“History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling the money and its issuance.” James Madison, the principal author of the U.S.
“There are more instances of the abridgment of the freedom of the people by gradual and silent encroachments of those in power than by violent and sudden usurpations.” James Madison, June 16, 1788, Virginia ratifying convention
“The Western fractional reserve system is on the verge of collapse and the
Asians know it. . . . These are absolutely historic and unprecedented times. We have never, ever had a situation in history where most major nations are bankrupt. Greyerz, founder of the Matterhorn Asset Management out of Switzerland, Eric King interview, August, 2013
“In politics, there are no coincidences’, Franklin Delano Roosevelt
The purpose of this article is to complete the scenario of the alternative of a conspiratorial Financial Sting. In my Article, “Derivatives and Bail Ins – How They Will Affect You, Part I, The Setup: G20 Strategy for Global Collapse, US Supporting Laws, ‘Too Big to Fail’ and G-SIFI”, we reviewed the fact that the size of the Derivative liabilities had become so large that the very large banks felt that even they would collapse when the market collapsed. Therefore, they provided the setup which I see as a series of laws and supranational agreements that sets the stage for moving those debts to the citizens when the collapse came. The collapse is inevitable. The timing is the variable. This setup would allow the “too big to fail” banks to survive. Specifically, Glass Steagall had to be removed from the books and ideally Sarbanes Oxley (they were unsuccessful here); other laws had to be enacted such as Graham, Leach, Bliley and the Dodd-Frank Act. Further, since the Sting was to be global, the international set of sovereign nations had to be brought into the operation via the G20 Strategic Financial Plan. All of this was done over a period of a few years – from 2010 to today. Finally, “Tests” of their methodology for the Sting had to be performed. I believe that this was accomplished with M F. Global, Cyprus, Spain’s Bankia Bank and the UK’s Co-op Bank. The stage is finally set and tested but the G20 Strategic plan alludes to a final “Test” being run in the 2nd half of 2013 and overseen by the IMF and the World Bank. What is the “Test”? No one knows. It is my belief, based on reading the G20 Financial Plan is that the final Sting will come with a total global financial collapse. This paper describes how that could occur and what instrument could be used to “pop” the bubble and execute the collapse. Specifically, this article will delve into “Buy Ins” and Derivatives.
The reader should remember that these events have not occurred, no publicity has been provided about a scenario that I paint, and most importantly, it might not occur if other exogenous events occur. However, this is the way it appears to me that events are heading. If it happens as I foresee, then I will have at least warned you. I find myself hoping that it will not occur this way. I am hoping that something will change and deter these evil men. Nevertheless, I feel that I must warn people about what I have found and the implications that I perceive.
I debated in my mind what to call this complex set of events. I finally settled on “The Sting” since the parallel to a sting operation was so strong and it would be easy to understand. The idea of the article as a “Sting” is taken from the 1973 movie of that name where Robert Redford and Paul Newman who set up a situation to con a mob boss out of a large sum of money. In this instance, the roles are reversed. The public is being conned by assuring them that the series of laws, covered in Part I, are meant for their protection and to make improvements in banking. In fact, they set the stage for the takedown that will be capable of a takeover of their assets in pension funds, bank deposits, 401K retirement accounts and IRA retirement accounts. To me if things unfold as I am seeing, then this will becomes the world’s largest White Collar Crime; and it is planned to occur under the wraps of a “legal” takeover of assets so it may never be recognized for what it is – theft. The G20 strategy will be used as justification and their strategic plan will be followed. In the US, the Dodd Frank Act acts as an operational cover because “Bail Ins” are covered but not called that. I believe that a failing of certain derivatives will act as the trigger because honoring these derivatives would mean that certain G-SIFI banks would fail. However, the G20 Strategic Plan and the Dodd Frank Act state that this can never be allowed to happen; therefore, the G20 “Bail Ins” will be enacted to prevent this event. The Bail Ins will be the method used in the theft of the assets in order to keep the G-SIFI financial institutions from failing. In order to accomplish this “Sting”, other officials will be required to participate. Specifically, involvement was required of international bankers, politicians within nations and politicians at the supra national level. One could take the position that this is just a coincidental series of laws and financial arrangements but I take the position of FDR who said, “In politics, there are no coincidences’” – and this is politics and fascism at its worse.
Before reading further, you might want to review my Blog that has both Posts and Articles related to this article. The Blog is www.joehawranek.com
On that site, the Posts are:
(1) “G20 Stability Board Financial Plan –Strategic Plan (Cyprus, MF Global and the New World Order) rev 1”, http://joehawranek.com/?p=790
(2) Bail Ins – How They Will Affect You – Part I, The Sting: The Set Up – G20 Strategy for Global Financial Collapse, U.S. Supporting Laws, “Too Big To Fail” and G-SIFI http: http://joehawranek.com/?p=792
(3) Post 6_041313_Does the FDIC Plan to Use Bail Ins as Excuse for Depositor Theft?
Before getting into the analysis, it is important to state the underlying assumptions that make up the environment for this scenario. These assumptions describe our Political Economic environment in America today that sets the investment environment for this article.
• The Federal Reserve (FED) is a private banking cartel owned by banks in both Europe and the United States.
• The FED owes its allegiance to and serves its owners and not the citizens.
• Congress gets “support” from banks to create laws that are favorable to banks not the citizens. In return, they get money for reelection campaigns plus other “opportunities.” This is an example of fascism that is commonly called in the press by the euphemism of “Crony Capitalism”.
• International G20 agreements are now in place that provide a plan that creates “Buy Ins” and use them to take assets to salvage large banks when derivatives fail or at any time where the G-SIFI looks insolvent.
• The Dodd Frank Laws are now in place to enable the bankers to take assets that ensure their survival. These laws serve the interests of the bankers but not the citizens.
• The size of the derivative market is such that they can never be paid. Further, these “side bets” are not financial instruments related to real assets but are gambling bets.
• The Sting will happen and “Bail Ins” will be enforced. To accomplish this, morality and sovereign law will be ignored per the G20 Strategic Financial plan. This will be done to save the G-SIFI financial institutions.
• The Fascists in power in our financial and banking institutions will do anything and say anything, to make their world survive.
Part II – The Sting
This article focuses on derivatives and their probable use in “popping” the financial bubble that will likely occur in the next year or so as well as show how “Bail Ins” will be used. It will describe the sting itself with a reasonable scenario of a derivative failure that will be used to start the piercing of the financial bubble; the social impact of using “bail Ins” with the ensuing social unrest; and finally, the likely hyperinflation and collapse that will follow. The article also discusses what can be done to avert the financial crash even though these actions will probably not be taken. The stage has been set for the G-SIFI bankers to save their “assets”. The bankers made either massively bad decisions or designed a beautiful scam – – -the reader’s choice. I will describe the situation but you must make your decision as to what it is. The bankers and politicians have put in place a system of laws that force the citizens to bail them out with the citizens’ assets when it appears as if the G-SIFI bank will fail. In this way the banks keep their firms from going insolvent and bankrupt and thus salvage the executives’ jobs, pensions and bonuses. Also, these laws and the G20 agreement provide a “get out of jail” card since a number of their actions were and will be illegal in the sovereign nation where it is activated. The citizens will lose a significant percentage of their assets. In true fascist fashion, the financial executives and politicians will do anything, say anything to make their world survive. Morality and law are to be ignored in favor of survival (see Article 6, G20 Financial Stability Board Strategic Plan, www.joehawranek,com). Further, they have the Congress working with them either out of ignorance, delusion or collusion. The world’s largest White Collar Crime has been set up to occur. And this is how it could unfold.
What is a derivative?
A derivative is a financial instrument which derives its value from the underlying entities such as assets, indexes, or interest rates. It has no intrinsic value. They are used to protect against and manage risk. A formal definition is that a derivative is a contract between a buyer and a seller entered into today regarding a transaction to be fulfilled at a future point in time. Frankly, it is really nothing more than a “side bet” that something will or will not occur. To say that a derivative is an instrument to hedge against risk is a euphemism for a “side bet”. It has nothing to do with investment. Derivatives have become complex and now include a wide variety of contracts associated with real financial transactions. These include structured debt obligations and deposits, swaps, futures, options, caps, floors, collars, forwards and combinations of these. Futures and options have been around for years and although they are derivatives, they have been regulated and in total are small relative to other derivatives. The others are recent within the last 10 years and will be the focus of this paper. However, most are statistically insignificant in relation to the big three that will be covered in this analysis. These are currency, interest rate and credit default swaps.
Size of Exposure
Paul Wilmott, who holds a Doctorate in Mathematics from Oxford University, is considered one of the world’s leading experts on derivatives. He has written and published in this discipline over several years. His estimate is that the total derivative market exposure is $1.2 quadrillion. A quadrillion is a 1,000 trillion. To put this in perspective, the world’s GDP is somewhere about $60 trillion and the U.S. GDP is about $15 trillion. Simply stated, the figure is too large to be ever repaid. I went to the Bank of International Settlements to find the official size of the derivative markets. They show that at the end of 2012, it was $632.6 trillion. The market has sectors unregulated; therefore, it is larger than this. I don’t know where Paul Wilmott gets his numbers but he is respected. For our purposes, we will use the BIS numbers to determine the relative importance of different types of derivatives. Figure 1, BIS Derivatives Outstanding as of 12/31/12, provides insight.
Figure 1, BIS Derivatives Outstanding as of 12/31/12
This shows that Interest Rate Swaps, Currency Swaps and Credit Default Swaps are the largest and most important derivatives. My position is simply that no derivative should be honored since they are not financial transactions. Rather, they are bets that certain financial transactions occur as designed or not. Thus, they are “side bets” on outcomes – – -not anything that represents Return on Investments. We will analyze why they came into existence in this paper.
Interest Rate Swaps
Interest rate swaps started in 1981 with a cross currency swap between IBM and World Bank. At the time this was unique. A swap is a contractual agreement between two parties to exchange streams of payments over time. If both exchanges are in the same currency, it is called an interest rate swap. They are hedges used by banks to combat the changes in market interest rates. It is a speculative tool that allows users to profit from a guess about which direction the interest rate will move. This transaction requires two parties. Party one gets a stream of interest payments based on a floating interest rate and pays a stream of payments based on a fixed interest rate. Party two receives a stream of fixed rate interest payments and pays a stream of floating rate interest payments. Both streams are based upon the same amount of principal. In theory, by this exchange, the two parties reduce uncertainty and threats from changes in market interest rates. When one thinks about this, it appears as if there is only one winner in the game. It is a game since no investment is made, only predictions on the direction of interest rates are made and it has nothing to do with capital investment other than the amount used as the basis for the calculation. Further, the interest rates can be moved by the FED at any time. Today, Figure 1 shows that this amounts to a $370 trillion bet that the bankers want the taxpayers to pick up if it goes wrong. It the interest rates spike as in the Volcker era, the derivatives will fail and the laws supporting “Buy Ins” will be executed.
Bets on interest rates comprise 81% of all derivatives. These are the derivatives that support high US Treasury bond prices despite massive increases in US debt and its monetization. Note that US banks’ derivative bets of $230 trillion (See Figure 2, US Bank Derivatives, End of 2011), concentrated in five banks, and are 15.3 times larger than the US GDP. A failed political system that allows unregulated banks to place uncovered bets 15 times larger than the US economy is a system that is headed for catastrophic failure. Interest rate derivatives are going to fail at some point in the near future because rates are rising and will continue to rise. That fact changes the assumptions of interest rate swaps made about changing rates of plus or minus about a fixed interest rate that has been falling slope for 30 years. Now it will start rising for 30 years rather than fall. In short, the interest rate slope just changed from a negative slope to a plus slope.
The only solution is to have the US government cancel the $230 trillion in derivative bets, declaring them null and void. Russia and China have already stated that they will not honor these instruments. As no real assets are involved, merely gambling on notional values, the only effect of closing out or netting all the swaps (mostly over-the-counter contracts between counter-parties) would be to take $230 trillion of leveraged risk out of the financial system. One must recognize that the financial gangsters who want to continue enjoying betting gains while the public underwrites their losses would scream and yell about the sanctity of contracts. However, a government that can murder its own citizens with drones without due process or throw them into dungeons without due process can certainly abolish all the contracts it wants in the name of national security. And most certainly, unlike the war on terror, purging the financial system of the gambling derivatives would vastly improve national security.
In a currency swap, the parties to the contract exchange the principal of two different currencies immediately, so that each party has the use of the different currency. They also make interest payments to each other on the principal during the contract term.
In many cases, one of the parties pays a fixed interest rate and the other pays a floating interest rate, but both could pay fixed or floating rates. When the contract ends, the parties re-exchange the principal amount of the swap.
Originally, currency swaps were used to give each party access to enough foreign currency to make purchases in foreign markets. Increasingly, parties arrange currency swaps as a way to enter new capital markets or to provide predictable revenue streams in another currency
Now consider how the derivative bill was run up. The bankers in Greece and other countries in the EU exchanged Euros for dollars. The dollars allowed the EU bankrupt charade to continue. The banks of New York ended up with Euros in exchange for dollars. If the European Union disintegrates, the banks in New York will have worthless paper. The citizens of the U.S. will be “Bailed In” to bail out the banks.
Credit Default Swaps
A credit default swap is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loan default. The buyer of the CDS will make a series of quarterly payments (fees) to the seller and in exchange receive the full value payoff of the loan if it defaults. It was invented by Blythe Masters of J P Morgan in 1994. In the event of default, the buyer of the CDs receives compensation of the face value and the seller takes possession of the defaulted loan. The buyer usually is an insurance company or hedge fund. The large amount of the loans outstanding and the lack of transparency led the regulators in 2008 to demand further access to the CDS data base because of systemic risk. The size of this market was $25.2 trillion at the end of 2012.
Consider a large bank that has both an insurance company and an investment banking company within one bank – – – JP Morgan, Goldman Sachs etc. This was allowed by the Graham, Leach, Bliley Act but not Glass Steagall. The bank can now charge the loan guarantee fee as well as the interest rate. As long as the note does not default, this increases earnings. When the loan defaults, it could destroy the bank since their debt to equity is so lopsided and the captured insurance company is liable for the loan. Nationally, the debt to equity ratio is currently at 20.6:1; however, before Bernanke QE feeding money to the banks, it was close to 60:1.
US Bank Exposure
Figure 2 – U.S. Bank Derivatives – End of 2011
Figure 2, U.S. Derivatives – End of 2011, provides a feel for the market and the size of exposure of U S banks. The table below if for U.S. banks only. In all instances, the size of the derivatives held far exceeds the assets of the bank and its ability to pay. Thus technically, all U.S. banks are insolvent since – Owners Equity = Assets – Liabilities. On the other hand they continue to function in order to keep the incumbents in office and to continue to receive salaries and bonuses. A desired debt to asset ratio historically for hundreds of years has been 10:1 and that value meets the New York State “prudent man rule” for bankers that the law requires them to honor. A 10:1 ratio would require that the total assets to increase by $11.9 Trillion or effectively double which is not going to happen.
Figure 3, Bank Trading Revenue – 2011 provides insight as to why they continue. Today’s revenues for large banks come from derivatives not normal loans.
Figure 3, Bank Trading Revenue – 2011
Given the reality that derivatives have been growing, loans are declining, the economy is failing – one wonders why this continues. Look no farther than the instrument itself and see how the top bankers get paid. In short, “follow the money”. Let’s take one example.
Fallacy of Derivatives
To understand how and why derivatives have grown the way they have, let’s examine how bankers get bonuses. To do that we need to examine a transaction. Let’s take a CDS. They create extraordinary personal profits for the traders. A major investor such as Goldman Sachs has an opportunity to lend to a corporation or a nation, but they are concerned about the risk. So the employee creates a derivative (CDS) that is a promise for a fee to take the risk for them. This is like taking out insurance on a loan or wrapping the loan with an insurance policy for a fee. As a trader, you determine that the trade is profitable for your employer and you take a percentage of those profits as a bonus reward for getting the employer into this transaction. However, the profits are so great that your supervisor, his supervisor and the president and senior executives all get bonuses. The collusive White Collar Theft exists because “everyone” is doing it and greed overrides rationality and the law.
There are risks so you set aside a reserve, or buy a credit derivative from another company – insurance company under the same corporate roof – or both. The critical element of your bonus this year is your assumptions. The lower the expectation of loss, the greater your bonus, the more competitive your bid and the greater your chance of beating out competitors.
Let’s see how this works. Assume a loan of $1 billion for ease of understanding. This could be a Sovereign nation loan or a big corporation loan. Assume that you pay 2.5% for a wrap insurance CDS for 10 years. This means that there is a front charge of $25 million. Your trader’s group assumes that the transaction stands a 4% chance of a loss and that the salvage value of the asset is 50% of the original loan. Now it gets interesting. The trader wants to maximize his bonus so he talks to the analyst who computes the risk and “convinces” him that the risk is only 3.5% or 10 % less. What does that mean to him? It means a bigger bonus. See the calculation in Figure 4, Making Money Using Derivatives.
Figure 4, Making Money Using Derivatives – The Effect of Change of Assumptions
It is easy to see you can double your profits by making a very small change in assumptions. Also, note that the bonus payout comes in the year of the transaction birth, not at its end of life. The message is clear, if you want the very big bonuses, you make very aggressive assumptions about how low the losses will be on the credit derivatives. This how personal bonuses are in the millions and 10s of millions of dollars per year. As a corporation or bank, you can create profits of billions or tens of billions without going through the trouble of actually building things, selling things or mining commodities.
Sub Prime Mortgages
Now let’s briefly look at Sub Prime mortgage derivatives. This market is small in contrast to the overall credit default swap derivative market but it illustrates an important point. These transactions are not independent events as assumed in order for the bankers to get bonuses. In the case of a sub-prime mortgage, you have individuals with poor credit records; no equity in their homes; self-reported incomes that are fiction; and who has no means of providing the payments or the capital to repay. The critical element in these instruments that combine the mortgages into larger packages of say 1,000 loans and resell them as AAA collateral loans are the aggressive assumptions. First, you must look at the owners’ ability to repay and their willingness to repay. In this instance, the ability to repay was not there. Further, one needs to look at the probability of a recession when all the housing in a development goes down 20-40%. This is happening today but was never built into the assumptions. It was always assumed that that other houses and mortgages would offset the losses of a few bad loans. All loans were made as if they were independent events when in fact they are not. When all or most of the loans are bad in a market, the market analysis means that all correlated risks will force you from the marketplace. This is what has now happened. However, now the bankers want the taxpayers to bail them out with “Bail Ins”.
In conclusion, the derivative market created obligations for the banks that can never be met. They created an instrument that is nothing but a “bet” on an outcome and is not a financial instrument. These derivatives were promulgated by traders and management since they and their executives personally made a lot of money in bonuses.
It is difficult to imagine a more reckless and unstable position for a bank to place itself in, but Goldman Sachs stands out. That bank’s $44 trillion in derivative bets is 442 times its risk capital and this was done in the face of the law’s 10:1 prudent man requirement.
History of “Buy Ins”
The term “Buy Ins” or “Bail Ins” originated in the G20 strategy documents written in 2010. It is stated therein as the strategy that was to be used to save the large banks. “Buy Ins” occur when the financial institution changes depositors’ assets to equity overnight, without their permission or knowledge. Thus, a $100,000 cash deposit is converted to bonds or stock overnight. How does a bank justify that within the law? First, the G20 Strategic Financial Plan says that the Dodd Frank Act of 2010 accurately describes the situation of banks being so much in debt that they could fail but must not be allowed to fail. Thus, the Dodd Frank term of “too big to fail” was accurate but not politically correct. They knew that they had to create another term for this description so they chose the term “Global Systemically Important Financial Institution” or G-SIFI to replace the “too big to fail” terminology but its meaning was the same. The G20 has moved to change laws all over the world and at least in the G20 set, to use the term G-SIFI and to institute the tenants of the Dodd Frank law into other nation’s financial laws. They say in their Strategic Plan that everything would be in place by June 1, 2013. Thus, the set up for the Sting has been completed. In my view, they had to test it to see if it would work prior to taking down the global financial system. The G20 Strategic Plan refers to another test in the second half of 2013. Let’s examine 4 instances that have happened.
M F Global
MF Global filed for bankruptcy on October 11, 2011. $1.2 billion in depositor assets from 27,000 customers were seized overnight and the bankruptcy court’s first actions were to transfer the firm’s assets to other firms. Jon Corzine, CEO, claimed that he did not know what happened to these assets. No one went to jail and will not. The court’s ruling per a CFTC lawsuit filed on June 6, 2013, is that this was massive mismanagement not theft; therefore, Jon Corzine, who was named in the law suit, will not go to jail but may pay some fines. This is a ludicrous ruling since Corzine was a former CEO of Goldman Sachs prior to becoming Governor of New Jersey. He was competent and willfully negligent or complicit.
There were four classes of customers and all were not made whole. The classes were “4D” – domestic exchanges showing a $205 million shortfall; “30.7” – foreign exchanges showing a $140 million shortfall; Delivery Customers – no shortage; Securities customers which were covered by Securities Investor Protection Corporation, SIPC, for up to $500K for securities and $250K for cash. Thus, a minimum $345 million short fall because the CEO could not figure out “where the money went”. This is a pattern that one can expect in the future. The money disappears, mismanagement is claimed, civil action is filed and no one goes to jail. Unless these White Collar criminals are put in jail, this type of action will not stop. Note that no formal mention was made as to where the remaining assets were sent. However, rumor on the street was that the money was used to back up a failing derivative at J P Morgan. This is consistent with the G20 Financial Strategy to make G-SIFI’s survive by taking over assets of smaller firms. (Source: Behind the Collapse of M F Global, Pork Network, Paul E. Peterson, 08/02/13).
See my Post 6, Does the FDIC Plan on Using Buy Ins as an Excuse for Depositor Theft?, on the Blog, www.joehawranek.com to get a more detailed description.
Briefly, this is what happened. One of the largest banks in Cyprus was taken over by another bank in the middle of the night. The citizens woke up on Monday morning and found that all assets over $100,000 were gone. They were simply taken to shore up the second bank. The citizens were given stock in the bankrupt entity that could not be sold for a year. They lost 75% of their holdings over 100,000 euros – 45% on the first sweep and 30% more on the depreciation of this stock substitute. In Cyprus, we have a collusive White Collar Crime between the State of Cyprus and the bankers. The net result after the fact was that:
• Banks closed but stayed in business;
• Capital controls were imposed;
• People could not write checks;
• People lost access to their money;
• Only limited amounts of withdrawals were allowed;
• Taxes were increased to pay the banking debt;
• Insiders were tipped off and removed their money before the fated weekend. Specifically, it was reported that the Russian KGB withdrew its funds before the event.
This should be considered typical as to what will happen after a “Buy In”. The Cyprus action caused investor fear across Europe and has caused money flight from the PIIGS (Portugal, Italy, Ireland, Greece and Spain) because they expect the same thing to occur in their sovereign nations.
Bankia in Spain
One million depositors of Bankia were sold preferred bonds (preferential) because it would pay more interest. These bonds carried terms as long as 1,000 years. 400,000 of these bond holders were Bankia customers. Bankia went bankrupt in May, 2012. “Preferentia” bonds were marked down by 38%. Bondholders were issued stock for the seized bonds. They could not sell them for one year and they were marked in value equal to 1.38 Euros. On May 13, 2013, the stock could be sold and it quickly dropped to 0.57 Euro creating another 58% loss. The total loss was 74%. This is a “Buy In” as described in the G20 Financial Strategy to salvage the G-SIFI companies.
This White Collar Crime was orchestrated by the bankers and the state. The Association of Consumers and users of banks and Insurance companies (ADICAE) labeled the action as a “programmed swindle of the Spanish banking system.”
Note that the depositor’s savings were converted into “preferences” bonds and then the bonds were changed into stock of a bankrupt institution. Forbes says, “All along, the exchange was a trap for retail investors.” (Source: “Bail-In: The Case of Spain’s Bankia, Dennis Small, June 7, 2013}
UK’s Co-Op Bank
The biggest customer owned business, Britain’s Co-Op Group, forced bondholders to swap their bonds for stock. The bonds were worth $2.4 billion. The Co-Op group runs supermarkets, pharmacies, and financial services and will retain the majority of the stock in the Co-Op that has 4.7 million customers. If the bondholders refuse to take the stock in the bankrupt bank, the Co-Op would be nationalized.
The Co-Op would move toxic assets to a “bad” bank as part of the restructuring. The “bail in” plan applies to $2.0 billion of the Co-Op bonds. About 7,000 private retail investors will be affected. The average investment was about 7,000 pound ($1,567). The Co-Op would have to sell its successful life insurance business for 220 million pounds and to sell its insurance business ($1 = .6379 pounds).
What happened? The bankers bought toxic real estate. The government used “Bail Ins” to make up the difference. These bondholders now become stock holders in a bankrupt bank. They should plan for a 75% loss since that seems to be the pattern that is emerging.
The US and Bail Ins
We have already seen that any of the big banks could declare bankruptcy since they are already technically insolvent. In this instance, within the guidelines of the G20 and using the Dodd Frank Law that puts the FDIC / FED in charge, they could and would take any asset that would make them solvent again. This includes, cash, bonds, IRAs, pensions and 401Ks. That is what was done in Europe. I see no reason for it not to head this way. Why? “Bail Ins” are defined in the G20 Financial Strategy as the “plan of record” for G-SIFI failures and the US was a signatory on the G20 plan.
Fuse That Triggers the Collapse
No one really knows what will trigger the collapse of the global financial system nor when it will occur. This paper adheres to what it sees as the plan – – – something causes derivatives to fail – then “bail ins” will occur as designed by the G20 Strategic Plan and then the Dodd Frank law will be used to gather in assets from all sources to ensure that the “Too Big to Fail Banks” called G-SIFI by the G20 Strategic plan will survive. At this point, firms will disappear, assets will disappear, firms will be reorganized and depositors will lose their assets by having them replaced with stock certificates in bankrupt banks. After this, the riots, and unrest will occur; people will panic to get what remains of their money out of banks but will not have access; the velocity of money will increase; the panic and velocity will trigger hyperinflation and eventual collapse. Not a pretty picture but I believe a real one that all investors need to become aware and try to protect their assets. Let’s look at a few of the most likely triggering events.
1. War in the Middle East: The US is aggressively acting to create war with its imperial policies in Syria and eventually Iran. I don’t believe that they will be successful because both China and Russia have told them to back off. Russia has a Naval base in Syria and major billion dollar contracts to build petroleum plants with Iran. China is building a pipeline to Iran for a direct tap on their oil. In the meantime, both countries have bi-lateral relationships with Iran that do not use dollars.
2. The FED: The FED can always reduce the M2 money supply surreptitiously or directly stop the $85 billion / month increasing of the money supply. Either one would quickly cause the collapse of the financial system. The first would do it by creating a situation with not enough money in the system to sustain commerce. The second would do the same. Currently, the artificial $85 billion stimulus per month goes to banks not the economy. They keep $45 billion as re-deposits in the FED or on their balance sheets and receive interest payments from the FED for doing so. The other $40 billion goes into the stock market to sustain it. Thus stoppage of the $85 billion would cause an immediate crash in the market. In both instance, I don’t believe that the FED would do these actions since they would be too obvious and the crash would be blamed on them. They manipulate the world’s financial system but do not want to have the public hold them responsible for destroying it – even if they in fact have done so.
3. Derivatives Themselves: In my mind, this is the most likely scenario. It could happen easily, be hidden easily and would cause the domino effect of multiple banks in multiple countries to fail over a period of weeks and months. Immediately a few would fail and then the rest would follow. Let us take one possible scenario that is in the news today. Deutsche Bank is under criminal investigation by Interpol for derivatives. It has been reported that Interpol entered the office of the CEO, Joseph Ackerman, and told him to sit down while they gathered records. He called lead politicians, judges and bankers that he knew but was told, “It is above us.” Deutsche bank has a 55.6 trillion euro exposure to derivatives and for perspective, the Nation of Germany has a 2.7 trillion euro GDP. Technically, Deutsche bank is insolvent but not announced as such. This paper has shown that the majority of these contracts are interest rate derivatives.
One question is what happens when a single derivative contract is not honored? The answer is other banks associated with that contract will be affected because these are usually joint efforts. As the contagion spreads, interest rates will go up. When that occurs, one will find that all the interest rate contracts will be in jeopardy. The system of derivatives themselves will then be in jeopardy and “buy ins” will start to be used. In this manner, a derivative transaction will be used to bring the financial system down. The timing could be from now to sometime in late 2014. The political timing could be just before the November, 2014 elections. Again, no one knows except the White Collar Criminals in charge.
A Likely Scenario for Collapse
We are talking here of a global collapse of the financial system. However, here is how it would most likely work in the US. Upon the crash event, the FDIC would transfer banking assets to a newly created entity. The FDIC has already stated that they intend to make sure that the bank obligations are simply “paid in full” – this includes derivatives. The large banks would be restructured but remain whereas many other smaller firms could disappear. Secretary of Treasury Lew has already stated that “all derivatives will be paid in full”. This is impossible but his attitude sets the tone of what will happen. It sets the stage for what I call “theft of all assets” that are within the financial system. This means IRAs, 401Ks, deposits, CDs and stocks. This is the reason that Jim Sinclair issued his warning, “GOTS” – get out the system now!
There is nothing sacred about the number “100,000” euros that was used in Europe. The G20 plan does not mention a dollar amount. Certain large financial institutions, other than banks, have expressly been labeled G-SIFIs by this administration. Specifically, the Financial Stability Oversight Council of the FED designated the following companies as G-SIFI: AIG (Goldman Sachs), Prudential Financial, GE Capital, and American Express as well as all banks over $50 billion in assets. Further, 8 financial market utilities have been named and procedures would be put in place to review banks annually to determine if they are G-SIFI. Jacob Lew, Secretary of Treasury, made an announcement that this action was to “protect taxpayers, reduce risk in the financial system and promote financial stability”. This, of course, is a lie. The purpose was to preserve the “assets” of the insiders, ensure that they keep their jobs, protect their pensions and keep them in charge. The Set Up is now complete. Only the Sting needs to be executed.
Let’s hypothesize how the Sting would work. First, the instrument would most likely be a derivative as noted previously. The Event would be surprise, it would have a major surprise effect and afterwards, investors would rationalize that the data was there but they did not act upon it.
It most likely would occur in Europe since Europe’s debt ridden strategy is in near collapse already. Specifically, there is little support for austerity; Greece lacks the willingness and the capacity for taxes; Italy’s $2.7 trillion in debt may already be beyond the point of return and the IMF has cut its forecast for Italy to -1.8%; Spain now has a prime minister caught in a money pay back scandal; Portugal’s public debt has jumped form 97% of GDP to 127%; Germany has new elections in September to determine whether the banker controlled Merkel will remain; and finally unemployment for the young under 30 has reached 50-60% in multiple nations. The failure of one Derivative of a Sovereign nation would be enough to start a domino effect that would flow to the New York banks. Everything is so fragile that it would only take the bankers in charge a simple command – “Do it” or in German, “Doch” – to crumble the entire system. At that point the Bail Ins would start to save the big banks both in Europe and America in spite of the fact that they created the problem in the first place.
For those that believe in the FDIC as a savior, don’t. There are 370 times as many on deposit funds than are in the FDIC fund. And, this does not count derivatives. FDIC almost went bankrupt in 2008. Also, the intent of our government / bank fascist collusion is to take your money not save it.
Derivatives are like stock, they are traded and they are used as insurance – betting that the loan will not default before a given date. Thus, this is a betting system, like a Casino, where you bet on the future values and performance rather than betting on cards and a roulette wheel – – -but they are not investments. The right answer then of what to do is to void them – – – -all of them and not honor any of them.
State of Investing World
Over the last few months, the world of investing has changed. The FED is about to replace a Chairman and Bernanke has announced the gradual end of Quantitative Easing. When QE slows or ends, interest rates will rise, bonds will drop, and the stock market will fall because it has been artificially supported by the banks. An article by Eric King, “Bankrupt World Now Header into Frightening Chaos, 8/13/13”, provides a number of statistics and points where I am in agreement. I have added to his points. Here in my summary view of the situation:
Sovereign Liabilities: The debt of most nations are far too high. For instance, debt / GDP ratios for Japan and Greece are almost 200%; total liabilities in Eurozone banking system is 32 trillion euros where GDP in Eurozone is about 11 trillion euros; and Switzerland liabilities / GDP is about 700%.
Governments: Sovereign nations will try to survive over the next two years. First, they will try to save their own economies but will not be able to do so. As a result of their austerity measures, increased taxes and broken promises, the voters will throw out the politicians. Basically, the governments will not have money to give the voters. As a result, governments will have short lives and change constantly. The demands of the voters cannot be met when there is no money for socialist / progressive services. As a result, social unrest in many countries will occur – especially socialist countries that have over promised. Eventually, countries will look inward and move to go to protectionism and isolationism.
Money: The fiat currencies in every nation will fail. There is a good chance that gold will become a reference and unofficial currency. This usually occurs when hyperinflation happens.
Gold: The International Forecaster, 8/21/13, reports that commercial traders have almost entirely covered their short positions and are now buying long gold. This implies that the gold bottom has been hit and gold will rise from here. One should expect gold to quickly jump to $1500 and silver to $50/oz. This is not the top, just the beginning.
In addition, the bullion banks have been taking physical gold out of ETFs and capturing premiums by selling it in Asia. As a result, the ETF vaults will be empty when stockholders come to get their gold. The demand for physical gold over the last year has been record breaking. For instance there has been increases of 37% for jewelry, 78% for gold bar and coins and 63% for investment. The national demands have also been phenomenal with increases of 71% for India and 85% for China. It is apparent to any who observer, that the Western fractional reserve system is now on the edge of collapse and the Asians know it. They are gathering as much gold as they can get.
COMEX: When one looks at the financial markets in the US, one looks as the COMEX for commodity exchanges. The FED does not want to see it fail; however, they are losing gold rapidly and it is not being replaced. The COMEX has a high probability of failure because of it not being able to deliver the gold and silver to its contract holders.
Stock Market: The stock market is ripe for a drop. For instance, the price earnings ratio of S&P are fair to very high; retail investors are pouring money into the market (usually a bad sign); margin debt is nearing record levels; bonds are selling off and money is leaving the country rather than being reinvested in the market; finally, Tobin’s “Q”, a measure of long term value, indicates 53% overvalue of S&P 500.
Bond Market: (Source: Vertical Research Advisory, Aug, 2013). In 1981, bonds hit 14.82%. The rates have been declining ever since. Major changes occurred last month. For instance, the municipal bonds outflow was $2.1 billion last month and there was an enormous withdrawal of $12.4 billion in bonds last month. This signals a change in the bond market. The interest rate will go up from here. Why? $1.2 trillion went into bonds over a four year period and only $114 billion came out so far. Banks got 0% money from the FED and invested in treasuries at 2-4%. Why loan money when you have a guaranteed profit? The game has changed. To make money, the cost of money will be higher than 0% and the rate must go up with this increased cost.
The end game is a stock market correction / crash. It could occur as early as the September / October time frame. It appears as if the FED and ECB are desperately trying to hold the system together but it is impossible. They can only delay the inevitable. Finally, a loss of confidence in government and banking is taking place globally. It has not reached the levels of “panic” yet that is required for hyperinflation.
In summary, gold is fleeing to Asia, bond money is being withdrawn from municipals and treasuries and not reinvested in stock market, FED is printing money to buy its own bonds, the money supply is surging and hyperinflations is awaiting in the wings when the public loss of confidence in banking and the government moves to the “panic” level. The measure of “panic” is runs on banks as is beginning to occur in Europe.
When naming this paper, I wrestled with what to call it. I settled on the “The Sting” since it closely paralleled the 70s movie of that name with Paul Newman and Robert Redford. We saw in Part I how “The Sting” was set up with laws and a supranational agreement. In Part II, we showed how “The Sting” will be enacted. I believe that it will use some form of derivatives to be made to fail or accidentally fail and “Bail Ins” will be enacted per Dodd Frank and the specific instructions of the G20 Strategic plan. As a result assets will be seized, investor deposits and investments will be “shaved” with the remainder given in conversion to stock in a bankrupt entity that must be brought out of bankruptcy usually after a year. Europe trials have already shown the investor how this will work and one should count on a 75% haircut over a period of a year. The large banks will survive but the medium and small banks will have their assets taken and many will go out of business.
Is there a solution? Yes, but it takes multiple parts not likely to be enacted due to our current political climate.
• Part 1: Have the US government cancel the $230 trillion in derivative bets, declaring them null and void. As no real assets are involved, merely gambling on notional values, the only effect of closing out or netting all the swaps (mostly over-the-counter contracts between counter-parties) would be to take $230 trillion of leveraged risk out of the financial system. One must recognize that the financial gangsters who want to continue enjoying betting gains while the public underwrites their losses will scream and yell about the sanctity of contracts. However, a government that can kill its own citizens with clones without due process; prosecute heroes for disclosing the truth; void our Constitution and its amendments at the will of the president, can abolish all the contracts it wants in the name of national security. And most certainly, unlike the war on terror, purging the financial system of the $230 trillion in gambling derivatives would vastly improve national security. It is interesting to note that China does not allow these contracts.
• Part 2: Investigate, prosecute if laws were violated, then jail political leaders in office and banking executives just like they did in Iceland.
• Part 3: Reenact the Glass Steagall Act; repeal the Dodd Frank Act and the Graham, Leach, Bliley law.
• Part 4: Reinstitute a Republican Democracy with oaths of allegiance required of all government employees to defend the United States of America and its Constitution. Make certain that these oaths were taken by all politicians and all members of Homeland Security.
Will the above happen? I doubt it. As a result, the investor needs to protect his assets as best he can. This would include keeping deposits minimal, pay off all debt, get out of IRAs and 401ks, and invest in “hard assets” such as land, precious metals, real estate and their homes. Will this happen? Not likely, so most people will be hurt and national unrest will come.
The above solution may appear extreme but there is a precedent that has already been done and successfully in in Iceland. When that nation figured out what was happening, the nation put a new president in office who put the banks into bankruptcy; investigated, indicted and jailed the bankers; got out of the Euro; reestablished their own banking system; went back to their own currency; and determined that all mortgages were fraudulent and set them to zero. They now have debt free nation, a debt free citizenry and their economy is blooming and booming – – all within 2 years.
Will it be done here? It is doubtful because of the fascist control of banking, our Congress and our Executive branch. Knowing what to do and doing it requires a different set of individuals in power. Our current politicians appear to have been coopted by the bankers.
What Will Happen When the Financial System Collapses?
No one knows with certainty. However, there are precedents from which one can get an idea of what will happen. We have the record of Cyprus and Spain after “Bail Ins” and we have the history of Germany in 1922. These events should follow the “Bail Ins”
1) Depositor assets via the “Bail In” will be taken by the government and given to the G-SIFI. This will shore up their balance sheets and pay off their debtors. The Force of government will be used.
2) Sovereign laws will be broken with impunity since the regulators, abiding by the G20 financial plan, are being told that they should do whatever is necessary to make the G-SIFI survive in spite of the local laws.
3) After the people discover that their savings have been taken and that they cannot access the rest of their money, riots will begin. This happened both in Cyprus and Spain. In Spain a banker who sold an investor the Principia bonds was shot and killed by the investor.
4) The government will attempt to intervene and put “austerity” measures in place. This means more taxes, less benefits, negation of government pensions, possibly reduced benefits in all pensions.
5) Civil action and lawsuits will be filed against the banks and bankers by the investors to no avail. MF Global had a civil suit but no criminal action was taken.
6) The people will figure out that there is really no safe place for their money and start pulling it out of their banks. This is happening in Europe in Greece, Cyprus, Spain and beginning to happen in other countries.
7) Many businesses will be shut down since the consumer demand is down because people want to hold onto their money or put it into hard assets such as gold.
8) When panic starts setting in, hyperinflation will start. It took Germany from February to December for their hyperinflation from start to finish – only 10 months. At this point, a new currency will have to be created that gets the support and trust of the people.
9) The German economy suffered hyperinflation for 10 months and then “Shut Down”. This means that “everything stops”. At that point, people will have money that is worthless to spend in stores that have empty shelves. Farms near cities will be raided by mobs for foodstuffs. Also, there was starvation and shortages of medicine. . It is highly likely that food stamps will be worthless since stores will not be open and that retirement payments and pensions will stop of be reduced.
What Should an Investor Do?
In times like these, safety and protection of assets should be the goal. When “Bail Ins” occur, it will be too late. A few ideas that I have seen recommended are:
1. GOTS – Jim Sinclair recommends, “Get Out of The System” now. He is referring to the stock market.
2. Get out of debt.
3. Keep assets in a bank less than $100,000 for all accounts.
4. Buy some physical gold and silver and keep it accessible.
5. Invest in real assets: Land, commodities; buildings etc.
6. Keep some cash available for immediate needs.
As a final comment. I hope none of the above happens because it is preventable. However, this is how I view events happening.