Level 3 Assets and SFAS 157

The Bear's Lair: Level 3 Decimation?

By Martin Hutchinson

October 29, 2007

Martin Hutchinson is the author of "Great Conservatives" (Academica Press, 2005) -- details can be found on the Web site www.greatconservatives.com

There's a mystery on Wall Street. Merrill Lynch last week wrote off $8.4 billion in its subprime mortgage business, a figure revised up from $4.9 billion, yet Goldman Sachs reported an excellent quarter and didn't feel the need for any write-offs. The real secret of the difference is likely to be in the details of their accounting, and in particular in the murky world, shortly to be revealed, of their "Level 3" asset portfolios.

Both Merrill and Goldman have Harvard chairmen – Merrill's Stan O'Neal from Harvard Business School and Goldman's Lloyd Blankfein from Harvard College and Harvard Law School. Thus it's pretty unlikely their approaches to business are significantly different – or is a Harvard MBA really worth minus $8.4 billion compared with a law degree? (The special case of George W. Bush may be disregarded in answering that question!)

We may be about to find out. From November 15, we will have a new tool for figuring out how much toxic waste is in investment banks' balance sheets. The new accounting rule SFAS157 requires banks to divide their tradable assets into three "levels" according to how easy it is to get a market price for them.  Level 1 assets have quoted prices in active markets. At the other extreme Level 3 assets have only unobservable inputs to measure value and are thus valued by reference to the banks' own models.

Goldman Sachs has disclosed its Level 3 assets, two quarters before it would be compelled to do so in the period ending February 29, 2008. Their total was $72 billion, which at first sight looks reasonable because it is only 8% of total assets. However the problem becomes more serious when you realize that $72 billion is twice Goldman's capital of $36 billion.   In an extreme situation therefore, Goldman's entire existence rests on the value of its Level 3 assets.

The same presumably applies to other major investment banks  – since they employ traders and risk managers with similar educations, operating in a similar culture, they probably have Level 3 assets of around twice capital. The former commercial banks Citigroup, J.P. Morgan Chase and Bank of America may have less since their culture is different; before 1999 those institutions were pure commercial banks and a substantial part of their business still lies in retail commercial banking, an area in which the investment banks are not represented and Level 3 assets are scarce.

There has been no rush to disclose Level 3 assets in advance of the first quarter in which it becomes compulsory, probably that ending in February or March 2008. Figures that have been disclosed show Lehman with $22 billion in Level 3 assets, 100% of capital, Bear Stearns with $20 billion, 155% of capital and J.P. Morgan Chase with about $60 billion, 50% of capital. However those figures are almost certainly low; the border between Level 2 and Level 3 is a fuzzy one and it is unquestionably in the interest of banks to classify as many of their assets as possible as Level 2, where analysts won't worry about them, rather than Level 3, where analyst concern is likely.

The reason analysts should worry is that not only are Level 3 assets subject to eccentric valuation by the institution holding them, but the ability to write up their value in good times and get paid bonuses based on their capital uplift brings a temptation that few on Wall Street appear capable of resisting. Both Goldman Sachs and Merrill Lynch are reported to have made profits of more than $1 billion on their holdings of Level 3 assets in the first half of 2007, for example, profits on which bonuses will no doubt be paid at the end of their fiscal years. Given that we have had five good years on Wall Street, years in which nobody has known the amount of Level 3 assets on banks' balance sheets, and no significant media waves have been made questioning their valuation methodologies, it would not be surprising if many banks' Level 3 assets had become seriously overstated, even without any downturn having occurred.

When Nomura Securities sold its mortgage portfolio and exited the US mortgage business in this quarter, it took a write-off of 28% of the portfolio's value, slightly above the 27% of the portfolio that was represented by subprime mortgage assets. Were Goldman Sachs's Level 3 assets similarly value-impaired, it would result in a $20 billion write-off, more than half Goldman's capital, leaving the bank severely damaged albeit probably still in existence. 

Defenders of Goldman Sachs and the rest of Wall Street will insist that less than 27% of their level 3 assets are represented by subprime mortgages yet that is hardly the point. Subprime mortgages, estimated to cause losses of $400-500 billion to the market as a whole, though only a fraction of that to Wall Street, have been only the first of the Level 3 asset disasters to surface. There is huge potential for further losses among assets whose value has never been solidly based. These would include the following:

• Mortgages other than subprime mortgages. With the decline in house prices accelerating, the assumptions on which even prime mortgages were made are being exposed as fallacious. As house prices decline, debt to equity ratios increase, and for mortgages with an original loan-to-value ratio of 90% or more quickly pass the 100% at which a mortgage becomes uncovered. If the value of conventional mortgages decline many securities related to them, currently classed as Level 1 or 2 assets, will become un-marketable and descend into Level 3
  
• Securitized credit card obligations. $915 billion of credit card debt is currently outstanding, the majority of it securitized, and its default rate is likely to soar as the full effects of the home mortgage market's crack-up spread to the credit card area. The risks in Level 3 portfolios derived from this asset class arise particularly in the areas of complex derivatives and manufactured assets based on credit card debt pools.
  
• Leveraged buyout bridge loans. After a hiccup in August, the market in these has reopened recently, although around $250 billion of them still remains on banks' balance sheets. The value of a leveraged buyout bridge loan that has failed to find a pier to support the other end of the bridge is very dubious indeed, even though these loans are being carried in the books at or close to par. As the value of underlying assets declines and the cash flow fails to match debt payments, the deterioration in credit quality of these loans will accelerate.
  
• Asset backed commercial paper. The amount of asset backed commercial paper outstanding has dropped from $1.2 trillion to $900 billion in the last three months. This financing structure was always unsound; it was basically a means of removing the assets backing the commercial paper from bank balance sheets, and always faced the problem of a severe mismatch between asset and liability duration. The $100 billion vehicle intended to rescue this market has found a mixed reception to say the least. It is likely that as credit conditions deteriorate, the assets underlying ABCP vehicles will increasingly find themselves on bank balance sheets, where they will prove to be almost completely unmarketable.
  
• Complex derivatives contracts. Even simple interest rate swaps and currency swaps caused large losses in the last significant credit tightening in 1994, although most of those losses were suffered by Wall Street's customers rather than Wall Street itself. The more complex transactions that have been devised during the last twelve giddy years are much more likely to prove impossible either to sell or to hedge. Goldman Sachs reported that in the third quarter of 2007 its profits on derivatives used for hedging more or less matched its losses on subprime mortgages. It is likely in reality that the bulk of those profits were incurred through model-based write-ups of value on contracts that were within the Level 3 category – after all, Goldman's Level 3 assets increased by a third during the quarter. It's not much good shorting to match a long position you don't like if your hedging shorts prove to be impossible to close out.
  
• Credit Default Swaps, the global outstanding value of which in June 2007 was $2.4 trillion, according to the Bank for International Settlements. These are a relatively new instrument, the efficacy of which has not been tested in a downturn. It appears likely that the value in banks' books of their Level 3 credit derivatives contracts bears no relation whatever to reality. As discussed above, the incentives have been all in favor of inflating it.
  

The capital underlying Wall Street, at the top, is not all that large – a matter of a few hundred billion. Given the piling of risk upon risk that has been engaged in over the last few years, and the size of the losses in the mortgage market alone that seem probable – my own estimate last spring of $980 billion looks increasingly likely to be somewhat below the final figure – it appears almost inevitable that in a bear market in which liquidity dries up and investors become skeptical, Wall Street's capital will be wiped out. Only the commercial banks like Wachovia and Bank of America whose investment banking ambitions have been largely thwarted and portfolios of Level 3 rubbish are correspondingly lower are less likely to disappear.

Given the size of the overall figures involved and the excessive earnings that Wall Street's participants have enjoyed over the last decade, a taxpayer-funded bailout of Wall Street's titans would seem politically impossible, however loud the lobbyists scream for it.

In the long run, that is probably a blessing for the US and world economies.

http://prudentbear.com/index.php?option=com_content&view=article&id=4809&Itemid=53

Please Welcome SFAS 157—The New Fair Value Measurement Standard and Hierarchy

By Maria Nizza

Historically, there has been no single consistent framework within the accounting literature for applying fair value measurements and developing a reliable estimate of fair value. With authoritative guidance scattered throughout various accounting pronouncements, companies often found fair value estimates difficult to determine. Without a consistent framework applied to identical instruments, situations could arise whereby identical instruments held by different companies could have different fair value estimates.

Furthermore, the development of these fair value estimates is becoming more complicated since markets are continually issuing more complex and less liquid financial instruments. After numerous deliberations, the FASB has attempted to address this challenge by publishing Statement of Financial Accounting Standards No. 157, Fair Value Measurements, in September 2006 (the "Statement" or "SFAS 157").

http://www.pwc.com/Extweb/pwcpublications.nsf/docid/A955DCBCFC4C74048525721A005CB347/$File/fairvalue.pdf

Debugging Wall Street's funky math

Big chunks of investment banks' earnings are from assets that few know how to value. Should investors and regulators be concerned? Fortune's Peter Eavis puts on the green eyeshade.

By Peter Eavis, Fortune writer

September 7 2007: 5:47 PM EDT

NEW YORK (Wall Street) -- In the first half of the year, most Wall Street firms awarded themselves large profits from assets that are rarely traded and difficult to price, according to numbers contained in the brokerages' recent financial statements.

But, with markets seizing up since the end of June, those assets could be even harder to value, potentially prompting investors and regulators to question Wall Street's earnings.

Morgan Stanley (Charts, Fortune 500) andGoldman Sachs (Charts, Fortune 500) are scheduled to report their third quarter earnings over the next two weeks. At each firm, gains from assets and liabilities that rely heavily on subjective, in-house valuations were equivalent to 20% or more of pretax earnings, according to figures from documents filed with the Securities and Exchange Commission.

In its first half, Bear Stearns (Charts), which also reports earnings next week, appears to show losses of nearly $1 billion on these assets and liabilities, which are given the classification "level three" in financial statements, under an accounting regulation introduced at the end of last year by the Financial Accounting Standards Board. Lehman's level three gains were around 12% of pretax earnings in the first half.

Merrill Lynch (Charts, Fortune 500), Citigroup (Charts, Fortune 500) and JP Morgan Chase, which are scheduled to report third quarter earnings in October, made substantial earnings from level three assets and liabilities in the year's first half.

Brokerage houses do not break out net level three gains as a single number, so the level three figures are calculated using data contained in the banks' financial statements filed with the Securities and Exchange Commission (SEC).

Level three assets - which often include some types of mortgage-backed securities, as well as private equity investments - are the least liquid, but level two assets, which make up by far the majority of brokerage's financial assets, are also valued using arbitrary inputs because they don't trade in highly liquid markets. Only level one assets trade with dependable market prices, and they make up no more than a fourth of financial assets at most Wall Street firms.

This reliance on illiquid assets will only stoke fears that, during the credit boom of the last five years, the brokerages became too exposed to complex securities and financial instruments that will be worth less, and trade even more infrequently, in a more sober market environment. Referring to financial firms, Warren Buffett told Fortune last month, "They are marking to model rather than marking to market. The recent meltdown in much of the debt market, moreover, has transformed this process into marking to myth."

Homes entering foreclosure at record

It is also likely that the Securities and Exchange Commission and banking regulators are paying close attention to valuation of level three and level two assets at Wall Street firms. Their efforts to bring liquidity back to markets relies on the resumption of sound pricing in the markets and that will take longer if banks persist in overvaluing assets using their own potentially erroneous assumptions.

Most brokerages mentioned in this story declined to comment. When asked if Goldman was overly reliant on hard-to-value assets, spokesman Lucas van Praag said: "We don't agree. Our economic exposure to level 3 assets was $24.6 billion at the end of the second quarter and that needs to be seen in the context of a balance sheet of around $1 trillion."

Morgan Stanley spokesman Mark Lake noted that a large proportion of the firm's level three gains were from real estate, an asset that has real value, even though it doesn't carry regularly quoted prices.

In addition, some on Wall Street argue that the models used to value level 2 and 3 assets are more likely to be accurate than not, because Wall Street has learned from past meltdowns that it is a big mistake to misprice illiquid assets. In addition, Wall Street's supporters say it's misleading to compare gains from level three assets and liabilities with pretax earnings. Instead, they argue that a better approach is to compare them with revenues, because the level three gains aren't reduced by accompanying expenses that do get included in the pretax earnings calculation. However, if brokerages had been tweaking internal models to produce gains, the expense associated with that would not be high and a large proportion of the resulting profits would go straight to the bottom line.

In their SEC-registered disclosures, the brokerages acknowledge that caution must be used when handling level 3 gains and losses -- and argue that the level 3 assets and liabilities may be hedged with instruments that are classed level 1 or 2. For example, Lehman Brothers' quarterly earnings statement says: "Actual net revenues associated with Level III, inclusive of hedging activities, could differ materially."

Subprime: Let the finger-pointing begin!

In the first half, Morgan Stanley and Goldman Sachs showed level three net gains that were the highest in their peer group, as a percentage of pretax earnings. Morgan Stanley's $2.16 billion of estimated net gains was 28% of pretax earnings, while Goldman's estimated $1.95 billion amounted to 24% of pretax earnings in the first half.

Bear's apparent $1 billion losses from level 3 assets and liabilities raise two questions. First, do the losses suggest Bear is a sort of canary in a coalmine and is just earlier than its peers in showing level 3 losses? Or was Bear uniquely over-exposed to illiquid assets that turned toxic? Third quarter results from its rivals should help answer those questions.

To be sure, these numbers do not make an open-and-shut case that a sizable chunk of Wall Street's profits are made up out of thin air. Some of the big level three gains could be on assets that are real and are actually increasing in value at the moment. For example, mortgage servicing rights, which represent future cash payments by mortgage holders to their servicers, will be worth more at a time when borrowers are doing much less mortgage prepayments -- like now.

However, few would deny that Wall Street held too many assets that are now extremely illiquid and are worth much less than they were even six months ago. Many of these assets never traded in active markets, so even honest models will be struggling to come up with dependable values. There remains a cloud over the brokerage industry so long as it continues to rely on opaque models rather than real money.  

Editor's note: An earlier version of this story used different figures for some banks' level three earnings that were derived using an incorrect methodology. CNNMoney regrets the error.

http://money.cnn.com/2007/09/06/magazines/fortune/eavis_level3.fortune/index.htm

http://www.beeland.com/ Jim Rogers Articles

http://www.rogersrawmaterials.com/
The Rogers International Commodity Index^® (the "RICI") is a composite, U.S. dollar-based, total return index created by James Beeland Rogers, Jr. ("Rogers") on July 31, 1998. The RICI^® was designed to meet the need for consistent investing in a broad based international vehicle; it represents the value of a basket of commodities consumed in the global economy, ranging from agricultural to energy to metal products. The value of this basket is tracked via futures contracts on 36 different exchange-traded physical commodities, quoted in four currencies, listed on eleven exchanges in five countries.

http://en.wikipedia.org/wiki/Credit_default_swap
A credit default swap (CDS) is a bilateral contract under which two counterparties agree to isolate and separately trade the credit risk of at least one third-party reference entity. Under a credit default swap agreement, a protection buyer pays a periodic fee to a protection seller in exchange for a contingent payment by the seller upon a credit event (such as a default or failure to pay) happening in the reference entity. When a credit event is triggered, the protection seller either takes delivery of the defaulted bond for the par value (physical settlement) or pays the protection buyer the difference between the par value and recovery value of the bond (cash settlement).

Credit default swaps resemble an insurance policy, as they can be used by debt owners to hedge against credit events. However, because there is no requirement to actually hold any asset or suffer a loss, credit default swaps can be used to speculate on changes in credit spread.

Credit default swaps are the most widely traded credit derivative product^[1]. The typical term of a credit default swap contract is five years, although being an over-the-counter derivative, credit default swaps of almost any maturity can be traded.

Fed pumps more money than any other day ex. 911 and snoops through data

OIL NEARS $100, RETREATS...

Stocks Plunge...

Fed Pumps $41B More...


Banks suffer big losses...


CITIGROUP Declines to Lowest in 4 Years...

A New York Fed spokesman said it was the largest single day of operations since $50.35 billion was pumped into the system on Sept. 19, 2001, following the terrorist attacks on New York and Washington. He declined further comment.

Related stories

• UK Treasury knew of US hunt through British bank data (16 February 2007)
  
• 'Pull European data from the US' (15 February 2007)
  
• ECB blamed (again) for SWIFT privacy debacle (1 February 2007)
  
• Hands off our bank data, Europe tells US (23 November 2006)
  
• European Central Bank wants EU protection from US (4 October 2006)
  
• US violated world's privacy with secret SWIFT checks (28 September 2006)
  
• SWIFT stalled EU probe of US snooping (15 September 2006)
  
• EU may be powerless to stop US snooping (25 August 2006)
  
• US authorities had free rein over world's bank data (22 August 2006)
  

http://www.theregister.co.uk/2006/09/27/swift_central_banks/ Europe's central banks caught in US spy scandal

[12:21:49 AM] Joe Gelet says: SWIFT eventually imposed some audits of its own on the US subpoenas, which are believed to have peaked at millions of private financial transactions. But there was a time when the US could look where it liked and no authority has been able to assess whether SWIFT's unofficial oversight of the investigation was adequate.

FX Tools

http://www.atnabtu.com/

ATNABTU (All Their News Are Belong To yoU) aggregates leading financial news feeds to provide recent currency-related news stories. You can configure the main ATNABTU window to focus on the feeds that matter to you most.

http://traderstartpage.com/ Your homepage as an fx trader. News, fx tools, and more.

Atlanta Water Crisis

http://www.atlantawatershortage.com/ Like you, we're quite concerned about the water crisis in Atlanta.  This blog is intended to serve as a single point for you to get all of the latest news about this situation.

If you know of something we've missed, please e-mail us at info@atlantawatershortage.com and let us know.  Thanks!

http://www.bloomberg.com/apps/news?pid=20601109&sid=a0WAzQxwAbNg&refer=home

Dry is the goal as United Parcel Service Inc., Coca-Cola Co. and other companies in the Atlanta area rally to cut water use in response to the region's most extreme drought since at least the 1920s. Metropolitan Atlanta, which has added more new residents than any other U.S. city since 2000, may face limits on growth if the shortage persists, business officials said.

``We are very galvanized around this issue,'' said John Somerhalder II, chief executive officer of AGL Resources Inc., which provides natural gas in Atlanta, and vice chairman of the Metro Atlanta Chamber of Commerce's environmental committee. ``It is the No. 1 topic that businesses are concerned about.''

The Coming Water Crisis - US News and World Report

The tap water was so dark in Atlanta some days this summer that Meg Evans couldn't ... water might someday make the energy crisis look like small potatoes

 

Dollar Demise even in 3rd world

Dollar's Demise Can Be Seen Even in the Maldives: William Pesek Bargaining while buying some trinkets in the Maldivian capital, Male, recently, I heard most unexpected words: ``You can keep your dollars.''

Oct. 29 (Bloomberg) -- Bargaining while buying some trinkets in the Maldivian capital, Male, recently, I heard most unexpected words: ``You can keep your dollars.''

This tiny nation of 1,200 islands has long accepted U.S. currency out of convenience for visitors and financial sobriety. The dollar tended to do better in global markets than the local monetary unit, the rufiyaa. That may be changing and it's a bad omen for the world's reserve currency.

``My dollars aren't as popular here as they've been in the past,'' says Moyez Mahfouz, 51, who has visited the Maldives from Bahrain with his family once or twice a year for a decade. ``More and more on this trip, I'm being asked for rufiyaa.''

Why does it matter what happens in the Maldives? Its $1 billion economy is worth 1/59th of Microsoft Corp. co-founder Bill Gates's wealth and 1/27th of Sri Lanka's output. While it's an amazingly beautiful place, the Maldives is a rounding error on the global economic pie chart. Yet it may be a microcosm of a tectonic shift in finance: the demise of the dollar.

These things start out slowly, and in recent months I have had similar experiences from Mexico to Vietnam. In markets, restaurants, taxis and tourist shops that long accepted dollars, many are opting for local currency. The reason: concerns the dollar plunge that analysts have predicted for years is afoot and that the U.S. is uninterested in halting it.

Bernanke, `Reluctant' to Cut Rates, May Yield to Markets and Do So Anyway Federal Reserve Chairman Ben S. Bernanke and his colleagues sound as if they'd prefer to just say no to an interest-rate cut this week. The financial markets may not let them.

NFA gears up for forex consolidation

http://www.nfa.futures.org/member/newsLetter2.asp - Testimony
NFA President urges House Subcommittee to address forex regulatory issues in CFTC reauthorization bill

TESTIMONY OF DANIEL J. ROTH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NATIONAL FUTURES ASSOCIATION

BEFORE THE SUBCOMMITTEE ON GENERAL FARM COMMODITIES AND RISK MANAGEMENT COMMITTEE ON AGRICULTURE
U.S. HOUSE OF REPRESENTATIVES

SEPTEMBER 26, 2007

http://www.nfa.futures.org/printerFriendly.asp?tag=entireArticle

In the CFMA Congress attempted to resolve the so-called Treasury Amendment issue once and for all by clarifying that the CFTC does, in fact, have jurisdiction to protect retail customers investing in foreign currency futures. The basic thrust of the CFMA in this area was that foreign currency futures with retail customers were covered by the Commodity Exchange Act ("Act") unless the counterparty was an "otherwise regulated entity," such as a bank, a broker-dealer or an FCM. When I testified here in 2003, I told you that NFA Member FCMs held $170 million in retail customer funds trading off-exchange forex. Four years later, that number is now over $1 billion. With this dramatic growth there have been some pretty dramatic problems.

Members acting as counterparties to retail forex transactions account for less that 1% of NFA's membership. Unfortunately, they also account for over 20% of the customer complaints filed with our arbitration program, over 50% of NFA's current enforcement docket and over 50% of the emergency enforcement actions NFA has taken over the last year.

There a number of problems in the current statute that have contributed to these problems. If you look at the firms that have caused virtually all of the customer protection problems in retail forex, they share a couple of traits. First of all, they are not really FCMs at all. Congress intended to allow FCMs, along with banks, broker-dealers and insurance companies, to act as counterparties to retail forex transactions because they are all "otherwise regulated entities." The wording of the statute, though, opened the door for firms that are not really FCMs to take advantage of the FCM exemption. Firms became registered as FCMs that are FCMs in name only-they do no exchange-traded futures. They are registered as FCMs solely to qualify to do retail forex business. To make matters worse, due to a further anomaly in the statute, the Act currently does not provide the CFTC with any rulemaking authority over these firms at all. Clearly, Congress did not intend to allow firms that are FCMs in name only to act as counterparties to retail forex futures. Congress should fix this problem by limiting the FCMs that can act as counterparties to those that are primarily and substantially engaged in the activities described in Section 1(a)(20) of the Act.

The second trait that marks the problem firms in retail forex is that most, though not all, have been thinly capitalized. Congress long ago recognized that acting as a dealer involves greater risk than acting as an agent in futures trading, the way a traditional FCM does. That is why Congress in 1978 imposed a $5 million net worth requirement for firms granting dealer options and why the CFTC created a $2.5 million capital requirement for leverage transaction merchants in 1984. Congress should amend Section 2(c) of the Act to require FCMs acting as counterparties to retail forex transactions to maintain minimum capital of at least $20 million. NFA has raised the capital requirements for forex dealers several times but this congressional action could ensure that firms can meet their obligations to their customers and have a significant financial stake in their business.

Jim Rogers Shifts Assets Out of Dollar to Buy Chinese Currency

Jim Rogers Shifts Assets Out of Dollar to Buy Chinese Currency

By Marcel van de Hoef and Danielle Rossingh

Oct. 24 (Bloomberg) -- Jim Rogers, chairman of Beeland Interests Inc., said he is shifting all his assets out of the dollar and buying Chinese yuan because the Federal Reserve has eroded the value of the U.S. currency.

``I'm in the process of -- I hope in the next few months -- getting all of my assets out of U.S. dollars,'' said Rogers, 65, who correctly predicted the commodities rally in 1999. ``I'm that pessimistic about what's happening in the U.S.''

Rogers, delivering a presentation late yesterday at an investors' meeting organized by ABN Amro Markets in Amsterdam, said he expects the Chinese currency to quadruple in the next decade and that he is holding on to commodities such as platinum, gold, silver and palladium.

The dollar has dropped against all the 16 most actively traded currencies except the Mexican peso this year as slowing growth and the first interest-rate reduction since 2003 last month dimmed the allure of dollar-denominated assets.

Since the Fed lowered U.S. interest rates on Sept. 18, the first cut in four years, the dollar has fallen 2.8 percent against the euro and touched a record low yesterday. Gold rose to a 27-year high and platinum jumped to a record.

``It's the official policy of the central bank and the U.S. to debase the currency,'' said Rogers, a former partner of George Soros.

``The U.S. dollar is and has been the world's reserve currency, the world's medium of exchange,'' he said. ``That's in the process of changing. The pound sterling, which used to be the world's reserve currency, lost 80 percent of its value, top to bottom, as it went through the whole period of losing its status as the world's reserve currency.''

China

The Chinese currency, known as the renminbi, or yuan, is ``the best currency to buy right now,'' Rogers said. ``I don't see how one can really lose on the renminbi in the next decade or so. It's gotta go. It's gotta triple. It's gotta quadruple.''

China, growing faster than any other major economy, is ``going to be the most important country in the 21st century,'' he said. China's gross domestic product expanded 11.9 percent in the second quarter, and analysts surveyed by Bloomberg estimate the economy grew by 11.5 percent in the three months to Sept. 30.

Rogers also is buying Swiss francs and Japanese yen, which he said have been ``pounded down'' because of the so-called carry trades.

Unwinding Carry Trades

In the carry trade, investors borrow in countries with low interest rates, such as Japan, and invest the proceeds where rates are higher. Japan's benchmark overnight lending rate is 0.5 percent, compared with 6.5 percent in Australia and 8.25 percent in New Zealand.

The carry trades in yen and francs will ``unwind someday,'' which will send the currencies ``straight up,'' Rogers said. ``I'm buying the yen.''

The bull markets in bonds and stocks are ``over,'' he said. ``Bonds will be a terrible place to be for many years and will in fact be going down for many years.''

Rogers said he remains bullish on commodities because ``that's where the big fortunes are going to be made in the world in the next five, or 10 or 15 years. The current bull market is going to last until sometime between 2014 and 2022.''

Commodity prices have surged as demand for raw materials, especially from China, rose faster than producers were able to increase output. Agricultural prices have led recent gains, including a record high for wheat last month and a three-year high in soybeans.

``The number of hectares devoted to wheat farming has been declining for 30 years, the inventory levels of food are at the lowest level since 1972,'' Rogers said. ``Suppose we start having droughts again. God knows how high the price of agriculture is going to go, so that's where I'm putting more of my money now than in other things.''

He added, ``I think I'm going to make more money in agriculture than I make in precious metals.''

Platinum, gold, silver and palladium will ``be much, much higher during the course of the bull market,'' he said.

To contact the reporters on this story: Marcel van de Hoef in Amsterdam at mvandehoef@bloomberg.net ; Danielle Rossingh in London at drossingh@bloomberg.net .

Last Updated: October 23, 2007 20:23 EDT

http://www.bloomberg.com/apps/news?pid=20601087&sid=amQBwDBSDvBE&refer=home

SIVs, Water Rights Issues, and Bank Failures

Even 'safe' funds play with fire

http://money.cnn.com/2007/10/19/magazines/fortune/eavis_boa.fortune/index.htm?postversion=2007101917

One of the things SIVs issue is asset-backed commercial paper, which is basically short-term debt that is collateralized with assets, although those assets may just be other types of debt.)

Beware banks' bragging on earnings

J.P. Morgan Chase and Goldman Sachs have used their superior results this quarter to try and steal business from rivals. But are they really as strong as they look?

http://money.cnn.com/2007/10/17/news/companies/wall.st.fortune/index.htm

The Future Is Drying Up

http://www.nytimes.com/2007/10/21/magazine/21water-t.html?_r=2&oref=slogin&pagewanted=print

This is an old prophecy, dating back more than a century to one of the original American explorers of the West, John Wesley Powell, who doubted the territory could support large populations and intense development. (Powell presciently argued that river basins, not arbitrary mapmakers, should determine the boundaries of the Western states, in order to avoid inevitable conflicts over water.) An earlier explorer, J. C. Ives, visited the present location of Hoover Dam, between Arizona and Nevada, in 1857. The desiccated landscape was "valueless," Ives reported. "There is nothing there to do but leave."

RESCUE EFFORTS TO SAVE BANKS REVEALS TOTAL BANKRUPTCY OF FINANCIAL POLICIES

If these people had examined critically, even for five minutes, the current state of affairs, it would have been apparent to them, that Bernanke's sell out to Wall Street was a stop gap measure to calm the markets and create a state of illusion. But it did not work for the simple reason that one cannot simply revive, on a permanent basis, a hopelessly terminally ill patient, when all its organs are failing rapidly, save the ventilator maintaining the last few breaths.

Japan ceases to use US dollar as reserve currency

Iran and Japan have taken another step in making the dollar's dominance a thing of the past.

Japanese oil refiners Cosmo Oil Co. and Japan Energy Corp. have started paying for Iranian crude oil in yen instead of dollars, announced company spokesmen on October 9. Both companies are following in the footsteps of Nippon Oil Corp.-Japan's largest oil refiner-which made the same announcement in September.

How significant is it that more and more nations are ceasing to use the dollar as a reserve currency?

Since the 1944 Bretton Woods Agreement, the US dollar has been the world's primary reserve currency. This has been especially true regarding the crude oil trade, in which the majority of nations pay for crude oil in dollars. The resulting massive demand for dollars has allowed the United States to accumulate trade deficits and fiscal debts without experiencing the negative economic impacts that such imbalances normally cause.

This past July, the National Iranian Oil Company (NIOC) general manager of crude oil marketing and exports, Ali Arshi, sent a letter to Japanese oil refineries requesting that all future crude oil shipments be paid for in yen. Three major Japanese oil refiners have already complied. Will other Asian oil refiners follow suit and move away from the US dollar?
As the largest overseas holder of US treasuries, Japan is a key supporter of the US dollar. Yet Iran is the third-largest supplier of Japanese oil. As one Tokyo investment securities analyst said, "What else can Japan do but accept the [Iranian] request, once the oil producer sent its wish?"

The switch to yen should have little negative impact on the Japanese economy. As the purchasing power of the dollar has decreased, the price of oil has skyrocketed to $80 a barrel. Any increase in value of the yen, due to increased oil-yen demand, will only make oil imports less expensive for a nation that is highly dependent on oil imports.

The Iranians are also optimistic about the switch. Hojjatollah Ghanimifard, the International Affairs Director of NIOC, stated that "With the arrangements we've made with our Asian customers, hopefully by the end of October we will have around 80 percent of our export revenues in currencies other than the dollar."

Already, approximately 65 percent of Iran's crude oil exports are based on the euro and another 20 percent on the yen. Iran is casting off the dollar and doing all it can to persuade the oil refineries of Japan to do the same.

Central banks in South Korea, China, Taiwan, Russia, Syria and Italy have announced plans to reduce their dollar holdings. As nations and corporations turn their back on the greenback, the decreasing demand for America's currency may cause its already weakening value to plunge to new depths.

Source: Fars News Agency

SIVs remain for round 2 credit crunch threat

Several of the world's biggest banks are in talks to put up about $75 billion in a backup fund that could be used to buy risky mortgage securities and other assets, a move designed to ease pressure on a crucial part of the credit markets that threatens the broader economy... http://www.nytimes.com/2007/10/14/business/14bank.html?ei=5065&en=6489772aacb69342&ex=1192939200&partner=MYWAY&pagewanted=print

Structured investment vehicles (SIVs) are investment companies that buy highly rated debt securities and fund themselves by issuing senior debt and capital. In recent years they have developed from a niche area into a large component of the structured finance market in the UK and other jurisdictions.http://www.iflr.com/?Page=17&ISS=17633&SID=524642

A structured investment vehicle (SIV) is an evergreen credit arbitrage fund, similar to a CDO or Conduit. They are usually from around $1bn to $30bn in size and invest in a range of asset-backed securities, as well as some financial corporate bonds. SIV is to make profits from the difference between short term borrowing rate and long term returns. The risk that arises from the transaction is mainly twofold. First of all, the solvency of the SIV may be at risk if the value of investments falls below the equity part. Secondly, there is a liquidity risk, as the SIV borrows short term and invests long term, that is the debt comes due before the asset falls due. Unless the borrower can refinance short-term at favorable rates, he may be forced to sell the asset into a depressed market. http://en.wikipedia.org/wiki/Structured_investment_vehicle

Notable SIV managers

Most SIVs are run or sponsored by banks, however a number are managed independently.

Bank Sponsors

• HSH Nordbank manages Carrera Capital Finance
  
• Bank of Montreal manages Parkland Finance and Links Finance
  
• Citigroup manage a number of SIVs including Zela Finance, Beta Finance, Sedna Finance and Dorada Finance
  
• Dresdner Kleinwort manages K2 Corporation
  
• HSBC manages Cullinan Finance
  
• Societe Generale manages Premier Asset Collateralized Entity (PACE)
  
• Standard Chartered Bank manages Whistlejacket Capital and White Pine Corp
  
• WestLB manages Harrier Finance
  

Independents

• Brightwater Capital Management manages Kestrel Funding
  
• Cheyne Capital Management managed Cheyne Finance
  
• Eiger Capital Limited manages Orion Finance
  
• Stanfield Global Strategies manages Stanfield Victoria
  

Links

http://www.risk.net/public/showPage.html?page=328506

http://www2.standardandpoors.com/portal/site/sp/en/us/page.article_print/2,1,1,0,1031342466642.html

 

 

EUR/CHF Short

 

Sell 1 lot EUR/CHF and add to the position as the trade enters profit. EUR/CHF is unsustainable at this prices, due to:

• CHF will raise rates EUR will lower
  
• EUR officials are pressured to drop EURO, claiming fears of hurt export markets
  
• Nothing fundamentally better in Europe than Switzerland
  
• Europe more prone to instability, more event risk in Eurozone vs. Suissezone
  

This trade is a long-term trade, use tight stops and re-enter if risk cannot be afforded. Otherwise just hold onto your shorts.

ICAP Bets on Currency Market

ICAP Bets on Currency Market

By KATIE MARTIN
October 11, 2007; Page C3

LONDON -- The global currency market faces a shakeout after yesterday's agreement by interdealer broker ICAP PLC to buy independent foreign-exchange-processing firm Traiana for $238 million.

The union propels New York-based Traiana into the cadre of big-hitting players in the $3.2 trillion-a-day currency markets, enabling it to challenge the central bank-supported monopoly CLS Bank, which ensures each side of currency trades gets paid.

CLS is the only service provider in this area, although banks settle between themselves about 50% of deals.

Traiana's foreign-exchange business revolves around smoothing post-trade flows for only certain types of trades. But co-founder Michael Laven said in an interview that he is ready to "flip the switch" to package together all types of currency deals, potentially slashing the flow to volume-hungry CLS and setting dealing banks on a collision course with central banks.

London-listed ICAP's chunky price tag for Traiana, which is expected to generate just $15 million in revenue in the year ending January, is a sign that it sees the firm expanding its capabilities.

"ICAP is making an interesting bet on the future of the marketplace as much as on Traiana's business today," said Justyn Trenner, principal at London-based ClientKnowledge, which advises banks on strategies in foreign exchange.

A person familiar with discussions on CLS's board said the move is "a big thing" for CLS. "The implications are clear," the person said, adding that the acquisition is likely to be high on the agenda at CLS's next board meeting at the end of this month in Geneva.

CLS processes and charges a fee for each trade that is submitted to it individually. That model made sense when it was set up in 2002, but since then, the amounts traded in the global foreign-exchange markets have boomed, and the number of deals has exploded.

The world's central banks have indicated through the Bank for International Settlements that they want currency-dealing firms to use the system, dubbing the use of other settlement methods as "backsliding" into risky practices.

CLS's board -- made up of representatives of foreign-exchange banks -- has made it clear it doesn't intend to change at this point, because a shift to accepting batches of trades would be economically "disastrous" for the system's smaller users, said the person familiar with CLS's board discussions.

CLS declined to comment.

Some bigger banks are considering and even testing ways to dodge CLS's processes to ease the costs and the data overload, despite their assurances to CLS that they support it.

http://www.icap.com/

http://www.traiana.com/

Record Dow in uncertain economy

STOCKS ROCKED: DOW HITS NEW RECORD...

PAPER: Corporate America racked by uncertainty; Executives unable to make strategic choices...

Qatar Minister Says Oil Prices Should Top $100...

Long NZD/GBP AUD/GBP

Hot money deposits in Britain have ballooned fourfold in a decade to £4,000bn. "What we have is an enormous liability. People have been very happy to park their money in Britain because of the high interest-rate culture and the country's reputation for sound management, but if you start to unpick that, it can go very fast. These investors are fickle," he said.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/10/05/cnhsbc105.xml

If $4 Trillion Pounds leaves GBP where will the money flow? Look for commodity currencies, possibly CAD in addition to NZD and AUD, to increase against GBP.

With 4 trillion pounds leaving GBP, where will the money flow? Look for commodity crosses and interest bearing crosses, NZD AUD being top 2.

Buy NZD/GBP , AUD/GBP

The above is a daily chart of NZD/GBP – has been up already, but with $4 Trillion pound floating around looking for a new home upside pressure will persist.

• elite trading team
  

 

US – British Banking Crisis

HSBC warns of hot money exodus from Britain under 'siege'

On October 4, 2007, Miami Valley Bank, Lakeview, Ohio

Failed Bank List

Inflation, Banking, and Dollar Crises

Washington Mutual 3Q Earnings to Tumble

Washington Mutual Inc. said Friday that the weak housing market and the recent mortgage crunch will lead to a 75 percent drop in its third-quarter net income, making it the latest financial institution to warn investors it took a major hit over the summer.

Dollar falls to 31 year low against Canadian Dollar

Bank Closing Information for Miami Valley Bank, Lakeview, Ohio

On October 4, 2007, Miami Valley Bank, Lakeview, Ohio was closed by the Ohio Department of Commerce, Division of Financial Institutions and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. No advance notice is given to the public when a financial institution is closed.

An Analysis of the Presidents Who Are Responsible for the Borrowing

Dollar's double blow from Vietnam and Qatar

Vietnam is planning to cut its purchases of US Treasuries and other dollar bonds, raising fears that Asian central banks with control over two thirds of the world's foreign reserves may soon join the flight from US assets.

Vietnam, which has mid-sized reserves of $40bn, is seen as weather vane for the bigger Asian powers

Together they hold $3,575bn of foreign reserves, over 65pc of the world's total. China leads with $1,340bn, but South Korea, Taiwan, Singapore, and even Thailand all built up massive holdings.

A potent inflationary cocktail

Finally, the Federal Reserve showed its true inflationary colors, and Total Fed Credit went up by $6.6 billion last week. The significance of this is that when you take another $6.6 billion in bank credit and multiply it by the current fractional-reserve multiplier (infinity), this calculates out to (according to my rough calculations) exactly 6.6 jillion gazillion umpty-ump quintillion dollars that can be created by the banks, which is just about enough money to bail out everybody in the Whole Freaking World (WFW), which (according to the bizarre current economic theory and practice) is the new purpose of a central bank; create a bubble by creating too much money and credit (which finances the bubble) and then bail everybody out of the ensuing bust by creating another bubble by creating too much money and credit again and again!

GREENSPAN SAYS HE KNEW ABOUT ABUSES IN SUBPRIME LENDING BUT FAILED TO FORSEE THEIR PARALYZING MARKET EFFECTS UNTIL LATE 2005

GREENSPAN SAYS HE KNEW ABOUT ABUSES IN SUBPRIME LENDING BUT FAILED TO FORSEE THEIR PARALYZING MARKET EFFECTS UNTIL LATE 2005
Thu Sept 13 2007 12:30:11 ET

Former Federal Reserve Chairman Alan Greenspan admits he "didn't really get it" that the subprime lending trend was significant enough to hurt the economy until very late 2005, but still defends his lowering of interest rates from 2001 until 2004 that critics say caused the crisis in the first place. Greenspan, who led the U.S. Federal Reserve Bank through 18 years and four presidents, speaks to Lesley Stahl in his first major interview, to be broadcast on 60 MINUTES Sunday, Sept. 16 (7:00-8:00 PM, ET/PT) on the CBS Television Network.

Greenspan says he knew about the questionable subprime lending tactics that gave loans to homebuyers and investors with low adjustable interest rates that could rise precipitously, but not the severe economic consequences they posed. "While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late," he tells Stahl. "I really didn't get it until very late in 2005 and 2006."

Even though one of the Federal Reserve governors raised a red flag on those lending practices, Greenspan says there was little he could do. "Well, it was nothing to look into particularly because we knew there was a number of such practices going on, but it's very difficult for banking regulators to deal with that," says Greenspan.

Several of Greenspan's former Federal Reserve governors have since said that Greenspan's policy of lowering interest rates for three consecutive years early in the decade was wrong because it opened the door for the subprime lenders. They think he kept rates too low for too long. "They are mistaken," Greenspan tells Stahl. "It was our job to unfreeze the American banking system if we wanted the economy to function. This required that we keep rates modestly low," he says.

Some believe today's market slide -- U.S. stocks have lost significant ground over the past few months -- could have been slowed had the current Federal Reserve Chairman Ben Bernanke lowered interest rates like Greenspan did early in the decade. Would he act as dramatically and quickly now as he did then if he were the current chairman as some believe? "I'm not sure that's true," says Greenspan. "We were dealing in an environment back there where inflation was easing. We could have acted without the fear of stoking inflationary pressures. You can't do that anymore... I'm not certain I would have done anything different [if he was the chairman today]," he tells Stahl. "I think [Bernanke] is doing an excellent job."

Historic Highs for the EURO

Oil Hits $80 a Barrel for First Time...


DOLLAR DECLINES TO RECORD LOW AGAINST THE EURO...

http://www.bloomberg.com/apps/news?pid=20601009&sid=a8HmfchzkP2Q&refer=bond ....Dollar May Fall as $700 Billion of Debt Matures

Senate panel okays $850 billion debt increase

The Senate Finance Committee on Wednesday approved an $850 billion increase in U.S. borrowing authority to $9.815 trillion in order to avoid a default as the government nears its credit limit of $8.965 trillion.

The committee approved the bill on a voice vote and it clears the way for the full Senate to take action most likely by early October. As of last Friday, the federal debt stood at $8.923 trillion and Treasury Secretary Henry Paulson has been urging Congress to act quickly to avoid unnerving financial markets that are already jittery over rising mortgage foreclosures.

It will be the fifth increase in the U.S. credit limit since President George W. Bush took office in 2001 when the U.S. debt stood at $5.6 trillion.

Mortgage Lender's Bankruptcy May Threaten Thousands of Homeowners -

Thousands of homeowners face an "imminent risk" of losing their homes because of clashes between American Home Mortgage Investment Corp. and its former financial backers, according to Freddie Mac, a government-chartered housing financier.

In documents filed with the U.S. Bankruptcy Court in Wilmington, Del., Freddie Mac said it seized $7 million that homeowners sent to American Home to cover principal and interest payments, property taxes and insurance just before the company's Aug. 6 collapse. American Home quit making payments to tax authorities and insurance companies Aug. 24.

Freddie Mac said 4,547 loans valued at nearly $797 million are at stake. It said it doesn't have the loan files necessary to pay insurance premiums and property taxes on them, however.

Fed Liquefaction Pushes August M3 Growth Towards 14%

Fed Liquefaction Pushes August M3 Growth Towards 14%

This afternoon's money supply release showed seasonally-adjusted M2 for the week-ended August 27th up by $64.9 billion to $7.400 trillion. M2 now has risen by $111.1 billion for the last two weeks, rising at an annualized fortnight growth rate of 48.2%.

Depending on the large time deposit numbers due for release on Friday (tomorrow) afternoon, annual M3 growth for August could jump to 14.0%, up from July's 13.0%, and up from my early August estimate of 13.6% made last week.

Despite the Fed coming close to its formal 5.25% fed funds target in the last couple of days, the liquidity crisis continues, and the financial markets remain extremely unstable and dangerous. Once again, watch the dollar!

Additional detail will follow this weekend.

Renaissance raising new fund to trade futures

Renaissance raising new fund to trade futures
Wed Sep 5, 2007 11:31 AM ET

NEW YORK, Sept 5 (Reuters) - Renaissance Technologies Corp. is raising its third quantitative hedge fund, this one specializing in trading futures and designed to handle up to $50 billion, a source familiar with matter said.

Renaissance, which is managed by mathematics professor-turned-financier James Simons, recently began sending out offering documents for the fund, the source said.

Long Island, New York-based Renaissance, which industry publication Alpha Magazine listed as the world's sixth-largest hedge fund group as of May 2007, continues to raise money for its second fund, the Renaissance Institutional Equities Fund (RIEF), which is now over $26 billion.

Its first fund, Medallion, which has about $6 billion, has been one of the most successful funds in the hedge fund world, but is closed to new investors.

Renaissance declined to comment. Private investment firms like hedge funds are barred by regulators from discussing fundraisings in the media on the view that this may entice ordinary people to invest in what are considered risky vehicles for sophisticated investors. News of the fundraising was reported by the Financial Times on Wednesday.

The fundraising comes at a time when many "quant" funds, which employ rapid-fire trading methods using computer driven models, took big hits during the market gyrations of the last month in particular.

Now some have recovered at least some lost territory as they reconfigured their models. The RIEF fund, which was down almost 9 percent by mid-August, bounced back and is now up about a half percent for August, the source said. Final figures aren't in yet.

It is all but clear whether investors will pony up $50 billion for the new fund, which would make it by far the world's biggest hedge fund.

In its offering documents, Renaissance said its RIEF fund was designed to handle up to $100 billion, but the fund is so far nowhere near that size and it is not clear whether it ever will be.

Is China quietly dumping US Treasuries?

Is China quietly dumping US Treasuries?
By Ambrose Evans-Pritchard

Last Updated: 6:55pm BST 05/09/2007

A sharp drop in foreign holdings of US Treasury bonds over the last five weeks has raised concerns that China is quietly withdrawing its funds from the United States, leaving the dollar increasingly vulnerable.

· China threatens `nuclear option' of dollar sales

Data released by the New York Federal Reserve shows that foreign central banks have cut their stash of US Treasuries by $48bn since late July, with falls of $32bn in the last two weeks alone.

"This comes as a big surprise and it is definitely worrying," said Hans Redeker, currency chief at BNP Paribas.

"We won't know if China is behind this until the Treasury releases its TIC data in November, but what it does show is that world central banks are in a hurry to get out of the US. They don't seem to be switching into other currencies, so it is possible they are moving into gold instead. Gold is now gaining momentum across all currencies and has broken through resistance at 500 euros," he said.

While the greenback has been resilient over recent weeks - even regaining something of a 'safe-haven' role as banks scrambled to buy the currency to cover dollar debts - most experts believe that America's $850bn current account deficit will eventually cause the dollar to resume its relentless slide.

David Powell, an economist at IDEAglobal in New York, pointed the finger at Beijing as the main suspect in the sudden bond flight this summer.

In a client note entitled "Has China started to dump US Treasuries?", he said the sales appear to coincide with early moves by Beijing to launch its new $300bn sovereign wealth fund.

The scheme is part of the government's plan to diversify it $1,340bn reserves from bonds (mostly in the US) to a broader portfolio of investments and a better yield.

If so, the switch comes at a very delicate time, just as tempers flair on both sides of the Pacific over China's policy of holding down yuan by currency intervention. A bill in Congress calls for punitive tariff sanctions of 27.5pc against Chinese imports, and there has been a growing outcry over contaminated pet food and lead-tainted toys.

Two top advisers to the Chinese government gave strong hints in August that Beijing should use its estimated $900bn holdings of US Treasuries and agency bonds as a "bargaining chip", words taken as an implicit threat to trigger as US bond crash if provoked.

The Chinese government has since put out an official statement clarifying that it has no intention in taking such an irresponsible step, which would in any case backfire by devaluing China's remaining holding.

Mr Powell said the switch out of Treasuires was a purely commercial decision. "If if turns out that the Chinese are behind this, it is merely an attempt to increase returns on investment. It has nothing to do with settling protectionist scores," he said.

Any evidence that China was pulling out would risk setting off an unstoppable stampede, which is why such a policy would never be announced. It holds the world's biggest pool of resrves, followed by Japan.

Robin Bhar, a metals analyst at UBS, said there was little evidence yet that Asian central banks were switching heavily into gold. Most of the recent buying of gold has been on the COMEX futures markets, the playground of hedge funds.

Central banks tend to buy their bullion in London at the AM and PM fixings, leaving a footprint that is visible to experts. They seem to have been largely absent from the market so far.

http://www.telegraph.co.uk/money/main.jhtml;jsessionid=OFUSXC05QVVI1QFIQMFSFGGAVCBQ0IV0?xml=/money/2007/09/05/bcnchina105.xml

Billions bet on catastrophe

Sunday, August 26, 2007

$4.5b bet on another 9/11 within 4 weeks

Updates
'Bin Laden' Options Trades Have Wall Street Whispering
Tell Congress to Stop the March to War with Iran
Cara's Commentary: The "Terrorism Put"
Betting on a crash?
US Opposition Political Leaders Issue Urgent False Flag Terror Warning
Or
US Opposition Political Leaders Issue Urgent False Flag Terror Warning
Congressman: Stock Market Will Eventually Collapse
Or
Congressman: Stock Market Will Eventually Collapse
---
Related
Mystery trader bets market will crash by a third
The Fed: Something big is going to happen
---
August 26, 2007

$4.5 billion options bet on catastrophe within four weeks

Anybody have a clue as to what these 'investors' are expecting?

The two sales are being referred to by market traders as "bin Laden trades" because only an event on the scale of 9-11 could make these short-sell options valuable.

There are 65,000 contracts @ $750.00 for the SPX 700 calls for open interest. That controls 6.5 million shares at $750 = $4.5 Billion. Not a single trade. But quite a bit of $$ on a contract that is 700 points away from current value. No one would buy that deep "in the money" calls. No reason to. So if they were sold looks like someone betting on massive dislocation. Lots of very strange option activity that I haven't seen before.

The entity or individual offering these sales can only make money if the market drops 30%-50% within the next four weeks. If the market does not drop, the entity or individual involved stands to lose over $1 billion just for engaging in these contracts!

Clearly, someone knows something big is going to happen BEFORE the options expire on Sept. 21.

THEORIES:

The following theories are being discussed widely within the stock and options markets today regarding the enormous and very unusual activity reported above and two stories below. Those theories are:

1) A massive terrorist attack is going to take place before Sept. 21 to tank the markets, OR;

2) China, reeling over losing $10 Billion in bad loans to the sub-prime mortgage collapse presently taking place, is going to dump US currency and tank all of Capitalism with a Communist financial revolution. Either scenario is bad and the clock is ticking. The drop-dead date of these contracts is September 21. Whatever is going to happen MUST take place between now and then or the folks involved in these contracts will lose over $1 billion for having engaged in this activity.

"$1.78 Billion Bet that Stock Markets will crash by third week in September Anonymous Stock Trader Sells 10K Contracts on EVERY S&P/Y "Strike" Shorts Stocks "in the money" effectively selling all his SPY holdings for cash up front without pressuring the market downward.

This is an enormous and dangerous stock option activity. If it goes right, the guy makes about $2 Billion. If he's wrong, his out of pocket costs for buying these options will exceed $700 Million!!! The entity who sold these contracts can only make money if the stock market totally crashes by the third week in September.

Bear in mind that the last time anyone conducted such large and unusual stock option trades (like this one) was in the weeks before the attacks of September 11.

Back then, they bought huge numbers of PUTS on airline stocks in the same airlines whose planes were involved in the September 11 attacks.

Despite knowing who made these trades, the Securities and Exchange Commission NEVER revealed who made the unusual trades and no one was ever publicly identified as being responsible for the trades which made upwards of $50 million when the attacks happened.

The fact that this latest activity by a single entity gambles on a complete collapse of the entire market by the third week in September, seems to indicate someone knows something really huge is in the works and they intend to profit almost $2 Billion within the next four weeks from whatever happens! This is really worrisome."

China opens forex investment agency

China issues first batch of bonds to fund new forex investment agency
Posted: 29 August 2007 1504 hrs

BEIJING: China was to sell nearly 80 billion US dollars worth of government bonds Wednesday in the first batch of a planned special issue to fund a new foreign exchange investment agency, state media reported.

The Ministry of Finance was to issue on Wednesday 600 billion yuan (79.4 billion US dollars) as part of the planned special treasury bonds sale totalling 1.55 trillion yuan, said the China Securities Journal.

Proceeds of the bond issue, authorised by China's parliament in late June, will be injected into the new state forex investment agency, tasked with diversifying and maximising returns on part of the country's huge forex reserves.

http://www.channelnewsasia.com/stories/afp_asiapacific_business/view/296667/1/.html

Flight to forex coming?

Now you see the ethics of the media, which explains why nobody ever heard that any of this stuff was coming.

LET IT CRASH

The news of last weeks plummeting stock market brought on by the housing bubble debacle, saved only by the infusion of billions of dollars by the Fed, should not be received with fear and trepidation by the working man but with a sense of hope that soon the whole rotten economic scam which is presided over by white collar criminals and their bought and sold lackeys in Washington is hopefully coming to an end.

Congressman: Stock Market Will Eventually Collapse

Ron Paul says martial law provisions in place to deal with economic discord.

Wall Street plunges on concern of economic outlook

Wall Street plunged with the Dow Jones average dropping more than 280 points Tuesday on refreshed concern of economic outlook.

Stocks are up a bit this morning. - M. R.

World stocks slump on new US economy fears

World stocks slumped today amid reports of more damage from the teetering US subprime mortgage sector and falling US house prices.

Ford and GM say factories in US face axe

EES US Investment Outlook Summer 2007

Recently financial markets have experienced more volatility than any historical period (since such volatility is being measured), according to a volatility index traded as a futures contract on the CME called the VIX. Aside from the anomalous trader profiting from the chaos, many investors have suffered large losses , and more importantly they are seeking safety in bonds and other debt-based instruments which have proven to be unsafe. Many previously high rated AAA bonds have been reduced to junk, and their exposure is almost everywhere. Many funds will invest in these risky bonds, either in the form of the repackaged sub-prime asset backed securities, or in the commercial paper market. For example, many money market funds had invested in CDO's, against the doctrine of the founder of money market funds, Bruce Bent.

"The money market fund was created to provide effective cash management, to guarantee at least a dollar in and a dollar back and beyond that, a reasonable rate of return," Mr Bent says.

Driven by fear, investors have moved quickly into treasuries, a 'flight to safety'.

Aug. 20 (Bloomberg) -- Yields on U.S. Treasury bills fell the most in two decades on demand for the safest securities amid concern over a widening credit crunch.

Bill yields have fallen five straight days as money market funds dumped asset-backed commercial paper in favor of the shortest-maturity government debt. Three-month yields dropped the most since the stock market crash of 1987 and more than in the wake of the Sept. 11, 2001, terror attacks in the U.S, as funds shunned assets that may be linked to a weakening mortgage market.

``The market is totally, absolutely, completely in fear mode,'' said John Jansen, who sells Treasuries at CastleOak Securities LP in New York. ``People are afraid that lots and lots of mortgage paper and mortgage paper derivatives of all sorts is completely opaque and they can't price it.''

The three-month Treasury bill yield fell 0.66 percentage point to 3.09 percent as of 5:06 p.m. in New York. It's the most since Oct. 20, 1987, when the yield fell 85 basis points on the day the stock market crashed, and eclipses the drop of 39 basis points on Sept. 13, 2001, the day the Treasury market reopened after the attacks. The yield has fallen from 4.69 percent on Aug. 13. The bills yielded about 7 percent in mid-October 1987 and 3.2 percent in the days before the September 2001 attacks.

``I've never seen it like this before,'' said Jim Galluzzo, who began trading short-maturity Treasuries 20 years ago and now trades bills at RBS Greenwich Capital in Greenwich, Connecticut. ``Bills right now are trading like dot-coms.''

However, treasuries are still US Dollar based. If Bernake lowers rates, and continues to lower, as indicated by the sentiment of traders, it can only sink the already sinking dollar more. In the next 12 months, if the dollar drops another 20%, and your treasuries have yielded 5%, your net gain is negative 15%. This may seem like simple arithmetic, yet no analyst on the street is mentioning the currency trade. They all know the carry trade, and that it's unwinding, but this is looked at as speculative trading activity. No one is commenting on the greater economic and investment impact of the 'credit crunch' as it relates to the dollar, and what it means for US based investors. They see the problem but not the solution. The current credit crisis is simple to understand.

• Average weekly wage as of December 2006 is $861 ($44,772 annually)
  
• Number of employed persons in US nationally is 135,933,200
  
• Total earnings is 5.7 trillion, GDP is 13.1 trillion (7.3 trillion sur-minus)
  
• Total national debt is 9 trillion
  
• Trade deficit is -$763.6 billion in 2006
  

The US doesn't have a surplus; we have a sur-minus. This is known as the national debt, but it comes in many forms. One claim is that we have a double deficit, that is, a current account deficit and a fiscal deficit. The consumer, the US government, and US based corporations all have negative savings rates, meaning they spend more money than they have.

What enables the economy to function in the red is a simple credit mechanism, which is unfortunately not backed by anything other than belief in USA. At some point, as the case with the credit market, there could be a 'tipping point' that could cause a whirlwind of dollar selling, a 'flight to convertibles' similar to the credit 'flight to safety'. Even the IMF states in a report that the USD is 30% overvalued.

Many stock analysts are recommending companies based on their overseas operations, placing a great value on companies that derive a great portion of their revenue from offshore markets. This is not a vote of confidence in sophisticated multinational operations; it is a derivative dollar short. These corporations are profiting in Euros and Pounds, and therefore have more gross revenue when repatriating those profits back home in the US Dollar, inflating their revenue by the value of the dollar decline. An investor doesn't need to invest in these stocks in order to profit by a dollar decline; one may simply short the dollar.

Shorting the dollar if you are a US based investor is a natural hedge, because if your trade is wrong, you will benefit from a long dollar position in your savings account (which is dollar based). It seems like a no-brainer, why isn't everyone doing it?

Real estate no longer is an appealing investment (if it ever was). Stocks are currently suffering due to subprime 'credit crisis' related exposure. Bonds are being downgraded to junk; ratings agencies rank bonds AAA one day and junk when they collapse, so what is the point of purchasing high-rated debt instruments?

EES proposes the following:

• Structured foreign exchange products offered to retail investors. Forex Managed Accounts with a track record, packaged as a structured forex investment.
  
• "Dollar short" automated strategies, that pick points to short the dollar based on momentum based indicators and RSI "overbought" style indicators. Instead of taking 1 simple dollar short position, an automated system could day-trade a falling dollar, locking in short term profits and hedge against losing trades.
  
• Principle protected products in a risky forex strategy, where only a % of cash is traded with high leverage. For example using a 1m fund, 100k is invested into high risk forex strategies, protecting 90% of capital 100%.
  

For more detail please visit Elite E Services at: www.eliteeservices.net

Liquidity Crunch Continues

China Prepares to Dump U.S. Dollars http://www.kitco.com/ind/vaughn/aug202007.html

Citigroup, JPMorgan, Banks Borrow From Fed Window http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=a9UW6JS94ORQ

BOFA controls 650billion in customer deposits, not counting investments (savings deposits) – not counting JP and Citi, 500m a drop in the bucket. What is the point?

A Fear of Foreign Investments

For years, the Bush administration has shrugged off concerns about the trillions of dollars that the United States owes to China, Japan and oil-producing countries in the Middle East, arguing that these debts give no undue leverage to foreign governments.

But at a time of global financial instability, the administration has started to worry that foreign governments are increasingly converting their dollar holdings into investment funds to acquire companies, real estate, banks and other assets in the United States and elsewhere. The fear is that these so-called sovereign wealth funds could destabilize markets or provoke a political backlash.

Proof that the system is unsustainable in its present form

Hurricane Katrina, an economic and national disaster, could have been prevented by spending a small fraction of the cost up front, compared to rebuilding post-disaster. That estimate is difficult to calculate precisely, but it is in the 1% range. At the time, the system was too cheap to spend the seemingly large hundreds of millions, to save a city from a potential natural disaster that had a high chance of occurring in 50 years, finally costing hundreds of billions. But the collateral damage to society is immeasurable: deaths of victims, lost opportunities of New Orleans residents, crime in Houston, and economic prowess that could have been spent on other projects instead of rebuilding a city that already existed. Imagine if the levy's had been built in 1965 and instead of rebuilding Katrina, we build a national maglev train system, such as exists in many other developed countries (China, Japan, Germany). There is even a proposal to build a maglev in Venezuela, certainly not a country most would consider superior to the United States in terms of Technology. Yet while the US is repairing a flooded and toxic New Orleans, Venezuela is building the train of the future. The question is not about politics, it's about an unsustainable school of thought: is it cheaper to build a dam, or to rebuild your entire city?

In another story, overleveraged hedge funds will collapse, losing billions, without any consideration of implementing risk management software, or advanced systems to mitigate market downturns.

There is not much argument to defend the kind of thinking (or lack thereof) that creates such situations. As the American mentality goes, you can just pay your way out, so no one pays much attention to efficiency. But what if you don't have the money? This is a major flaw in thinking of policy makers in government and corporations. They assume that in their lifetime, the government will have the power of the purse to bail them out of any disaster, as the fed is now bailing out defaulting borrowers of loans. We assume we can spend our way out of any bind, and if we run out of money, the fed will bail us out by 'injecting liquidity' into the economy.

Secondly, many countries operate as they do being supported by the US and the US Dollar. If they get into the mess, they can always call Uncle Sam. But who will bail out the fed if the fed collapses? (any collapse will be called "reorganization" or "restructuring" and will be spun and woven into a blanket of keywords and sound bites so it will seem that it is still in control but morphing into an institution of the 21^st century)

It is a difficult scenario for many to imagine, who have grown up in a world fueled by cheap oil, a relatively stable world political scene, and a negative output capacity. However a global meltdown is not only likely, based on all existing evidence, it is highly probable. Not just institutional crisis, not a bankruptcy, major system wide meltdown, to the level that basic infrastructure will collapse, such as we have seen in the mid-west, and people (of all classes) will lack basic services and necessities. The system is connected in ways that cannot be easily explained but can be easily understood. Bank of America has 650 billion in customer deposits, and is a known provider of banking services to small businesses. If BOFA experienced a 'liquidity crisis', and there was any delay in customer deposits, imagine the repercussions in the local economy. Most small businesses run on little or zero credit lines, and depend on weekly cash injections, payments, and invoicing to stay afloat. Moreover, most employees live from paycheck to paycheck, and are 2 paychecks away from major financial disaster. Every company claims they are safe from a crisis, and backup measures can be implemented in the event of such crisis, but none of them can understand how interdependent they are of each other. Moreover, they are taught to be salesmen and believers of their own company, not analysts or skeptics. This means if a crisis was on the horizon, no one inside these institutions would even notice. Any critique of their policies is labeled conspiracy or fanaticism, which is supported by the public view that everything should be happy and pretty, leave the negative dark discussion to crackpots living in the woods. Yet when the house burns, they are apparently surprised how this has happened. After a period of the egotistical denial phase "how could this happen in united states??" there is the blame game, then redemption. What we have not seen is the widespread understanding that the system itself is the problem, not corporate greed, global warming, or criminals, or foreign dictatorships, or drug use by teens, or any other likely societal scapegoat. Just keep shopping and everything will be fine, as bush said in his latest speech, we are a country of Does and Innovators, and we have created eBay; therefore our economy is resilient and capable of thinking and innovating our way out of an 8 trillion USD based debt bill.

Today (August 10^th,2007) on Bloomberg TV, several guests from the banking community assured viewers that the "credit crunch" would not affect Money Market funds. These are treated by many banking customers as savings accounts, many do not understand that a money market account is not a cash account but is a type of debt-security which is sold by the bank to 3^rd party buyers. These buyers could theoretically renege on their obligations, putting the holders of the money market funds out of the money. Under normal circumstances, the amount of defaulting loans is so rare that they can be covered by insurances and profits. But if there is a system-wide 'credit-crunch' (which is incorrectly titled, a better title would be 'money crunch' or 'cash crisis' as there is plenty of credit but not much cash), borrowers might feel they can get a better deal by not repaying, suffering through a bankruptcy or debt restructuring, and renege on their obligations.

In the example of Goldman's Alpha fund, a sophisticated asset diversification tool has been developed, with no clear risk management for losing trades. Of course in the hedge fund world you don't disclose what your quant strategy is, but the fact that the fund has consistently lost money is proof that there is no risk management which is working.

There is no clear conclusion to these thoughts, because we do not have a clear picture of the extent of the crisis, and reports are still being created, investigations still taking place. Many of which will be released on or before Monday, but it is a process that can take weeks or months. We can expect volatility – normally one would say "a flight to safety" but now that bonds and real estate and stocks are all scratched off as being 'safe' – and money market funds are also in question, many investors may not know where to feel safe. www.eliteeservices.net