all the finger wagging the Fed has been doing at Japan for its failure to let its big banks bust and get on with the normal operations of the market.
Don’t even think about the flimsy concepts for managing risk or the efficiency of markets. You will now bow before the “two young kings,” as we heard Paulson and Bernanke described on NPR this morning. O, the hypocrisy!


How safe are Treasury bonds?
The cost of credit protection on U.S. Treasury bonds right now is 30 basis points. That is "point 3 percent," or .3%. Technically, the rate on U.S. Treasuries are supposed to represent the risk-free rate of interest. What the credit protection market is telling us is that U.S. Treasuries are no longer risk-free. Here's something to ponder. It was not too long ago that Fannie Mae and Freddie Mac bonds were trading at a 30 basis point spread over U.S. Treasuries. So right now, the sophisticated investors are saying that the default risk of the U.S. Government is about the same as it was on FNM/FRE bonds, before the problems with FNM/FRE became apparent to all. It looks to me like the problems with our whole financial system are becoming apparent to the smart money.

01:39 Regulators changing rules on the fly - NYT
Regulators at four federal agencies -- FDIC, the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Reserve -- quietly proposed significant changes in accounting rules 15-Sep and 16-Sep to encourage consolidation by making banks more attractive to purchasers. The changes largely relate to more favorable treatment of goodwill, and stand to be adopted after 30 days of public comment.


Well dear reader the following comment I wrote before Friday. What happened on Friday does not change anything in the essence of the comment.

With the change mentioned above it will be easier to put lipstick on a pig. Are we getting close to fraudulent reporting? Well of course as it will be official it will not be fraudulent but we are in my opinion getting close to it.



Not in all cases will lipstick make a difference. At least for the buddy above it will be hard to make him look better. The same might be true to the reporting if one looks at the details and does not believe everything.

02:54 Banks calling in favors on Capital Hill to support loan program for automakers - Detroit News
The problem with the firms' stepping in to plead the automakers' case is timing: "We've been asking for a lot of favors lately," says one bank source. Firms like Goldman Sachs (GS) and JPMorgan Chase (JPM) own huge amounts of carmakers' corporate debt, and therefore think of the proposed $25B in government loans as insurance. Combined with parts suppliers, F and GM account for 10% of the corporate high-yield debt market in the US.

About Manipulation
Found on www.lemetropolecafe.com
Quote
To all; well, what is there to say? Finally a day where the manipulators got killed? It has been long proferred by GATA, Turk, Citigroup, Credit Agricole, Sinclair, Embry, Veneroso, etc. etc. that the metals markets were rigged, manipulated and generally suppressed for YEARS. Today the submerged beachballs called Gold and Silver have slipped [ever so slightly] out of the hands of the manipulators. For years JP Morgan and Goldman Sachs have had their names raised by those claiming manipulation. As of last Friday, Goldman was considered one of the "saviours". They were always talked about as a potential white knight that could swoop in and save those that were failing. Today they became the HUNTED! Speculators started their attacks in earnest yesterday, today Goldman's blood has infested the waters and the sharks are circling. This event [along with general fear] helps explain the precious metal moonshots today.
Let me explain, the market place is attacking Goldman and fear in the CDS markets are suggesting a possible failure. The market clearly believes Goldman is in big trouble, if in fact we have been correct about Goldman's involvement in suppressing the metals then it certainly follows that trading against Goldman's positions is a smart trade. Obviously there is more to Gold's move than just trading against Goldman, but since they have had their greedy hands on the "beachball", it makes sense that maybe, just maybe the manipulative shackles are breaking. Obviously fear that the entire system is coming down is behind the metals' moves, but the moonshots had to start somewhere and have a fuse to light. Goldman is the fuse! Even if Goldman is not short metal, they are perceived as dying suppressors.
So far this witch hunt on Wall Street has left few unscathed. JP Morgan stands out like a tuxedo in a Texas beer joint. JP Morgan has been relatively "unscathed" with both their earnings and stock price. Why should this be? They are the 1000 pound gorilla in the room. They have more derivatives, more leverage, more assets and certainly more liabilities than any other player. How is it possible that they are so smart and nimble to have avoided this train wreck? I don't think they have. If you go back nearly 2 years you will recall that Pres. Bush signed a presidential directive that said [paraphrase] if you take losses resulting from matters of national security, YOU DON'T HAVE TO REPORT THEM! I think JPM has followed this law to the letter. I also think JP Morgan will be the last big game target. Once Goldman and Morgan Stanley succumb to mother nature's warriors, JPM will sing solo on the stage of mea culpas. JP Morgan surely has had their $100 Trillion derivative book riddled with holes, they surely have counterparty risk, they surely ARE counterparty risk.
If JPM were to fall on the Fed, Uncle Ben Bernanke and even the Treasury for that matter will look like a Lincoln penny left for a freight train to squash. JPM is the pinnacle, they are the biggest of big, they will kill everything financial when they go down.
Very soon the public will understand they got screwed royally. They have worked and saved in the Dollar system their entire lives only to be told "we're sorry but the system didn't work out the way we planned, so go back to work and start from scratch". The public is going to be PISSED!!! They will want jail time for anyone and everyone involved in banking and finance. They will want blood, [and Gold].
AIG sold banks and other investors CDS protection on $441 billion of fixed-income assets, including $57.8 billion in subprime-mortgage related securities. There are likely very few firms with this much exposure into the CDS market
Unquote
Please check as well www.gata.org


Well the next part seems now to be old news. Although information from the beginning of last week, there is some interesting parts inthere. If you do not like to go through these old news bits, please scroll down to the part from Jim Sinclair which I believe to be very important

"Wells Fargo & Co. (WFC: 33.73 -3.44%) said after market close on Tuesday that it held roughly $250 million in exposure to now-bankrupt Lehman Brothers Holdings Inc...The company holds roughly $480 million in GSE preferred equity securities, trading at roughly 5 to 10 percent of par value."
So WFC will be writing down close to $800 million in losses from exposure to Lehman and AIG. But it gets better. Wells has $84 billion in home equity loans on its balance sheet, half of which are on homes in California and Florida. Rest assured, unless a massive bubble in housing reignites, that the mark to market value of that $84 billion in home equity is in all likelihood zero. But assume the fair market value is 50 cents on the dollar. That would mean Wells should write down its home equity portfolio by $42 billion.
According to WFC's latest 10-Q filing in March, it had $48 billion in book value. So an honest mark on just its home equity portfolio, combined with the write-offs on LEH and AIG, would substantially wipe out WFC's book value. And we haven't even addressed its residential mortgage and commercial loan exposure....Let's see what they got:
According to their earnings release in July, they held $168 billion in commercial real estate loans (the next bubble to collapse), $75 billion in 1st lien housing mortgages, $27 billion in auto loans, and $13 billion in credit card loans.
Looking at those numbers and visualizing realistic future write-downs of those "assets," I think its safe to assume that Wells Fargo is in a substantially negative net worth position, and will eventually hit the wall of insolvency.
Goldman Sachs may have to merge or divest assets -- starting with U.S. Government



Here's a quote from Jim Sinclair at www.jsmineset.com

1. The quoted amount of OTC derivatives on Lehman's books are not notional value, but some silly mark to no market. The real number is trillions. When either party to an OTC derivative fails the value of that derivative instantaneously become the size of what was previously called notional value. With one quadrillion, one thousand one hundred and forty four trillion (BIS) in notional value, there is NO means to stop this financial cataclysm.
2. The shit has hit the fan because trillions of dollars of OTC derivatives failed Monday.
3. The entity to fail is not the winner on those fraudulent pieces of paper but the loser. Otherwise it would not have failed.
4. Many other counter parties to those derivatives have fallen into potential bankruptcy.
5. The long spoken about "domino effect" is active and I now believe the Fed did not consider how a derivative becomes full value (formerly called notional value) when one side goes into bankruptcy. Yes, Pandora's Box opened Monday morning.
6. For years I was laughed out when this present condition was clearly described.
7. Gold is going to $1200 and $1650. Laugh at me again if you must.
8. Those that demand a date already have one - on or before January 14th, 2011.
9. This is it and it is now.
10. The greatest damage done to gold shares and gold came directly from those that were over-margined. Yes shorts got it down but those on margin got them here. Shame on you who demanded margin!
11. Continue to ignore all the means of protecting yourself and you do not deserve to be protected.
12. If you fail to retain proper parties such as an attorney to read your custodian agreement you do not deserve to be protected. Cheap out NOW and you crap out later, and that won’t be much later…


Wall Street crisis: Is this the death knell for derivatives?

On page 62 of last year's accounts, under the heading "off balance sheet arrangements" Lehman had derivative contracts with a face value of $738bn
If this is the death of Wall Street as we know it, the tombstone will read: killed by complexity.
Derivatives in their baffling modern forms – collateralised debt obligations, credit default swaps and so on – lie at the heart of the failure of Lehman, Bear Stearns, Fannie and Freddie, and even our own Northern Rock.
The philosophy that underpins the growth of derivatives is the idea that risk can be transferred to institutions more able to take the strain. In theory, it's a terrific scheme – the weak can get rid of risks they can't handle, and the financial system should be stronger as a result.

The practice is very different, as Warren Buffett worked out years ago. His 2002 letter to his Berkshire Hathaway shareholders made headlines by condemning derivatives as "financial weapons of mass destruction". The passage comprised only a couple of pages of the lengthy letter but read it again today - it is the best guide to understanding how Wall Street has arrived at today's mess.
Here is Buffett on General Re Securities, a derivatives dealer that Berkshire inherited with its purchase of insurer General Re. "At year-end (after ten months of winding down its operation) it had 14,384 contracts outstanding, involving 672 counterparties around the world. Each contract has a plus or minus value derived from one or more reference items, including some of mind-boggling complexity. Valuing a portfolio like that, expert auditors could easily and honestly have widely varying opinions."
http://www.guardian.co.uk/business/2008/sep/15/lehmanbrothers.wallstreet


More…
The quoted amount of OTC derivatives on Lehman's books are not notional value, but some silly mark to no market. The real number is trillions. When either party to an OTC derivative fails the value of that derivative instantaneously become the size of what was previously called notional value. With one quadrillion, one thousand one hundred and forty four trillion (BIS) in notional value, there is NO means to stop this financial cataclysm. The s*** has hit the fan because trillions of dollars of OTC derivatives failed Monday. The entity to fail is not the winner on those fraudulent pieces of paper but the loser. Otherwise it would not have failed. Many other counter parties to those derivatives have fallen into potential bankruptcy. The long spoken about "domino effect" is active and I now believe the Fed did not consider how a derivative becomes full value (formerly called notional value) when one side goes into bankruptcy. Yes, Pandora's Box opened Monday morning. For years I was laughed out when this present condition was clearly described. Gold is going to $1200 and $1650. Laugh at me again if you must. Those that demand a date already have one - on or before January 14th, 2011. This is it and it is now. The greatest damage done to gold shares and gold came directly from those that were over-margined. Yes shorts got it down but those on margin got them here. Shame on you who demanded margin! Continue to ignore all the means of protecting yourself and you do not deserve to be protected. If you fail to retain proper parties such as an attorney to read your custodian agreement you do not deserve to be protected. Cheap out NOW and you c*** out later, and that won’t be much later…

Well dear reader reading the above information I might understand why I doubt that all the problems are really solved. The derivatives beast is still under control but for how long?

JPMorgan Gave Lehman $138 Billion After Bankruptcy
Sept. 16 (Bloomberg) -- Lehman Brothers Holdings Inc., the securities firm that filed the biggest bankruptcy in history yesterday, was advanced $138 billion this week by JPMorgan Chase & Co. to settle Lehman trades and keep financial markets stable, according to a court filing.
One advance of $87 billion was made on Sept. 15 after the pre-dawn filing, and another of $51 billion was made the following day, according to a bankruptcy court documents posted today. Both were made to settle securities transactions with customers of Lehman and its clearance parties, the filings said.
The advances were necessary ``to avoid a disruption of the financial markets,' Lehman said in the filing.
The first advance was repaid by the Federal Reserve Bank of New York, Lehman said. The bank didn't say if the second amount was repaid. Both advances were ``guaranteed by Lehman' through collateral of the firm's holding company, the filing said. The advances were made at the request of Lehman and the Federal Reserve, according to the filing.
Lehman disclosed the advances in a motion seeking court permission to give JPMorgan's claims special status in its attempts to recover any advances. Lehman said that if that status isn't granted, JPMorgan may not be able to make future advances needed to clear and settle trades.
``The granting of the relief requested is in the best interests of the estate and its stakeholders and the public markets,' Lehman said, adding the advances would be ``essential to Lehman's customers.'
JPMorgan may make future advances at its sole discretion, all of which would be guaranteed by Lehman under its agreement to pledge collateral, Lehman said.
JPMorgan said in a statement in court documents that it has had a clearing agreement with Lehman since June 2000, and had pledged its collateral under an Aug. 26 guarantee.
JPMorgan lawyer Harold Novikoff and JPMorgan spokesman Brian Marchiony didn't immediately return calls for comment.
The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).


Paulson gets on national television and says no tax payer money will be provided for Lehman Brothers; yet, the Federal Reserve advances $138B in one day to Lehman’s counterparties through J.P.Morgan.


Global banks brace for derivative blow-up

http://www.theaustralian.news.com.au/story/0,25197,24351406-5001641,00.html



http://jessescrossroadscafe.blogspot.com/2008/09/underperforming-banks-and-thrifts-most.html



Why the extraordinary measures for Fannie, Freddie and AIG?
The answer may have less to do with saving the insurance business, the housing market, or the Chinese investors clamoring for a bailout than with the greatest Ponzi scheme in history, one that is holding up the entire private global banking system. What had to be saved at all costs was not housing or the dollar but the financial derivatives industry; and the precipice from which it had to be saved was an “event of default” that could have collapsed a quadrillion dollar derivatives bubble, a collapse that could take the entire global banking system down with it.
http://www.webofdebt.com/articles/its_the_derivatives.php

Well dear reader this is interesting news as well. Friday’s action was not only to help Wall Street but to keep the Money Markets afloat too.

07:09 EDT Credit concerns causes commercial paper market to break down-WSJ -

Companies go to the commercial paper market for short term funding. Yesterday, overrun by investor concerns about the safety of money market funds, it wasn't' working, reports the Wall Street Journal. "We are not functioning in the short term credit market," says Howard Simons with Bianco Research. "We have issuers who can't issue and buyers who won't buy

These bailouts miss the point.
An entire economy was created to irrationally slingshot the US economy to this tipping point. The economy is based on the activity of gearing up to create, finance, market and exploit malinvestment.
That doesn't mean that malinvestment can continue, and it doesn't mean that this malinvestment is going to become valuable. Losses will have to be realized - nothing is going to magically give this house of cards real world economic value.
From the trenches…

The talking heads are saying "get this toxic debt off the banks books." Well, what is going to prevent them from putting new toxic debt back on as soon as they have the opportunity? Did they suddenly grow wisdom? Learn from experience? Become chaste and humble?

And when this latest plan fails, because they are still only treating symptoms, and enriching the bankers, and manipulating markets, what will they do next?

Forced buying of Treasuries? Currency controls on the dollar? Production quotas for industries? Government lists of patriotically favored stocks and commodities from homeland security?

When the banks and the government become trading partners we are beyond simple moral hazard.


http://jessescrossroadscafe.blogspot.com/2008/09/sec-issues-emergency-order-bans-all.html


Commodities
The merits of precious metals became a little clearer this week. Gold recovered 14.1% to $874 and Silver 15.6% to $12.475. October Crude rallied $3.67 to $104.55. October Gasoline dropped 6.1% (up 5% y-t-d), while October Natural Gas added 2.2% (up 0.6% y-t-d). December Copper slipped 0.5%. December Wheat was little changed, while December Corn fell 3.7%. The CRB index ended the week about unchanged (up 0.2% y-t-d). The Goldman Sachs Commodities Index (GSCI) was almost exactly unchanged (up 5% y-t-d and 17.6% y-o-y).

Gold



Frankly, we're surprised, that gold is not already at $2,000 an ounce," declared Citigroup analysts John H. Hill and Graham Wark.
In an analysis published Wednesday, Hill and Wark suggested, "Gold appears to be entering a powerful new phrase of investment demand tied to safe-haven and monetization themes."
Citigroup metals analysts ask why gold is not already at $2,000/oz
"We have been surprised that gold has been so heretofore quiet, and have expected a much strong and more immediate response to the government takeover of GSE [Government Sponsored Enterprises]/mortgage insurance entities, and broker-deal bankruptcies," they wrote. "It is notable that hard-core goldbugs have been proven correct in the decade-long contention that an overwhelmingly vast and complex pool of nested financial derivatives would ultimately result in cascading defaults and ruin for major portions of the banking system. Frankly, we're surprised that gold is not already at $2,000 per ounce."
http://www.mineweb.co.za/mineweb/view/mineweb/en
/page33?oid=62900&sn=Detail

Following a part from an interview with John Embry who is one of those people I would rate a most expert in the precious metal sector

The Gold Report: In our last interview you said gold would unquestionably detach from the
dollar. Ten months later, gold is still tethered.
John Embry: The downturn in both gold and silver was literally preposterous in magnitude
relative to the rise in the dollar. This was a violent intervention by the paper players. Three U.S.
banks on COMEX shorted something like 8,000 contracts in a very short time. That’s more ounces
than all the world's miners produce in a month.
TGR: Can they keep doing that forever?
JE: No, they can’t. This is similar to what happens when you compress a spring. You hold it down
but when it comes up, it springs back hard. We'll see a violent reaction in the gold price soon.
TGR: Will we have to wait six months or six weeks?
JE: If gold hasn’t moved up by the end of this year, I would be very surprised. People don't realize
how distressed the gold mining industry is. Even at $1,000, miners weren’t doing very well. At
$800, the entire industry is in crisis. Costs have risen so much, nobody’s making any real money.
In fact, some mines are starting to close.
TGR: Could mines reopen when gold reaches $850 or $900?
JE: Gold would have to be at least $1200 before mines reopen.

Well dear reader gold has done well past week. As mentioned before we need to go above the 900 level in order to move up more. It will be interesting to see how the gold price will behave this coming week. We have on one side possible hyperinflation which should make the gold price fly but on the other side one could believe that all problems are now under control and therefore gold as safe haven is not needed anymore. I doubt that that will happen but as always could be the case. What effect will the new rules (short selling for example) have on the hedge funds? More hedge funds to blow up? What will that mean for gold?
Whatever it will mean, I still believe, as mentioned at the beginning of this post, holding gold in these times is not such a bad idea. In that sense I truly wish you a very successful week and all the best.