Sunday, November 20, 2011

Too Big to Fail...Too Little to Save...Too Small to for Accounting Control Fraud. The next MF Global Awaits...

There you have it, Mr, BURNanke has presided over an era where precisely the opposite of everything he says is what it does, precisely the opposite of everything he and his minions predict happens and precisely the opposite of what is marketed to the public is actually done.

The single biggest result out of the crash of 2008 was that it was deemed publicly that no institution could be allowed to become too big to fail. Yet lets look at what happened...nearly every large institution got bigger and the financial industry went on a consolidation binge. It is no coincidence that this occurred since, while the BURNanke guy was trumpeting the exact opposite publicly, he was making sure that there were very accomodative rules and regulations in place to allow the insolvency of institutions to hidden behind the single largest occurrence of accounting control fraud in history - dwarfing 2008 by comparison. If one just wants to see it in living proof, then all one needs to do is go a few BURNanke town hall meetings back, at which time, he proudly asserted that American institutions had very little risk and exposure the the European sovereign debt debacle. I accused him of deliberately lying...I think that it is patently clear that the guy had to know that using exotic insurance and leverage schemes the banks have a ton of exposure and now they have way more to worry about than just exposure to declining prices. They have to worry about how they are going to continue perpetrating there accounting fraud sham without getting caught and destabilising the entire system. What is happening now is that the accounting fraud is now actually causing the perpetrators not to trade with each other because they know everyone else is lying about their books just like they are.

JP MOREgan and Goldman TAX are the prime risks of this condition and they are both insolvent by the way...BAC and many others are already toast and they are having a lot of trouble moving what assets they have left that look like they have any value around to make their books look remotely solvent. Goldman and JP have, however, directly attempted to interfere with regulation and government to such a degree that they think they can always come up with a way to coverup nasty business deals with officially sanctioned accounting frauds. They have made the most use of the rules that allow them to maintain significantly higher leverage ratios than they report and marks that make their books look far more solvent than they actually are. Given the disaster we went through in 2008 why would it be desirable for us to do 2008 at 10x now?

The real question is if institutions were too big to fail in 2008 why were they allowed directly under BURNanke's supervision to become so much bigger and systematically imperative and risky? I think the answer is quite simple. It is much easier to commit subterfuge and obfuscation based accounting control frauds at a few institutions with large and complex books and portfolios than at thousands of small, BURNanke and officials have deliberately and by specific design created a framework which is designed to allow solvency to be visible without actually truly being existing. Remember, that the Fed essentially not that long ago reduced the reserve requirement fro banks to 1%. That is truly stunning when you think about it...if we all wanted our money from the bank that only 1% of it really exists in reserve. That would be shocking enough that no reasonable businessman would ever seek to run his business that way and would immediately shut it down. But that is the least of it. 1% is not low enough for the banks or the Fed so they have come up with more money amplification scams via all sorts of crazy products and techniques to reduce the actual amount of money on reserve to way less than the 1% they are supposed to have and which is woefully insufficient to inspire confidence when stress is introduced into the system. So, here we are again solving the problem of too much debt with more debt. This is exactly like the heroin addiction that I have previously mentioned. A heroin addict first attempts to solve his need by using more than he did before and repeats the pattern over and over until he either dies via overdose or checks into rehab for anti-heroin heroin - namely methadone. We are at that stage with our money amplification addiction, overdose or rehab and the requirement for both is anti-amplified money money - pure and simple fiat cash - unleveraged! Think about that for a minute. This essentially means that banks need to get to 70 to 80+% in reserve. This likely means that assets need to fall in similar fashion to this reserve level rising in order to cure the patient. In this case, the global financial system.

I think that its very important to understand that the entire financial system is connected by two core themes: very high performance incentive based compensation and the tentacles of massive leverage that underpins the banking activity and miraculous revenue streams that banks have been pursuing. The result of this type or arrangement is that bankers have the capability to generate significant payouts with other peoples money - namely the backstop of public option.

Good ole Lloyd is doing god’s work by getting ready to pass off his losses to US and Jamie Diamondust is doing the same. These guys have both made tons of money running organizations built completely on a foundation of deception and accounting fraud. We are about to see just the extent of it as JPM and Goldman have to start to factor in the counter party into all their insurance scams and their short premium books.

MF Global was no accident and the implications are clear as I presented in my CME post. Someone is and was holding a gun to the CME's head and their actions have been clearly motivated by the fact that the problems going on are systemic. Thus these problems create a quandary when trying to figure out how to respond to them. The reality, however, is probable that MF Global is not an isolated situation and that rampant pledging of client assets as collateral is embedded and hiding in the system. As people return to the theme of being more interested in the return of their money than the return on their money they will chase US Treasuries into negative yield. We can certainly expect the stress of that pressure to force these assorted ponzi schemes out into the open.

Lest you think this whole process has to take a long time to play out...I would prefer that you see it as a light switch. The switch has flickered and will likely be turned off imminently. That is the liquidity and money amplification switch - when that is off - its game over. It will be fast. You will find the whole financial system breaks and suddenly rules you expected to be followed will be reinvented before your eyes. You will see this in many terrible ways - like for example when you attempt to go Bank of America and withdraw cash or wire money.

My recommendation, the one I have given to all my clients and friends and I have done myself, is to take plenty of cash out of the bank NOW and keep it somewhere safe...which in this case is anywhere but a bank. A safety deposit box is usually at a bank and a bank is not a safe place for your money at this time. If exogenous stresses occur (and they should be expecting them) you will see Banks closed or schedules and rules changed to try to slow the progression of the death by overdose that the financial system is in the troughs of.

Also, as an interesting side effect to all these assorted issues…if any of this does come to pass, many people will be caught unprepared, they will take that to the voting booths with them and as I have indicated previously, in the case of a financial calamity, Ron Paul stands highly increased odds of being elected president…I see no reason that the scenerio and outcome has changed.
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