Everything that
has happened since 2007, every Central Bank move, ever major political
decision regarding the big banks, every trend, have all been focused solely
on one issue.
That issue is collateral.
What is
collateral?
Collateral is an
underlying asset that is pledged when a party enters into a financial
arrangement. It is essentially a promise that should things go awry,
you have some “thing” that is of value, which the other party can get
access to in order to compensate them for their losses.
You no doubt are
familiar with this concept on a personal level: any time you take out a
bank loan the bank wants something pledged as collateral should you fail to
pay the money back. In the case of property, the property itself is usually
the collateral posted on the mortgage. So if you fail to pay your mortage,
the bank can seize the home and sell it to recoup the losses on the
mortgage loan (at least in theory).
In this sense,
collateral is a kind of “insurance” for any financial transaction; it is a
way that the parties involved mitigate the risk of their deal not working
out.
As many of you
know, our entire global financial system is based on leverage or borrowed
money. Collateral is what allows this to work. Without collateral, there is
no trust between financial institutions. Without trust there is no borrowed
money. And without borrowed money, money does not enter the financial
system.
In this sense,
collateral is the “reality” underlying the “imaginary” or “borrowed”
component of leverage: the asset is real and can be used to back-stop a
proposed deal/ trade that has yet to come to fruition.
For finacial firms, at the top of the
corporate food chain, sovereign bonds are the senior-most form of
collateral.
Modern financial
theory dictates that sovereign bonds are the most “risk free” assets in the
financial system (equity, municipal bond, corporate bonds, and the like are
all below sovereign bonds in terms of risk profile). The reason for this is
because it is far more likely for a company to go belly up than a country.
Because of this,
the entire Western financial system has sovereign bonds (US Treasuries,
German Bunds, Japanese sovereign bonds, etc.) as the senior most asset pledged as
collateral for hundreds of trillions of Dollars worth of trades.
Indeed, the global
derivatives market is roughly $700 trillion in size. That’s over TEN
TIMES the world’s GDP. And sovereign bonds… including even bonds from
bankrupt countries such as Spain… are one of, if not the primary
collateral underlying all of these trades.
How did the world
get this way?
Back in 2004, the
large banks (think Goldman, JP Morgan, etc.) lobbied the SEC to allow them
to increase their leverage levels. In very simple terms, the banks wanted
to use the same collateral
to backstop much larger trades. So whereas before a bank might have $1
worth of collateral for every $10 worth of trades, under the new
regulation, banks would be able to have $1 worth of collateral for every
$20, $30, even $50 worth of trades.
Another component
of the ruling was that the banks could abandon “mark to market” valuations
for their securities. What this means is that the banks no longer had to
value what they owned accurately, or based on what the “market” would pay
for them.
Instead, the banks
could value everything they owned, including their massive derivatives
portfolios worth tens of trillions of Dollars using in-house models… or
basically make believe.
This is getting a
bit technical so let’s use a real world example. Imagine if you had
$100,000 in savings in the bank. Then imagine that the bank let you use
this $100,000 to buy millions and millions of dollars worth of real estate.
Then imagine that the bank told you, “we aren’t going to have our analysts
independently value your real estate, you can simply tell us what you think
it’s worth.”
In this set up,
you would potentially buy $10 million worth of real estate or more… using
just $100,000. But what if your newly purchased real estate drops in value
to $5 million? No worries, you could simply tell the bank, “my analysis
indicates that the properties are worth $20 million.” The bank
believes you so you continue to buy more properties.
This sounds
completely ludicrous, but that is precisely the environment that banks
operated in post-2004. As a result, today US banks alone are sitting on over
$200 TRILLION worth of derivates trades. These are trades that the banks
can value at whatever
valuation they want.
Now, every large bank/ broker dealer knows that the other banks/dealers are
overstating the value of their securities. As a result, these derivatives
trades, like all financial instruments, require collateral to
be pledged to insure that if the trades blow up, the other party has access
to some asset to compensate it for the loss.
As a result, the
ultimate backstop for the $700+ trillion derivatives market today is sovereign bonds.
When you realize
this, the entire picture for the Central Banks’ actions over the last five
years becomes clear: every move has been about accomplishing one of two
things:
- Giving the over-leveraged
banks access to cash for immediate funding needs (QE 1, QE 2, QE3 and
QE 4 in the US… and LTRO 1, LTRO 2 in the EU.)
- Giving the banks a chance
to swap out low grade
collateral (Mortgage Backed Securities and other garbage
debts) for cash that they could use to purchase higher grade
collateral (QE 1’s MBS component, Operation Twist 2 which lets bank
their long-term Treasuries and buy short-term Treasuries, QE 3, etc).
All of this is a grand delusion meant to
draw attention away from the fact that the financial system is on very,
very thin ice due to the fact that there is very little high quality
collateral backstopping the $700+ trillion derivatives market.
Indeed, if you
want further evidence that the financial elites are already preparing for a
default from Spain and a collateral crunch, you should consider that the
large clearing houses (ICE, CEM and LCH which oversee the trading of the
$700+ trillion derivatives market) have ALL begun accepting Gold as
collateral.
Gold as Collateral Acceptable for Margin
Cover Purposes
From 28 August 2012 unallocated Gold (Loco
London) will be accepted by LCH.Clearnet Limited (LCH.Clearnet) as
collateral for margin cover purposes.
This addition to
acceptable margin collateral will be subject to the following criteria;
Available for
members clearing OTC precious metals forwards (LCH EnClear Precious Metals
division) or precious metals contracts on the Hong Kong Mercantile
Exchange. Acceptable to cover margin requirements for all markets cleared
on both House and ‘Segregated’ omnibus Client accounts.
CME
Clearing Europe to Accept Gold as Collateral on Demand
CME Clearing
Europe will accept physical gold as collateral, extending the list of
assets it’s prepared to receive as regulators globally push more
derivatives trading through clearing houses.
CME Group Inc.
(CME)’s European clearing house, based in London, appointed Deutsche Bank
AG (DBK), HSBC Holdings Plc and JPMorgan Chase & Co. as gold
depositaries. There will be a 15 percent charge on the market value of gold
deposits and a limit of $200 million or 20 percent of the overall initial
margin requirement per clearing member based on whichever is lower, Andrew
Lamb, chief executive officer of CME Clearing Europe, said today.
“We started with a
narrow range of government securities and are now extending that,” Lamb
said in an interview today. “We
recognize there will be a massive demand for collateral as a result of the
clearing mandate. This is part of our attempt to maintain the risk
management standard and to offer greater flexibility to clearing members
and end clients.”
It is no
coincidence that this began only when the possibility of a sovereign
default from Greece or Spain began. The large clearinghouses see the
writing on the wall (that defaults are coming accompanied by a mad scramble
for collateral) and so are moving away from paper (sovereign bonds) into
hard money to attempt to stay afloat.
The most telling
item is that clearinghouses now view Gold as money. Indeed, you can see
this fact in other stories indicating that various entites are concerned
about having their gold stored “inhouse” if the stuff ever hits the fan.
Texas
Republican State Representative Giovanni Capriglione authored the bill
demanding state owned gold bars be returned to the Lone Star State. The
legislation to pull $1 billion in gold reserves from a Federal Reserve
vault in New York is supported by Governor Rick Perry…
“For us to have our own gold, a lot of the
runs on the bank and those types of things, they happen because people are
worried that there’s nothing there to back it up.”
Governor Perry
stated that if Texas owns the gold, then no one else should be able to
determine if the state can reclaim possession of the bars of precious
metal. Representative Capriglione also noted that Texas is not interested
in implementing its own gold standard. According to the Republican’s
statements about the gold bars bill, he simply wants to bolster the state’s
fiscally secure reputation. The Texas public servant also feels that
such a solid financial persona would be beneficial in case an international
of national fiscal crisis occurred.
The legislation notes the state does not
merely want gold certificates from the Federal Reserve, they want the
actual gold bars to store inside a planned Texas Bullion Depository. Moving $1 billion in gold bars from New York to Texas would be
a huge task, one some are calling impractical. State Representative
Capriglione suggested selling the gold currently housed inside the New York
vault and then repurchasing the same amount in Texas.
Take note, Gold is
officially money for the most powerful entities in the world. They are not
only accepting Gold as collateral but are openly trying to insure that they
have their own Gold in safe custody.
Gold is money. And
it’s a great way to protect you from a potential crisis.
This report
outlines a number of strategies you can implement to prepare yourself and
your loved ones from the coming market carnage.
Best Regards
Phoenix Capital
Research
|
No comments:
Post a Comment