Weekend Viewing: From Goldman Sachs to Jobless Jack

Friday, July 31, 2009

If you stopped playing the markets, Goldman Sachs will make generate more than 52% of NYSE turnover. So who needs you anymore, you poor bummer? Animation courtesy of Mark Fiore.

The Gold/Silver Ratio From 1300 to 1900...And Now

TABLE: If you still have doubts about allocating a little of your portfolio into silver, these historic gold/silver ratios may make you think twice. Table courtesy of John F. Chown's "A History of Money"
Today the gold/silver ratio stands at 67,98 - I hope to have your permission to round it to 1:68.
Now that Markowitz' model of risk-free portfolio diversification has been proven as wrong as did the Black-Scholes option pricing formula I am more than inclined to seek my clues in centuries old relationships.
It can be safely said that markets either overshoot or undershoot, but are never in equilibrium (can any economist write a formula to scientifically prove my common sense assumption!?)
Take your own conclusions. This blog is for informational and entertainment purposes only. For precious advice email me.
DISCLOSURE: long bullion and adding.

This Is Not Your Lying Newspaper...

Thursday, July 30, 2009

...but a one-man blog operation. Excuse me for a day off, filled with bureaucracy and rage about a certain domestic but foreign-owned bank. I am on the steps of being able to explain why Austrian banks have a problem making revenue/fees/profits.
Meanwhile, enjoy my archive for some accurate predictions and explanations why we are where we are since 2005.

See Inflation With Your Own Eyes

Wednesday, July 29, 2009

Preparing my favorite cooked breakfast of bacon & eggs with fried tomatoes and baked beans on toast I stumbled upon another sign of food inflation. While this depicted can of baked beans costs an unchanged 89 Euro cents in my local supermarket I get less product for the same price.
Opening the 10 cm high can one discovers that it is only filled with 75% beans. Heinz has become generous with its tomato sauce which fills the top 2.8cm of the can and I can remember very clearly there used to be more beans in the can 2 years ago. Under the assumption that Heinz used to fill the cans with 90% beans I arrive at an earlier kilo price of €2.68.
At the lower fill rate of 75% one has now to pay €3.21 to get a kilo of this Heinz classic.
This is a 20% price hike within 2 years or some 9.8% p.a. Being highly skeptical about official consumer price indices I prefer such on-the-ground research, this time in the comfort of my own kitchen. Like stamps there cannot be any hedonic changes applied to baked beans. It's the same product for several decades. Although EU laws require food distributors to display a kilo price consumers are being tricked this way in a multitude of food items. My favorite cookie bar still costs the same, but on opening the wrapping I find a vacuum of 2 centimeters in a 6 cm long wrapper. This is one more sign that companies cut corners in order to keep the price tags per unit unchanged.
It is ironic that consumer surveys on prices always result in a much higher rate of price inflation than the respective national statistics office's calculations. Prices have roughly doubled in Austria since the introduction of the Euro. Former central bank governor Klaus Liebscher's statements that consumers "feel higher inflation" made him always appear a bit helpless when defending the non-existent strength of the Euro.

The Euro Is Doomed to Fail as All Monetary Unions Did in the Past
If you are in the mood to read more about the doomed Euro currency, download this PDF from Black Swan Capital, titled "Preparing for a Breakup in the European Monetary Union." Short reminder: All currency unions in history ended with a complete economic mess due to wide differences in the terms of trade that varied regionally. From a historic perspective the Euro will share the same fate. While I certainly oppose Milton Friedman's supply side theories Black Swan noted this smart statement made before the introduction of the Euro:
It seems to me that Europe, especially with the addition of more countries, is becoming ever more susceptible to any asymmetric shock. Sooner or later, when the global economy hits a real bump, Europe’s internal contradictions will tear it apart.
Parsing Black Swans research note I am reminded about the sunny summer Maastricht convergence criteria. They mandate the following.
  1. Inflation rate: No more than 1.5 percentage points higher than the average of the three best performing (lowest inflation) member states of the EU.
  2. The annual government deficit to gross domestic product (GDP) must not exceed 3%.
  3. The ratio of gross government debt to GDP must not exceed 60%.
  4. Nominal long-term interest rate must not be more than two percentage points higher than in the three lowest inflation member states.
These criteria were invented 10 years ago when it was unimaginable for the big majority of "experts" that Europe would ever face again strong economic headwinds as we witness them now. Thanks to these optimists there are no official strategies as how to unwind from the Euro currency union without major collateral damage.
I faintly remember that the idiotic Maastricht criteria also include punishment rules if a country diverges too far. Seeing only negative convergences these days like rapidly rising unemployment, ballooning government debts and tricks on official inflation figures I arrive at the sad conclusion that applying fines on weak Euro members can be compared to a man who stumbled and falls and the arriving paramedics jump on his back.
Brussels, we have a problem and you are cooking up the wrong medicine. Celebrating black masses at the grave of John Maynard Keynes are certainly not the solution. You cannot fight monetary inflation by printing ever more Euros for a sagging economy.

Once More: This Is a Trillion Visualized

Tuesday, July 28, 2009

Mail this one-minute video to your political representative. Maybe it opens her/his eyes that we are approaching hyperinflation indeed.

For a little more on this 13-digit figure click here.
Keep in mind that the TARP may cost up to $24 trillion.

Some Junior Silver Miners Are Heavily Underpriced

Monday, July 27, 2009

It's summertime and the bloggin' ... strays a little from my usual diet of central bank watching, calling for a revival of the gold standard and criticizing the excesses of greed.
Having correctly forecasted the current crisis of the Western world since 2005 and fearing the coming period of hyperinflation due to central banks more than willing to monetize the debt I have shifted portfolio contents accordingly. While I have fared well with my gold stocks, Redback Mining (RBI.TO) still being my long term favorite - reported a new high-grade discovery today - since I got in at C$1.50 I had spent the better part of 2007 in Vancouver, focusing on silver stocks.
Taking Ted Butlers arguments that there is less silver than gold above ground with more than just a grain of salt, I nevertheless believe that silver will outperform gold in the long run as it has also industrial uses as the best electric conductor at dirt cheap prices.
The strange thing about the former monetary metal is where has it gone? Not even the Mexican central bank reports its silver holdings and neither does the People's Bank of China or the Reserve Bank of India, 2 countries that had been on a silver standard before WW2.
Recycling experts say most silver used in appliances does not get recycled, citing cost concerns. The catalytic process becomes a lot more interesting when one looks at e.g. platinum, currently traded at $1,214.
This amounts to a massive loss of mined silver although it cannot be quantified.
There are more fundamentally positive reasons for silver. The gold/silver ration stands at 1:68 at the time of writing. In the last 2000 years this ratio was closer to 1:15 until US president Nixon closed the gold window.
According to the Mogambo Guru silvers historic record price was $1,012 per troy ounce:
The historical high for silver was set 532 years ago in 1477, topping at (using the purchasing power of 1998 dollars) a princely $806 an ounce. By comparison, the price of silver less than $19 an ounce today, and was only about $5 an ounce in 1998, after having bottomed at under $4 an ounce in 1992.
Now, fast-forward to today as our 2008 dollars, which have fallen 50% in purchasing power since 1998, means that the all-time high price of silver, set in 1477, now stands at $1,012 an ounce, measured in the buying power of 2008 dollars!
In such a long term perspective the Hunt brothers' failed cornering of silver with a high at $50 appears quite tame.
As I live in a country that punishes silver bullion investments with 20% VAT I get my ounces through investments in silver miners and the ETF of Zuercher Kantonalbank.
I prefer junior silver miners as they offer the biggest bang for the buck after the worst crash of miners in the last 80 years in 2008.
Most companies I follow have yet to recover to their highs made in 2007 or early 2008 when silver spiked to $21, only to fall back to $14 within a week.
A silver bug in Vancouver has saved me a lot of work at comparing junior silver producers.
Before I report on his findings I feel better when informing potential investors that the whole silver market, no matter whether physical or mining shares, is a tiny, tiny speck in the world of investment instruments. But this is also where the biggest gains of the future may be made. Just imagine once the mainstream mutual funds start to allocate said miners in their asset allocation. A few billion will propel gold and silver miners to the moon and maybe even further.

GRAPH: The bunch of junior miners resembles a minefield. Yesteryear's production is not a guidance for the future as ECU Silver, First Majestic and Genco Resources prove this with wild swings in annual production. Click graph for a larger image.
A look at net income shows that miners often need many years to arrive at a positive net income due to the huge outlays until production starts.

GRAPH: Impact Silver is the only member of this peer group consistently recording growing net income. Click for a larger image.
If you want to dive deeper into the key figures of these 8 junior silver miners, download an Excel sheet here.
Find a complete list of silver companies here and take 2 minutes to read the pro's and cons in silver investing.
DISCLOSURE: Long Impact Silver, Endeavour and bullion.

2 Austrian Banks Cannot Pay Interest On Public Capital Infusion

In contrast to the optimistic utterances from Austria's central bank the Austrian Treasury fears that its public capital infusions may turn into large write-offs. According to a spokesperson from the finance ministry it is expected that Oesterreichische Volksbanken AG (OeVAG) and the Hypo Alpe Adria Group will not be able to pay interest on its capital injections, Austrian Press Agency APA reported on Monday.
OeVAG had received €1 billion in subordinated capital at a rate of 9.3% in April but will not report a profit for the running year. OeVAG issued a profit warning on Monday after Moody's Investors Service had assigned an A3 rating to the Participation Capital Certificates to be issued by OeVAG. The rating is three notches below the bank's Aa3 senior debt and deposit rating and at the same level as the bank's A3 baseline credit assessment (BCA) and C bank financial strength rating (BFSR). Moody's says that the A3 rating for the non-cumulative, perpetual non-call 10-year Participation Capital Certificates to be issued by OeVAG reflects the deeply subordinated nature of the securities.
Hypo Alpe Adria has already missed the first 8% interest payment on its state capital of €900 million that saved it from insolvency in late 2008. The rather small bank had lost several hundred million Euros in 2004 due to speculative trading and has since changed ownership. Germany's Bayerische Landesbank holds now a majority stake. After reporting a marginal profit in Q1 2009 Bayern LB CEO Michael Kemmer had warned last week that he expects massive loan write-offs in Central Eastern Europe (CEE) in the second half of 2009. According to Austrian banking law interest on so called "Partizipationskapital" has only to be paid if the respective bank is profitable.
The sky won't cave in on Austria today, but these are new signs that the worst is yet to come as bankers chit-chat about a rapid deterioration in their CEE subsidiaries, expecting huge loan write-downs.
Raiffeisen International, Austria's biggest bank in CEE had received a capital shot of €1.25 billion from its 70% owner Raiffeisen Zentralbank AG last week after a capital note exchange offer was rejected by investors.
This was not Raiffeisen's own money but a first draw from an officially announced government package of loans and state guarantees with a volume of €100 billion. This figure may become outdated though. Last month Bloomberg cited from EU internal documents that Austria's banking sector may need as much as €165 billion in rescue funds. I only wonder whether Austria can find these mind-boggling sums and at what price.
It is only my guess as half year results have not been published by most Austrian banks as of today, but there will be a painful blood-letting in the next months for all Austrian banks resulting from their overexposure in CEE.
Seeing the wave of bank closures in the USA it is a mystery to me how all European banks are still standing upright. Whereas US banks have "only" been overexposed to reckless mortgage lending and now trip over credit card loans Europe's banks fight at still more frontiers. They not only invested heavily in defaulting US debt, spurred a continent wide property bubble and ventured into CEE loaning where all experts say the big default wave will gain speed in the remainder of 2009.

Mick Jagger Turns 66

Sunday, July 26, 2009

In tribute of the greatest RnB band in the world. Mick Jagger turns 66 on this Sunday. Lean back, turn up the volume and enjoy.

"Honky Tonk Women" at the legendary free concert at Hyde Park 2 days after Brian Jones had died.

The must see video the Stones tried to hide: wild in-flight party.

The world would be different without "Street Fighting Man"

Bridges to Babylon tour. 1996/7 "Gimme Shelter." First time they used a video wall to give 80,000 fans a better picture. Yes, they are larger than life.

Eliot Spitzer: The Fed Is a Ponzi Scheme

Do not miss out on this MSNBC video! Former New York Governor Eliot Spitzer says the Fed is a Ponzi scheme and the guys in the studio depict the fatal flaw of the Fed's strategy. Using cheques and a garbage bag, finance can become easily understood. Enjoy the full 8:38 minutes.

It certainly is only a coincidence that Spitzer was pressured to step down at the time he had become a persistent nuisance for all those banks that had overleveraged.
Spitzer was exposed for using an escort service and resigned from his governor's post on March 17, 2008. Justice must have become heavily imbalanced in the USA when the former White House occupators under George W. Bush get away with torture and several hundred thousand civilians killed in far-off places in the name of petro-theism.

Need Half a Trillion Paper Money or Much More? Bernanke Will Be Happy to Print Them As Long As You Are a Bank

Saturday, July 25, 2009

The strange thing about financial crises is that they don't happen because of too little money but always because there is too much fiat money, obviously in the wrong hands, though.
Enjoy this video where Fed chairman Ben Bernanke says he does not know who got 553 billion Federal Reserve Notes (FRN) which were "swapped" to foreign central banks.
At these sums
, don't worry if the Fed's figures may be wrong for a few billions up or down. This is another proof that the Fed is just a one trick pony that can only print unlimited FRNs at "virtually no cost."

Fed Accountant: We Don't Know Where the 9 Trillion Went
If 553 billion don't send your blood pressure through the roof, watch this video where Rep. Alan Grayson asks the Federal Reserve Inspector General on May 11, 2009, about 9 trillion FRNs lent or spent by the Federal Reserve and where it went, and the trillions of off balance sheet obligations. Inspector General Elizabeth Coleman responds that the IG does not know and is not tracking where this money is.

This should make it clear by now that this is the endgame of the Fed's global rulership with a private currency. Once you arrive at trillions, you don't have to run any math formulas to know it has all gotten out of the hand of the central banks. Social unrest and widespread poverty through hyperinflation is probably just around the corner because the Fed's helicopters are exclusively dropping their fresh money into the courtyards of financial institutions.

Dog Days and a Thunderstorm in Vienna

Friday, July 24, 2009

Thursday was Vienna's hottest day with temperatures reaching 38 centigrades, followed by the worst thunderstorm in 60 years.
As I have to clear my garden from broken tree parts that also block my garage blogging will cease at least until Monday.

Bernanke Outlines the Fed's Exit Strategy

Wednesday, July 22, 2009

On Tuesday Treasury markets signalled re-emerging confidence that the Federal Reserve may be able to absorb the oceans of liquidity it has pumped into markets in the last 2 years. The nice rally across the curve based on an OpEd piece by Fed chairman Ben Bernanke in the Wall Street Journal.
As the investment world has grown wary of the explosive growth of the Fed's balance sheet since last September Bernanke stressed the argument that this has helped to mitigate the problems in the economy. According to Bernanke historically low Fed funds rates will be with us as long as there is a recession, but the Fed acknowledges the need to raise interest rates to avoid higher inflation.
Looking at such key indicators like industrial production and the labor market I am left with the question when we will see growth in the USA again. Bernanke did not specify any time frame for the recovery.
The Fed head also pointed out that he has an arsenal of tools to tighten monetary policy despite an inflated balance sheet:
Even if our balance sheet stays large for a while, we have two broad means of tightening monetary policy at the appropriate time: paying interest on reserve balances and taking various actions that reduce the stock of reserves. We could use either of these approaches alone; however, to ensure effectiveness, we likely would use both in combination.
Citing the ECB, Bernanke sees a way to put a floor below short term rates.
Considerable international experience suggests that paying interest on reserves effectively manages short-term market rates. For example, the European Central Bank allows banks to place excess reserves in an interest-paying deposit facility. Even as that central bank’s liquidity-operations substantially increased its balance sheet, the overnight interbank rate remained at or above its deposit rate. In addition, the Bank of Japan and the Bank of Canada have also used their ability to pay interest on reserves to maintain a floor under short-term market rates.
4 Tools to Tighten Monetary Policy
Bernanke argues that the Fed has 4 more tools to drain excess liquidity:
First, the Federal Reserve could drain bank reserves and reduce the excess liquidity at other institutions by arranging large-scale reverse repurchase agreements with financial market participants, including banks, government-sponsored enterprises and other institutions. Reverse repurchase agreements involve the sale by the Fed of securities from its portfolio with an agreement to buy the securities back at a slightly higher price at a later date.

Second, the Treasury could sell bills and deposit the proceeds with the Federal Reserve. When purchasers pay for the securities, the Treasury’s account at the Federal Reserve rises and reserve balances decline.
The Treasury has been conducting such operations since last fall under its Supplementary Financing Program. Although the Treasury’s operations are helpful, to protect the independence of monetary policy, we must take care to ensure that we can achieve our policy objectives without reliance on the Treasury.

Third, using the authority Congress gave us to pay interest on banks’ balances at the Fed, we can offer term deposits to banks - analogous to the certificates of deposit that banks offer their customers. Bank funds held in term deposits at the Fed would not be available for the federal funds market.

Fourth, if necessary, the Fed could reduce reserves by selling a portion of its holdings of long-term securities into the open market.
Don't expect any tightening soon, though:
Overall, the Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so. As my colleagues and I have stated, however, economic conditions are not likely to warrant tighter monetary policy for an extended period.
While outlining the Fed's strategy is a good guide for the future, the big "if and when the economy recovers" does not get answered by Bernanke. The lending spree in this decade has turned a good part of the US population into debt servants who will likely look into more savings and paying off their loans before the hailed US consumer will find a few notes in her/his wallet to go on the next shopping marathon.
Looking at bankrupt California, tent cities across the nation and the sharp drop in industrial production these indicators show no signs of a recovery anytime soon.

Something's Fishy Here: S&P Backtracks Bond Downgradings

Tuesday, July 21, 2009

Rating agency Standard & Poors (S&P) appears to do all it can to further wreck its status. According to a Bloomberg story from Tuesday S&P had downgraded three AAA-rated commercial mortgage-backed debt papers only a week ago to BBB-, the lowest investment-grade rating. Lower ratings than BBB are considered junk issues.
On Tuesday S&P reversed course and upgraded the bonds again to AAA in a move destined to downgrade its own reputation.
The move coincided with new proposed legislation sent to Congress that would require rating agencies to observe a raft of new disclosure rules and restrictions, writes the Financial Times.
From Bloomberg:
Standard & Poor’s backtracked on ratings cuts issued last week and raised the ranking on commercial mortgage-backed debt from three bonds sold in 2007.

The securities, restored to top-ranked status, had been downgraded as recently as last week, making them ineligible for the Federal Reserve’s Term Asset-Backed Securities Loan Facility to jump start lending.
S&P lowered the ratings on a class of a commercial mortgage-backed bond offering from AAA to BBB-, the lowest investment-grade ranking, on July 14. The New York-based rating company reversed the cut today, S&P said in a statement. In a related report, S&P said it adjusted assumptions on the timing of projected losses on the mortgages.

It is a stunning reversal and certainly raises questions concerning the robustness of their revised model,” said Christopher Sullivan, chief investment officer at United Nations Federal Credit Union in New York. “It may engender further uncertainty with respect to ratings outlooks.”
Debt rated below AAA isn’t eligible for the Federal Reserve’s TALF. Investors sought $668.9 million in loans from the Fed to purchase so-called legacy commercial mortgage-backed bonds on July 16, the first monthly deadline to finance the purchase of the securities.
If you are confused about the alphabet soup liquidity measures of the Federal Reserve since the onset of the credit crunch, William D. Cohan, author of "House of Cards: A Tale of Hubris and Wretched Excess on Wall Street" came up with a cute TALF explanation:
Imagine if you were not really in the market for a house but the government came along and said that it would finance 94% of a home's purchase price with a mortgage rate of less than 3%. Still not interested? Wait, Uncle Sam has some additional sweeteners: if you do the deal and buy the house for only 6% down, you also get the equivalent of rental income every month to the tune of at least an annualized yield of 10% of the purchase price.

But wait there's still more: if, say, after two years, you decide you don't want the house any longer, you can just walk away from it. No need to pay the balance of the mortgage (it won't affect your credit rating), and you can keep the rental income received to date.
That's essentially the deal that Treasury Secretary Timothy Geithner has offered qualified professional investors who participate in the so-called TALF (Term Asset-Backed Securities Loan Facility)...

The way the TALF works in practice is this: The amount of equity an investor has to put up, or the "haircut" as the TALF documents call it, depends upon the assets involved, the term of the loan or lease of the underlying asset (say, a car) and the credit quality of the underlying borrower. A loan to buy a three-year security backed by a group of credit-card receivables from high-quality borrowers would require an investor to put up 6% of the capital -- a 6% "haircut" -- and then can borrow the rest from the TALF through his brokerage account. To buy a two-year high-quality credit-card receivable security, a borrower would put up 5% of the face amount of the securities purchased. Auto receivables require as 12% equity investment for a three-year security. Small business loans require 5% down. Student loans require 10% down for a three-year deal.

An investor interested in a $10 million slice of three-year credit card receivable would put up 6% of the money -- $600,000 -- and borrow the balance of $9.4 million from the TALF at a rate of three-year LIBOR plus 100 basis points (Attention K-Mart shoppers, that's 2.85% at this moment.) Depending on all sorts of assumptions, the yields on these investments are said to be in the 11% to 15% range, especially attractive since the TALF loans are non-recourse to the borrowers -- you can just walk away and lose only your underlying equity investment and the collateral but you are not held responsible for the unpaid portion of the TALF loan itself.

In addition, the TALF loan is not marked-to-market so if the underlying collateral deteriorates in value, the investor is not required to put up more equity. What's more as the car payments or credit-card payments on the underlying security are made, the payments are distributed to the government and the investor on equal footing -- that means the investor starts getting paid back at the same time as the government even though the government is the senior secured creditor and even though an investor has put up only a small fraction of the original money. One private equity investor, who would not normally have looked at investing in such a deal but did, called this particular aspect of the TALF "shockingly good."
This short refresher course leads back to the absurd business model of rating agencies who have not missed out on a single blunder in the past 4 decades.

Their pay to play model now raises the question about their input data to assess the risk of securities. Reducing a rating by three grades from AAA to BBB and then retracting it one week later does not exactly help ironing out the current imbalances in ratings.

I assume as long as the $$$,$$$ roll in for their work, rating agencies are willing to take hits from enraged investors. Rating agencies have certainly helped to globalize securities trading, especially in the fixed income (what a misnomer these days) sector. Fund managers like the trade too as it offers them a scapegoat in case something goes wrong with their presumably well-rated holdings.

An unnamed fund manager explains his view,
"How else could I invest into foreign ABS (asset backed securities) or MBS (mortgage backed securities)? I can't travel the world to assess the quality of my holdings. This is why we need a rating agency."
But he agrees that recent zig-zags of ratings often cannot be explained with underlying fundamental changes,
"one week down, the next week up does not instill confidence in the grading mechanism of the agencies. This recent move by S&P smells fishy. I think there were less formulas applied but rather some phone calls from authorities like the Fed or the Treasury."
Given the tendency of the Fed and the Treasury to play under a sheet of secrecy this sounds plausible and brings up the fundamental question whether the rating agencies should not be shut down for good.

This could have helped non-US investors avoid hefty losses who were drawn to the fairy tale land of investment grade ratings which offered a nice spread above other high-grade bond issues, e.g. sovereign bonds.

The Treasury's new plan is aimed at reducing conflicts of interest at rating agencies, boosting the regulatory authority of the US Securities and Exchange Commission over the agencies and reducing the financial system’s reliance on credit ratings.
From the FT:
Barney Frank, head of the chairman of the House financial services committee, on Tuesday endorsed measures that would overturn requirements that require the use of the credit ratings agencies.

“There are a lot of statutory mandates that people have to rely on credit rating agencies. They’re going to all be repealed,” he told Reuters.

The business models at Moody’s Investors Services, Standard & Poor’s and Fitch Ratings – which are paid by the companies whose debt securities they rate – remain largely intact.

Defending the Treasury’s decision not to heed calls by some for a fundamental overhaul, Michael Barr, assistant Treasury secretary for financial institutions, said there were conflicts inherent in alternative models too.

Tuesday’s proposals would bar ratings agencies from providing consulting services to any company they rated and would require them to disclose fees for a rating. It also attempts to stem “ratings shopping’’ in which a company solicits “preliminary ratings’’ from multiple agencies but only pays for and discloses the highest.

Ratings agencies would be required to use different symbols for structured finance products, which are perceived to be riskier, than for corporate bonds...

The SEC has created special examiners to oversee ratings agencies, and last year passed rules prohibiting activities such as executives providing both ratings and advice on how to structure securities, and barring those who evaluate the debt from discussing fees, as well as limiting gifts from debt underwriters to rating agency employees.

S&P said it was studying the proposal. Moody’s said it supported the goals of “increased transparency and enhanced ratings quality’’. Fitch said the plans were consistent with its views on transparency.
An Overbanked World
Looking at the global picture with the advantage of hindsight rating agencies have dramatically contributed to the internationalization of securities trading. But as we have arrived in a period where the whole world has become over banked one can safely assume that this long cycle of over-investments in the financial sector will reverse too. Desperate moves by governments to keep all their domestic banks alive will only lengthen the unavoidable process of shrinking the industry. So far banks have an advantage as they can convince politicians that they are the arterial system of the economy. This will certainly change once the broad mass finds out that their rising tax payments are used to keep the banks alive who had embarked on a greed-trip not seen since the last depression in the 1930s.

There is no reason why banking could not be reshaped and re sized. I can't find the source anymore, but I remember to have seen a study that concluded that banks' profitability growth since the 1960s has left all other industries in the dust far behind.

It would have cost the world a lot less had bankers stayed with their 3-6-3 business model: Borrow at 3%, lend at 6% and make sure to be on the golf course by 3PM.

GUEST CONTRIBUTION - William Greider: Dismantle the Fed

Monday, July 20, 2009

The calls for shutting down the Federal Reserve are rapidly growing into a chorus. William Greider, author of undeniably the best book about the Fed, "Secrets of the Temple - How the Federal Reserve Runs the Country" chimes in these days too. His book was my first milestone on the never ending road of understanding monetary policy and to learn about the greater realities in life.
Reading the "Secrets of the Temple" one can grasp that Greider only found out about the conflict-laden fiat currency system established by the Fed during his long and accurate research that made him ask years later why capital hires labor and not the other way round in his 2004 book "The Soul of Capitalism: Opening Paths to a Moral Economy."
I am especially delighted to have Greider's permission to post his most recent attack against the Fed which should be dismantled in his opinion. But read it all yourself.
Dismantling the Temple
by William H. Greider
The financial crisis has propelled the Federal Reserve into an excruciating political dilemma. The Fed is at the zenith of its influence, using its extraordinary powers to rescue the economy. Yet the extreme irregularity of its behavior is producing a legitimacy crisis for the central bank. The remote technocrats at the Fed who decide money and credit policy for the nation are deliberately opaque and little understood by most Americans. For the first time in generations, they are now threatened with popular rebellion.

Fed Threatened With Popular Rebellion
During the past year, the Fed has flooded the streets with money -- distributing trillions of dollars to banks, financial markets and commercial interests -- in an attempt to revive the credit system and get the economy growing again. As a result, the awesome authority of this cloistered institution is visible to many ordinary Americans for the first time. People and politicians are shocked and confused, and also angered, by what they see. They are beginning to ask some hard questions for which Federal Reserve governors do not have satisfactory answers.

Where did the central bank get all the money it is handing out? Basically, the Fed printed it, out of thin air. That is what central banks do. Who told the Fed governors they could do this? Nobody, really -- not Congress or the president. The Federal Reserve Board, alone among government agencies, does not submit its budgets to Congress for authorization and appropriation. It raises its own money, sets its own priorities.

Fed Is Independent With One Exception: Banks
Representative Wright Patman, the Texas populist who was a scourge of central bankers, once described the Federal Reserve as "a pretty queer duck." Congress created the Fed in 1913 with the presumption that it would be "independent" from the rest of government, aloof from regular politics and deliberately shielded from the hot breath of voters or the grasping appetites of private interests -- with one powerful exception: the bankers.

The Fed was designed as a unique hybrid in which government would share its powers with the private banking industry. Bankers collaborate closely on Fed policy. Banks are the "shareholders" who ostensibly own the twelve regional Federal Reserve banks. Bankers sit on the boards of directors, proposing interest-rate changes for Fed governors in Washington to decide. Bankers also have a special advisory council that meets privately with governors to critique monetary policy and management of the economy. Sometimes, the Fed pretends to be a private organization. Other times, it admits to being part of the government.

Favoring Bankers Is Embedded In the Fed's DNA
The antiquated quality of this institution is reflected in the map of the Fed's twelve regional banks. Five of them are located in the Midwest (better known today as the industrial Rust Belt). Missouri has two Federal Reserve banks (St. Louis and Kansas City), while the entire West Coast has only one (located in San Francisco, not Los Angeles or Seattle). Virginia has one; Florida does not. Among its functions, the Federal Reserve directly regulates the largest banks, but it also looks out for their well-being -- providing regular liquidity loans for those caught short and bailing out endangered banks it deems "too big to fail." Critics look askance at these peculiar arrangements and see "conspiracy." But it's not really secret. This duck was created by an act of Congress. The Fed's favoritism toward bankers is embedded in its DNA.

Black Hole of Democracy
This awkward reality explains the dilemma facing the Fed. It cannot stand too much visibility, nor can it easily explain or justify its peculiar status. The Federal Reserve is the black hole of our democracy--the crucial contradiction that keeps the people and their representatives from having any voice in these most important public policies. That's why the central bankers have always operated in secrecy, avoiding public controversy and inevitable accusations of special deal-making. The current crisis has blown the central bank's cover. Many in Congress are alarmed, demanding greater transparency. More than 250 House members are seeking an independent audit of Fed accounts (ed: initiated by Ron Paul). House Speaker Nancy Pelosi observed that the Fed seems to be poaching on Congressional functions -- handing out public money without the bother of public decision-making.

"Many of us were...if not surprised, taken aback, when the Fed had $80 billion to invest in AIG just out of the blue," Pelosi said. "All of a sudden, we wake up one morning and AIG was receiving $80 billion from the Fed. So of course we're saying, Where is this money coming from? 'Oh, we have it. And not only that, we have more.'" So who needs Congress? Pelosi sounded guileless, but she knows very well where the Fed gets its money. She was slyly tweaking the central bankers on their vulnerability.

Bernanke Fears a Congressional Audit
Fed chair Ben Bernanke responded with the usual aloofness. An audit, he insisted, would amount to "a takeover of monetary policy by the Congress." He did not appear to recognize how arrogant that sounded. Congress created the Fed, but it must not look too deeply into the Fed's private business. The mystique intimidates many politicians. The Fed's power depends crucially upon the people not knowing exactly what it does.

Bernanke So Far Neither Winner Nor Loser
Basically, what the central bank is trying to do with its aggressive distribution of trillions is avoid repeating the great mistake the Fed made after the 1929 stock market crash. The central bankers responded hesitantly then and allowed the money supply to collapse, which led to the ultimate catastrophe of full-blown monetary deflation and created the Great Depression. Bernanke has not yet won this struggle against falling prices and production -- deflationary symptoms remain visible around the world -- but he has not lost either. He might get more public sympathy if Fed officials explained this dilemma in plain English. Instead, they are shielding people from understanding the full dimensions of our predicament.

The Fed Needs to Be Reformed
President Obama inadvertently made the political problem worse for the Fed in June, when he proposed to make the central bank the supercop to guard against "systemic risk" and decide the terms for regulating the largest commercial banks and some heavyweight industrial corporations engaged in finance. The House Financial Services Committee intends to draft the legislation quickly, but many members want to learn more first. Obama's proposal gives the central bank even greater power, including broad power to pick winners and losers in the private economy and behind closed doors. Yet Obama did not propose any changes in the Fed's privileged status. Instead, he asked Fed governors to consider the matter. But perhaps it is the Federal Reserve that needs to be reformed.

2013 Would Be a Good Time to Change the Fed
A few months back, I ran into a retired Fed official who had been a good source twenty years ago when I was writing my book about the central bank, Secrets of the Temple: How the Federal Reserve Runs the Country. He is a Fed loyalist and did not leak damaging secrets. But he helped me understand how the supposedly nonpolitical Fed does its politics, behind the veil of disinterested expertise. When we met recently, he said the central bank is already making preparations to celebrate its approaching centennial. Some of us, I responded, have a different idea for 2013.

"We think that would be a good time to dismantle the temple," I playfully told my old friend. "Democratize the Fed. Or tear it down. Create something new in its place that's accountable to the public."

The Fed man did not react well to my teasing. He got a stricken look. His voice tightened. Please, he pleaded, do not go down that road. The Fed has made mistakes, he agreed, but the country needs its central bank. His nervous reaction told me this venerable institution is feeling insecure about its future.

Six Reasons Why Granting the Fed Even More Power Is a Really Bad Idea:
  1. It would reward failure. Like the largest banks that have been bailed out, the Fed was a co-author of the destruction. During the past twenty-five years, it failed to protect the country against reckless banking and finance adventures. It also failed in its most basic function--moderating the expansion of credit to keep it in balance with economic growth. The Fed instead allowed, even encouraged, the explosion of debt and inflation of financial assets that have now collapsed. The central bank was derelict in enforcing regulations and led cheers for dismantling them. Above all, the Fed did not see this disaster coming, or so it claims. It certainly did nothing to warn people.
  2. Cumulatively, Fed policy was a central force in destabilizing the US economy. Its extreme swings in monetary policy, combined with utter disregard for timely regulatory enforcement, steadily shifted economic rewards away from the real economy of production, work and wages and toward the financial realm, where profits and incomes were wildly inflated by false valuations. Abandoning its role as neutral arbitrator, the Fed tilted in favor of capital over labor. The institution was remolded to conform with the right-wing market doctrine of chairman Alan Greenspan, and it was blinded to reality by his ideology (see my Nation article "The One-Eyed Chairman," September 19, 2005).
  3. The Fed cannot possibly examine "systemic risk" objectively because it helped to create the very structural flaws that led to breakdown. The Fed served as midwife to Citigroup, the failed conglomerate now on government life support. Greenspan unilaterally authorized this new financial/banking combine in the 1990s -- even before Congress had repealed the Glass-Steagall Act, which prohibited such mergers. Now the Fed keeps Citigroup alive with a $300 billion loan guarantee. The central bank, in other words, is deeply invested in protecting the banking behemoths that it promoted, if only to cover its own mistakes.
  4. The Fed can't be trusted to defend the public in its private deal-making with bank executives. The numerous revelations of collusion have shocked the public, and more scandals are certain if Congress conducts a thorough investigation. When Treasury Secretary Timothy Geithner was president of the New York Fed, he supervised the demise of Bear Stearns with a sweet deal for JPMorgan Chase, which took over the failed brokerage -- $30 billion to cover any losses. Geithner was negotiating with Morgan Chase CEO and New York Fed board member Jamie Dimon. Goldman Sachs CEO Lloyd Blankfein got similar solicitude when the Fed bailed out insurance giant AIG, a Goldman counterparty: a side-door payout of $13 billion. The new president at the New York Fed, William Dudley, is another Goldman man.
  5. Instead of disowning the notorious policy of "too big to fail," the Fed will be bound to embrace the doctrine more explicitly as "systemic risk" regulator. A new superclass of forty or fifty financial giants will emerge as the born-again "money trust" that citizens railed against 100 years ago. But this time, it will be armed with a permanent line of credit from Washington. The Fed, having restored and consolidated the battered Wall Street club, will doubtless also shield a few of the largest industrial-financial corporations, like General Electric (whose CEO also sits on the New York Fed board). Whatever officials may claim, financial-market investors will understand that these mammoth institutions are insured against failure. Everyone else gets to experience capitalism in the raw.
  6. This road leads to the corporate state -- a fusion of private and public power, a privileged club that dominates everything else from the top down. This will likely foster even greater concentration of financial power, since any large company left out of the protected class will want to join by growing larger and acquiring the banking elements needed to qualify. Most enterprises in banking and commerce will compete with the big boys at greater disadvantage, vulnerable to predatory power plays the Fed has implicitly blessed.
Fed Will Remain in the Crosshairs
Whatever good intentions the central bank enunciates, it will be deeply conflicted in its actions, always pulled in opposite directions. If the Fed tries to curb the growth of the megabanks or prohibit their reckless practices, it will be accused of damaging profitability and thus threatening the stability of the system. If it allows overconfident bankers to wander again into dangerous territory, it will be blamed for creating the mess and stuck with cleaning it up. Obama's reform might prevail in the short run. The biggest banks, after all, will be lobbying alongside him in favor of the Fed, and Congress may not have the backbone to resist. The Fed, however, is sure to remain in the cross hairs. Too many different interests will be damaged -- thousands of smaller banks, all the companies left out of the club, organized labor, consumers and other sectors, not to mention libertarian conservatives like Texas Representative Ron Paul. They will recognize that the "money trust" once again has its boot on their neck, and that this time the government arranged it.

Formidable Obstacles to Democratize the Fed
The obstacles to democratizing the Fed are obviously formidable. Tampering with the temple is politically taboo. But this crisis has demonstrated that the present arrangement no longer works for the public interest. The society of 1913 no longer exists, nor does the New Deal economic order that carried us to twentieth-century prosperity. The country thus has a rare opportunity to reconstitute the Federal Reserve as a normal government agency, shorn of the bankers' preferential trappings and the fallacious claim to "independent" status as well as the claustrophobic demand for secrecy.

Wisdom of Central Bankers Fails Spectacularly
Progressives in the early twentieth century, drawn from the growing ranks of managerial professionals, believed "good government" required technocratic experts who would be shielded from the unruly populace and especially from radical voices of organized labor, populism, socialism and other upstart movements. The pretensions of "scientific" decision-making by remote governing elites -- both the mysterious wisdom of central bankers and the inventive wizardry of financial titans -- failed spectacularly in our current catastrophe. The Fed was never independent in any real sense. Its power depended on taking care of its one true constituency in banking and finance.

Submitting to Transparency and Public Scrutiny
A reconstituted central bank might keep the famous name and presidentially appointed governors, confirmed by Congress, but it would forfeit the mystique and submit to the usual standards of transparency and public scrutiny. The institution would be directed to concentrate on the Fed's one great purpose--making monetary policy and controlling credit expansion to produce balanced economic growth and stable money. Most regulatory functions would be located elsewhere, in a new enforcement agency that would oversee regulated commercial banks as well as the "shadow banking" of hedge funds, private equity firms and others.

End the Fed's Hybrid Private-Public Status
The Fed would thus be relieved of its conflicted objectives. Bank examiners would be free of the insider pressures that inevitably emanate from the Fed's cozy relations with major banks. All of the private-public ambiguities concocted in 1913 would be swept away, including bank ownership of the twelve Federal Reserve banks, which could be reorganized as branch offices with a focus on regional economies.

Treasury and Fed Have No Grant to Create Money
Altering the central bank would also give Congress an opening to reclaim its primacy in this most important matter. That sounds farfetched to modern sensibilities, and traditionalists will scream that it is a recipe for inflationary disaster. But this is what the Constitution prescribes: "The Congress shall have the power to coin money [and] regulate the value thereof." It does not grant the president or the treasury secretary this power. Nor does it envision a secretive central bank that interacts murkily with the executive branch.

Given Congress's weakened condition and its weak grasp of the complexities of monetary policy, these changes cannot take place overnight. But the gradual realignment of power can start with Congress and an internal reorganization aimed at building its expertise and educating members on how to develop a critical perspective. Congress has already created models for how to do this. The Congressional Budget Office is a respected authority on fiscal policy, reliably nonpartisan. Congress needs to create something similar for monetary policy.

More Oversight Is Needed
Instead of consigning monetary policy to backwater subcommittees, each chamber should create a major new committee to supervise money and credit, limited in size to members willing to concentrate on becoming responsible stewards for the long run. The monetary committees, working in tandem with the Fed's board of governors, would occasionally recommend (and sometimes command) new policy directions at the federal agency and also review its spending.

Setting monetary policy is a very different process from enacting laws. The Fed operates through a continuum of decisions and rolling adjustments spread over months, even years. Congress would have to learn how to respond to deeper economic conditions that may not become clear until after the next election. The education could help the institution mature.

Congress Needs a Council of Public Elders

Congress also needs a "council of public elders" -- a rotating board of outside advisers drawn from diverse interests and empowered to speak their minds in public. They could second-guess the makers of monetary policy but also Congress. These might include retired pols, labor leaders, academics and state governors--preferably people whose thinking is no longer defined by party politics or personal ambitions. The public could nominate representatives too. No financial wizards need apply.

Cleaning Up the Mess Will Require Hard Rules
A revived Congress armed with this kind of experience would be better equipped to enact substantive law rather than simply turning problems over to regulatory agencies with hollow laws that are merely hortatory suggestions. Reordering the financial system and the economy will require hard rules -- classic laws of "Thou shalt" and "Thou shalt not" that command different behavior from certain private interests and prohibit what has proved reckless and destructive. If "too big to fail" is the problem, don't leave it to private negotiations between banks and the Federal Reserve. Restore anti-monopoly laws and make big banks get smaller. If the financial system's risky innovations are too complicated for bank examiners to understand, then those innovations should probably be illegal.

Citizens Must See Through the Fed's Secrets
Many in Congress will be afraid to take on the temple and reluctant to violate the taboo surrounding the Fed. It will probably require popular rebellion to make this happen, and that requires citizens who see through the temple's secrets. But the present crisis has not only exposed the Fed's worst failures and structural flaws; it has also introduced citizens to the vast potential of monetary policy to serve the common good. If Ben Bernanke can create trillions of dollars at will and spread them around the financial system, could government do the same thing to finance important public projects the people want and need? Daring as it sounds, the answer is, Yes, we can.

Money Made by Keystrokes
The central bank's most mysterious power -- to create money with a few computer keystrokes -- is dauntingly complicated, and the mechanics are not widely understood. But the essential thing to understand is that this power relies on democratic consent -- the people's trust, their willingness to accept the currency and use it in exchange. This is not entirely voluntary, since the government also requires people to pay their taxes in dollars, not euros or yen. But citizens conferred the power on government through their elected representatives. Newly created money is often called the "pure credit" of the nation. In principle, it exists for the benefit of all.

Lincoln Used Greenbacks to Win the War - Bernanke Does It to Save Banks
In this emergency, Bernanke essentially used the Fed's money-creation power in a way that resembles the "greenbacks" Abraham Lincoln printed to fight the Civil War. Lincoln was faced with rising costs and shrinking revenues (because the Confederate states had left the Union). The president authorized issuance of a novel national currency -- the "greenback" -- that had no backing in gold reserves and therefore outraged orthodox thinking. But the greenbacks worked. The expanded money supply helped pay for war mobilization and kept the economy booming. In a sense, Lincoln won the war by relying on the "full faith and credit" of the people, much as Bernanke is printing money freely to fight off financial collapse and deflation.

If Congress chooses to take charge of its constitutional duty, it could similarly use greenback currency created by the Federal Reserve as a legitimate channel for financing important public projects -- like sorely needed improvements to the nation's infrastructure. Obviously, this has to be done carefully and responsibly, limited to normal expansion of the money supply and used only for projects that truly benefit the entire nation (lest it lead to inflation). But here is an example of how it would work.

Not Bernanke But Congress Should Create a Development Fund
President Obama has announced the goal of building a high-speed rail system. Ours is the only advanced industrial society that doesn't have one (ride the modern trains in France or Japan to see what our society is missing). Trouble is, Obama has only budgeted a pittance ($8 billion) for this project. Spain, by comparison, has committed more than $100 billion to its fifteen-year railroad-building project. Given the vast shortcomings in US infrastructure, the country will never catch up with the backlog through the regular financing of taxing and borrowing.

Instead, Congress should create a stand-alone development fund for long-term capital investment projects (this would require the long-sought reform of the federal budget, which makes no distinction between current operating spending and long-term investment). The Fed would continue to create money only as needed by the economy; but instead of injecting this money into the banking system, a portion of it would go directly to the capital investment fund, earmarked by Congress for specific projects of great urgency. The idea of direct financing for infrastructure has been proposed periodically for many years by groups from right and left. Transportation Secretary Ray LaHood co-sponsored legislation along these lines a decade ago when he was a Republican Congressman from Illinois.

This approach speaks to the contradiction House Speaker Pelosi pointed out when she asked why the Fed has limitless money to spend however it sees fit. Instead of borrowing the money to pay for the new rail system, the government financing would draw on the public's money-creation process -- just as Lincoln did and Bernanke is now doing.

Bankers Would Howl of Course
The bankers would howl, for good reason. They profit enormously from the present system and share in the money-creation process. When the Fed injects more reserves into the banking system, it automatically multiplies the banks' capacity to create money by increasing their lending (and banks, in turn, collect interest on their new loans). The direct-financing approach would not halt the banking industry's role in allocating new credit, since the newly created money would still wind up in the banks as deposits. But the government would now decide how to allocate new credit to preferred public projects rather than let private banks make all the decisions for us.

The reform of monetary policy, in other words, has promising possibilities for revitalizing democracy. Congress is a human institution and therefore fallible. Mistakes will be made, for sure. But we might ask ourselves, If Congress were empowered to manage monetary policy, could it do any worse than those experts who brought us to ruin?
ABOUT THE AUTHOR: William Greider was an editor of national affairs at the Washington Post for 14 years before joining Rolling Stone magazine where he wrote a regular column for 17 years, driven by the motive to translate high politics and finance into plain language as he assessed that newspapers talked down to their readers, without knowing it. "I learned how to explain the complexities of politics and government with clarity and without the condescension that’s typical of the mainstream media," he writes in his self-description.
Greider has written several best-selling books.
His latest work, Come Home, America: The Rise and Fall (and Redeeming Promise) of Our Country, describes the epic turning point in our nation’s history driven by financial crisis, economic deterioration and other fundamental adversities.
The country faces a hard passage ahead. The fateful question is whether we can emerge on other side as a better country with more-fulfilling, self-directed lives for all. This is possible, the book insists, but only if the people themselves step up and reclaim their role as citizens in the full meaning.
Greider is the national affairs correspondent for The Nation, the USA's oldest and largest political weekly. This guest contribution will appear in the August 3 issue of The Nation.

What's the Problem of the Secretive Fed?

Wednesday, July 15, 2009

What is the problem of the Federal Reserve that it does neither want to publish who got the $1.2 trillion it pumped into the banking system nor who are its owners.
Watch Fed vice chairman Donald Kohn evading any questions that would shine a little more light on the Fed's interventions in the banking system that blew up its balance sheet from $800 billion to $2 trillion.

NOTE: Tyler Durden has listed all those officially against lifting the ownership veil at zerohedge.

Markets Show an Easing of Banks' Stress

ECB president Jean-Claude Trichet was quite complacent at the last council meeting. And for the first time since the beginning of what was first called subprime, then credit crunch, only to morph into a recession by now, markets seem to agree with Trichet.
There is a glimmer at the far off end of the tunnel of hope. Euro interbank markets spreads are currently the lowest in a comparison with Federal Reserve Notes and Pound Sterling, Trichet was happy to tell an audience at the University of Munich on Monday.

GRAPH: Mr. Market says there is less stress in the system than there was last year. The long term picture leaves a lot to desire, though. Chart courtesy of ECB.
And now, if you really got nothing better to do than waiting on the FOMC minutes due today, read Trichet's speech here.
UPDATE: FT Alphaville writer Izabella Kaminska has done the work for all on such a humid summer day. Click here for her excerpts from Trichet's speech, covering the ECB's rubbish in its portfolio,, i.e. "Other assets."

Austria's Bond Issue Agency Piles Up Losses On SIVs

Austria's series of bad headlines does not stop. According to a paper by the Rechnungshof, literally Austrias General Accounting Office, Federal Financing Agency OeBFA sits on 1.8% of all issued US Structured Investment Vehicles (SIV), counting so far €616 million of losses on a €4,92 billion portfolio. Now, don't be envious because of such small figures raising the eyebrows of the Rechnungshof. This is still €615 for every Austrian invested in subprime.
On Tuesday the Rechnungshof criticized especially that the OeBFA had pumped half of its liquid funds into such papers.
The Rechnungshof did not attack Austria's Federal Financing Agency, but noted manifold that the OeBFA had not done any proprietary research on the SIVs bought, but had relied on the ratings of these papers. Well, we have discussed this issue here.
As the purchases of these SIV were stopped on 2007, Austria's bond issuer can at least be credited to have ended such irresponsibilities before the onset of the credit crunch in August 2007. According to the Rechnungshof most distressed SIVs had lost half their value before.
I am left one more time with the question, what statistics and news did they read?
On the other hand these losses fall into the era of finance minister Karl-Heinz "I have no ideology" Grasser who looted Austria's central bank to the tune of €4 billion in order to remain the country's most popular son-in-law.
In total Austria will survive this loss, dwarfed by an official banking rescue package of €100 billion, that may mushroom to €165 billion or €20.500 for every Austrian. These SIVs are only a tip on top of the iceberg this country will have yet to come to terms with.

US Mint AGAIN Suspends Gold Coin Sales - Is USA Really Out of Gold?

Monday, July 13, 2009

I may have missed one or the other suspension of gold coin sales by the US Mint. But here we go again: Checking the online store of the US Mint I came across notices of delays and suspensions with golden Eagles and Buffaloes with waiting times between weeks and further notice.
The US Mint press room has entirely omitted this confirmation about the tightness of the bullion market which enjoys upward momentum thanks to the thousands of big problems the world faces.
Checking on 24kt Buffalo gold coins the Mint saddened me with this statement:
Production of United States Mint 2009 American Buffalo Gold Proof Coins has been delayed because of the limited availability of 24-karat gold blanks. The 2009 American Buffalo One-ounce Gold Proof Coin is scheduled to go on sale in the second half of the 2009 calendar year after an acceptable inventory of 24-karat gold blanks can be acquired. The release date, once established, will be posted to the 2009 Scheduled Products Listing.
As a result of the numismatic product portfolio analysis conducted last fall, beginning in 2009, American Buffalo Gold Proof fractional coins and the four-coin set are no longer available. Additionally, the United States Mint will no longer offer American Buffalo Gold Uncirculated Coins.
The most economical way to buy gold coins, US gold eagles is blocked as well:
Production of United States Mint American Eagle Gold Proof and Uncirculated Coins has been temporarily suspended because of unprecedented demand for American Eagle Gold Bullion Coins. Currently, all available 22-karat gold blanks are being allocated to the American Eagle Gold Bullion Coin Program, as the United States Mint is required by Public Law 99-185 to produce these coins “in quantities sufficient to meet public demand . . . .
The United States Mint will resume the American Eagle Gold Proof and Uncirculated Coin Programs once sufficient inventories of gold bullion blanks can be acquired to meet market demand for all three American Eagle Gold Coin products. Additionally, as a result of the recent numismatic product portfolio analysis, fractional sizes of American Eagle Gold Uncirculated Coins will no longer be produced.
Not being able to suppress a smile I am left with a few questions:
  • If gold is soooo cheap why can't the US Mint risk buying those ounces on the free market?
  • Wasn't it the IMF who said it's gonna go and sell some of its yellow bars? Hey, this could become innovative: See the first ever gold deal done by dark pools in order to keep the public in the dark for some time longer.
  • If nobody wants gold and sees it as relic of history (like the history of price stability), what keeps the Mint from entering what it sees a buyers market?
  • Is this maybe blatant price manipulation because we don't know about the size of the Mint's backlog and order book?
Check ebay prices here to see what gold savers are willing to pay. I cannot see any lessening demand for the physical. Is the Mint maybe waiting for Goldman Sachs' summer attack on gold bullion prices, using as much short futures contracts as can be stored in their computers?
They may run in a problem with this strategy, though. Investors worldwide have long begun to snap every gold bar they can get their hand on. As always ahead of hyper inflation people will scratch everything together to get just that other ounce of security.

Former Assistant Treasury secretary: Treasury Works For Goldman Sachs

Thursday, July 09, 2009

Continuing the series of sunny summer day bloggin' lite please enjoy the video below.
For those busy with saving the world from its banks irresponsibilities, read the quotes and find yourself in a financial world bare of any Chinese walls.
It's all run and done' by Goldman Sachs, with the help of the Treasury:
Craig Roberts(Assistant Secretary of the Treasury in the Reagan Administration): ... Bank bailout was a fraud and it won't succeed. Don't know what sort of stupidity the Treasury Secretary and the Federal Reserve will resort to next.
Max Keiser: Quick question. What should the Treasury Secretary be doing?
Craig Roberts: He should be trying to save the dollar as the world's reserve currency which means stopping the wars, reducing the bailout money, and trying to reduce the trade and budget deficits in order to save the dollar. That's what he should be doing.
Max Keiser: Does the treasury secretary work for the people or does he work for the banking system on Wall Street?
Craig Roberts: He works for Goldman Sachs.

Hat tip goes to Michael Shedlock

European Credit Rankings Show No Uptrend Nowhere

Wednesday, July 08, 2009

Catch this graph of brand new credit rankings by European credit insurer Coface: Stable at lower levels at best, no positive outlook anywhere. This chart found in Austrian daily "Der Standard":

GRAPH: European map by credit rankings. The eventual bottoming out of the global margin call is probably as distant as the year 2011. Important translation: "sehr hohes Risiko" means "very high risk." Chart courtesy APA/Coface. Click for larger image.

Moody's Offers Training Courses on CDO/S - After Getting 99% of Ratings Wrong

In a world drowning in some 64.000 AAA rated CDO and CDS (credit debt obligations/swaps) Moody's has - 3 to 4 years late - but correctly recognised the public's demand for information on all these papers, posing a TRILLION risk for the entire financial globe.
They must be eager to get out word on the dangers of rated derivatives. Moody's tries to get you back to class room with a DISCOUNT OFFER included in its spam. It was not revealed whether these courses were AAA-rated.

SCREENSHOT: Found in my spam folder: Moody's invitation to take classes on credit derivatives 3 to 4 years after these "weapons of financial mass destruction" (Warren Buffett) have brought us on the brink of financial apocalypse. Click for larger image.
This borders on irony as my first ever blog post was born from my fury on the triple-A writers serving everybody who paid them.

TBTF-Theory Not Reflected in History Books

Monday, July 06, 2009

Observing nowadays' financial news I notice to have been reading and hearing a lot about the "too big to fail" (TBTF) theory since the onset of the credit crisis. There is only one fundamental problem: Not one former TBTF-candidate has remained alive much longer once this discussion had been started.
Since the South Sea Co. Ltd. was first TBTF, only to come down and take the better part of England in the South Sea Bubble with it, there is not a single grain of proof that would hold me back from officially burying the TBTF-theory as what it really is: an urban myth.
Uncountable financial corpses like Continental Illinois in the early 1980s, Long Term Capital Management in the late 1990s and not too long ago, Lehman Brothers, litter the road of economic disaster. Find a timeline of most recent TBTF events here.
This series may be continued with Goldman Sachs. At least there is no historical precedent saying otherwise and the TBTF discussion has just been given a new breather by Zerohedge's refreshing spate of documents, with an interesting answer by Kid Dynamite. As Reuters blogs/commentaries have started the timeline also eagerly documented by Karl Denninger, who served blogosphere more Goldman chutney on Monday, I may add that they may be onto something, this guess based on the historically non-proven TBTF theory.

German Magazine: Silver as Legal Way to Repatriate 6-Digit Funds from Austria Back Home

Saturday, July 04, 2009

It has become rare under ever tightening money transfer laws - allegedly because this helps fight "terrorism" - to be able to issue an alert that may help those cautious Germans who survived the markets Tsunami of 2008 to repatriate money from tax friendly Austria back home.
Legions of German savers with money deposits at Austrian banks appear to have turned into silver bulls.
Top quality German weekly "Spiegel" on Saturday revealed a legal loophole in German and EU laws that allows Germans to repatriate 6-digit funds in a most discreet, but still legal way from Austria to their home country.
This makes me understand the delighting record profits at the Austrian Mint in 2008 with a high degree of chance that 2009 will end with a still bigger income figure as sales have already exceeded last year's numbers.
I let Spiegel tell in its own words (emphasis mine) before adding a few interesting details on Austria's long term silver obligations:
The object of desire is 37 millimetres in diameter and made of .999 fine silver. On one side, the coin shows an organ, its country of origin ("The Republic of Austria") and its face value: €1.50 ($2.12). On the flipside: "Vienna Philharmonic Silver" and a few musical instruments from the world famous orchestra.
The coin, known to numismatics as the "Silver Philharmonic," could well drive Germany's already harassed Finance Minister Peer Steinbr├╝ck over the edge. Because the ounce of silver is a hot tip among German investors -- and a means of discretely transferring untaxed funds back home.
Austria issued the new coin in early 2008, wisely anticipating the consequences of the bank collapse, the stock crash and the rising value of precious metals. The coin was explicitly intended for purposes of investment, not collection. Bernhard Urban, marketing spokesman of the Austrian Mint, modestly calls it "unique" in Europe. The story of its success has to do with a funny little contradiction: As a means of payment with a value of €1.50, the coin can be used to buy a beer. But nobody in his right mind will take it to the pub in the first place because the exclusive silver piece is worth -- depending on the price of silver --somewhere between €11 ($16) and €14 ($20), and costs that much at the teller's window.

Austrian Mint 1st Euro member to Issue a Legal Tender Silver Coin
It's this difference between the face and market values of the coin that makes it so attractive in the context of international money transfers. The coin manages -- astonishingly -- to circumvent currency import regulations. A person travelling from Austria to Germany is allowed to bring €10,000 ($14,000) into the country without having to declare it at customs. So that person can bring more than 6,000 Philharmonic coins over the border and in doing so, bring home, with each trip, more than €110,000 ($156,000) of his hidden Austrian treasure.
It's common knowledge that many Germans make use of the discrete accounts in Austrian banks. But it's equally clear that the days of strict banking confidentiality are numbered. Bavarian customs officers claim not to have noticed anything yet. But in Austria, the Philharmonics are already "an absolute hit," as coin expert Urban proudly proclaims, especially among the Germans.

6,000 Philharmonics Equal €110k Paper Money
Like the entrepreneur from Munich who picked up the nifty little tip from his friends at the yacht club. Since then, the coin trick has been doing the rounds among wealthy Bavarians who stash their money next door. Because the coin collectors are exchanging tax evasion tips galore in chatrooms, the Bundesbank (Germany's central bank) is not anxious to draw attention to the matter. But senior bankers are abundantly aware of the problem.
The German Finance Ministry has responded by warning inventive investors not to get too comfortable. Customs officers suspicious about coins can forward these concerns. But they can only confiscate the silver pieces if they exceed the face value of €10,000 ($14,000).

"We want to fill a vacuum"
Meanwhile, the Austrian Mint can hardly keep up. It's a four-week wait for the coin at the Oberbank in Salzburg. There's no question that the Philharmonics are reaching well beyond traditional coin collector circles. In February 2008, the mint was anticipating sales of three or at most, five million coins; by the end of the year, almost eight million were in circulation. And already in 2009, nearly five million pieces have been bought or ordered
Of course, Urban denies that the Philharmonic is making life easier for tax evaders. That certainly wasn't the coin's purpose, he says. It was obvious that investors would go for precious metals in these uncertain times. "We wanted to fill a vacuum that the banks have left behind." Which means: for the growing number of customers who don't trust the investment advisor at their local bank, the Philharmonic offers a perfect alternative.

Germans Don't Sell Their "Real Money" 5-Deutschmark Coins
It's impossible to know how many Germans are using the coin for investment purposes and how many for cross-border transfers. What's clear is that the Bundesbank is not benefiting from the silver boom. German citizens are holding back on domestic coins at the moment; German coins are good only for collecting, not smuggling. Silver mintages have become shelf warmers. Now it's too late for the Bundesbank. The Austrians were first to grasp that in bad times, it makes more sense to mint investment opportunities rather than collector's items.
As there is not much else to say, Spiegel being reknown for decades of faultless reporting I want to add a few interesting details that may support the never ending allegations about a huge suppression scheme in silver prices.
Searching the Oesterreichische Nationalbank's annual report (PDF) the term "silver" in its physical meaning brings up only 4 references concerning silver in the annual report, all included in this one paragraph on page 109 (slight redaction for readability):
This balance sheet item exclusively subsumes the claim on the Austrian Federal Treasury from silver commemorative coins issued before 1989, based on the 1988 Coinage Act as promulgated in Federal Law Gazette No. 425/1996.
In theory, the maximum federal liability is the sum of all total silver commemorative coins before 1989, minus any coins returned to and paid for by the central government, minus any coins directly withdrawn by the Austrian Mint and minus repayments, which are effected by annual installments of €5.814 million. The proceeds from silver recovery, including the interest on the investment of these proceeds by the Austrian Mint, are designated for repayment by the contractual deadline (every year on Dec 15.)
Any amount outstanding on December 31, 2040, will have to be repaid...from 2041 to 2045 in 5 equal installments. The federal liability came to € €1.183 billion on December 31, 2008.
In short this means the Austrian central bank is at least €1.183 billion short silver (indeed and not with COMEX-contracts) as it is highly unlikely that coin owners will sell them at former Schilling face values of 5; 10; 25; 50; 200; 500 Austrian Schillings (divide all figures by 13.7603 to arrive at the € face value) when the pure market silver value means gains pf up to 3-digit percentage ranges, depending on face value and silver fineness of these coins. Find more details on the resale value here.
Although all these figures are minuscule in comparison of Eurozone banks borrowing €442 billion for 12 months from the ECB it may be another grain of salt, that central banks might be keen no to see silver rising further. In my personal opinion I see 3-digit €/$ prices for an ounce of silver.
So it may not be a bad idea to keep all the silver you have and maybe buy a little more at current prices.
There are many costly traps for physical silver buyers in Europe: Austria still applies a horrific 20% VAT on the monetary metal, absolutely defying any other logic than impeding investors from buying silver.
Germans have to give less of the purchase price to the taxman. In Germany, silver coins with a face value and being legal tender, are only levied with 7% whereas VAT on bullion bars is a hefty 19%, defying any logic than maybe "protective measures" to a yet officially unknown winner in the tax game.
Austrians can unofficially evade the 20% VAT up mark, a clear discrimination to the other monetary metal gold which is VAT free (making the whole affair look like a political and not logical decision), by buying their coins in Germany or from German sellers on ebay.

Tax-Disadvantaged Austrians Can Buy Silver Cheaper in Germany
This means that Austrians can get Philharmonics cheaper in Germany, or on ebay Germany, than at home. They too, can import a 6,000 silver Philharmonics from Germany, saving 13% VAT percentage points and stay within the bound of Austrian and EU laws.
It might be interesting to find out whether these rules also apply in other countries. The USA requires travellers to declare monies above $10,000 face value. It is up to one of my readers to find out - best with the advice of a lawyer - whether one could also import Austrian silver Philharmonics up to an exchange rate adjusted face value. This would result into a handy transfer of 4,761 ounces without alerting the IRS or immigration.
Non-EU citizens can hit another bargain: As they are VAT exempted, they can get an immediate cash refund of the 20% VAT asked by the Austrian commercial seller at the VAT refund offices at Vienna's airport by simply presenting their purchase records.
For those without knowledge of Europe's laws it may be helpful to know that Austrian banking secrecy laws will protect foreign depositors as Austria does not pass on information to foreign tax authorities that would reveal their holdings outside their domestic tax legislative. But the EU Moloch in Brussels will probably pressure Austria to reveal such intimate details in the medium term. So better buy your legal tender Austrian silver Philharmonics tomorrow than the day after.

Wikinvest Wire