Paulson Says Blankfein Told Him Goldman Would Be Next To Fail If Morgan Went Under. Didn't Blankfein Say They Were Always In Good Shape?

Is this a shareholder lawsuit in the making for misleading and giving wrong information? The kind of stuff that banned Henry Blodget from the industry? Should Blankfein be banned from the industry, too? Why not? Because he is doing "god's work"?

The article from Financial Times below or through this link suggests that Morgan and Goldman were about to go under as admitted by Paulson and Blankfein through Paulson. The day Morgan Stanley and Goldman -a day or two later if not the same day- were about to go under according to people watching the markets those days, UK came out with the financial stock shorting ban. That happened at around 9pm in the UK, a very odd time for them to come out with such a decision. One wonders if Paulson, Geithner, Bernanke, or even Blankfein called someone in the UK and urged them to do something like this to save those mostly Goldman, a what many believe an insolvent bank -still. I guess they asked UK to do it because the US officials were not allowed to come in right away or that it would look suspicious for them to come out with an emergency thing like that midday as the stocks were down 20% or so. The next day US followed with the short ban. Talking about interference with free markets... What a joke that was.

The below article vindicates those who have been saying that those institutions were bankrupt -still are, but the Fed and treasury is helping them hide it- and that the short ban was brought in place to save Goldman -Morgan was just a lucky beneficiary - and were called conspiracy theorists for that. Paulson in trying to cover his butt is giving out some welcome information.

"

'Everything that Could Go Bad, Did Not'

By Krishna Guha
Financial Times, London
Sunday, January 31, 2010

http://www.ft.com/cms/s/0/772748d6-0e94-11df-bd79-00144feabdc0.html?ncli...

Hank Paulson feared there would be a run on the dollar during the early phase of the financial crisis when global concerns were focused on the US, the former Treasury secretary has told the Financial Times.

"It was a real concern," Mr Paulson said in an interview ahead of the release on Monday of his memoir, "On the Brink." A dollar collapse "would have been catastrophic," he said. "Everything that could go bad did not go bad. We never had the big dislocation of the dollar."

When the crisis escalated and went global with the failure of Lehman Brothers in September 2008, the dollar rallied -- but Mr Paulson had to grapple with a firestorm of financial failures.

He feared that Goldman Sachs and Morgan Stanley would go down along with Washington Mutual and Wachovia.

Lloyd Blankfein, Goldman Sachs chairman, told him that Goldman would be "next" if speculators succeeded in bringing down Morgan Stanley, the former Treasury secretary said.

"If they go, we're next," Mr Blankfein told Mr Paulson, a former Goldman chairman who had recused himself from decisions relating to his former company.

US officials explored the possibility of mergers between JPMorgan and Morgan Stanley, Goldman and Citigroup, or Goldman and Wachovia, before settling on turning Morgan Stanley and Goldman into banks with access to central bank loans.

Even then Morgan Stanley was not safe until the US Treasury helped seal an investment by Japan's Mitsubishi UFJ, Mr Paulson writes.

The frenzied manoeuvring came in the three-week period between the failure of Lehman on September 15, 2008, and Columbus Day weekend in early October, when the global financial system was on the verge of meltdown.

"Banks were going down like flies," Mr Paulson told the FT. As his book details, he was scrambling to secure Tarp bailout funds from Congress. "The timing could not have been worse since we were months or weeks from the election, so you had the collision of markets and politics.”

Although a Republican, Mr Paulson found it harder to deal with John McCain than Barack Obama -- raising the interesting (and unanswered) question of which candidate Mr Paulson voted for.

Mr Paulson said that the turning point in the crisis came when -- armed at last with Tarp equity -- the US joined other Group of Seven nations to announce comprehensive interventions to guarantee bank funding and access to capital on October 10.

Three days later Mr Paulson pressured nine top US financial institutions into accepting $125 billion in Tarp capital. "I do think it was the defining act," Mr Paulson said.

Mr Paulson said the US authorities lacked essential tools to deal with a crisis -- above all a controlled bankruptcy regime for non-bank financial companies.

He hopes his book conveys "the pace at which things were moving and the number of decisions that had to be made in very short time frames."

He said he was surprised by the vehemence of the public reaction against bailouts. He told the FT there was "a disconnect" between the way policymakers saw their actions and the way the public perceived them.

"We knew -- I knew -- that when the markets froze there was going to be a painful impact on the economy a number of weeks out."

Mr Paulson is frustrated that people do not pay more attention to disasters averted by timely actions -- including the move to seize control of Fannie Mae and Freddie Mac.

Instead, most debate centers on the failure to stop Lehman from collapsing, and the decision to rescue insurance giant AIG.

Critics say the Treasury should have deployed its sole pre-Tarp source of capital, the Exchange Stabilisation Fund, to backstop a rescue. However, Mr Paulson said Treasury lawyers had been through this during the Bear Stearns crisis six months earlier and concluded that it would not be lawful.

Others fault top US officials for not doing a better job of preparing for a Lehman collapse.

Mr Paulson said the US was taken by surprise by the UK bankruptcy administrator's decision to seize hedge fund assets held by Lehman -- a move he said was "devastating."

He also admitted: "I did not see the money markets moving as quickly as they did" after the Lehman collapse. But he said there were limits to what could have been done in general to mitigate a Lehman failure without precipitating its immediate collapse.

On AIG, Mr Paulson said he had nothing to do with the controversial decision to pay counterparties at par -- and found out about it only in December when AIG made a public disclosure.

"The decision to rescue AIG was a Fed authority, a Fed decision, and the Fed was responsible for administering that loan," he told the FT.

His book hints that the Treasury was less than enthusiastic about supporting the original Federal Reserve loan with later Tarp equity -- but Mr Paulson refused to discuss AIG further.

Looking back, Mr Paulson is confident that -- notwithstanding criticism -- the big calls were the right ones.

"This Monday morning quarter-backing misses the point -- that, guess what, we did take the important actions that it took to stop the system from collapsing."

"

Sprott Management Sees Gold At $6,000 Or Possibly More

Here is the latest commentary from Sprott Asset Management, one of the few funds that got the gold picture right and have been invested in it for a long term.
Here is the link.

"Beware Counterfeiters
By: Kevin Bambrough & David Franklin
January 2010


Long time readers know that we have written about gold many times over the last ten years, starting with an October 2001 article entitled “All that Glitters is Gold”. We first invested in the precious metal based on the belief that central bank sales were filling a fundamental supply deficit that existed in the gold market. We also wrote that if you believed in gold as a financial instrument you might envision a gold price appreciation of 45% to US$400 per ounce, or even higher, as investors sought to protect their wealth in the ‘bear market’ that followed the 2000 stock meltdown. What a difference nine years have made. In 2010, Central Banks are now close to becoming net buyers of gold while mine output continues to decline. With major indices returning nothing to investors over the last ten years it has been a lost decade for stocks but an excellent decade for gold.
Gold’s recent appreciation in US dollars has led some market commentators to question its fair value. This is nothing new for gold – it has been criticized and downplayed as an asset ever since it came off its previous peak in 1980 of US$850 per ounce. In our view, however, it is not gold’s value that is in question; it is the value of paper money.
Let us consider the supply and demand fundamentals of paper money. Clearly, the supply of paper money is technically infinite. This has, of course, not always been the case. For millennia, money was commodity based - its value was linked to goods produced from land and labour. It was impossible to counterfeit wheat, nickel, copper or other commodities and therefore impossible to counterfeit money. Money was viewed as a link to, or representative of, productive capacity. If you had money, you had the right to trade it in for something real, and therefore possessed real wealth.
Historically, gold, principally because of its preciousness, has been the commodity into which paper money has been convertible. Each paper note represented tangible, stored gold and included a promise to convert that piece of paper into a specific quantity of gold on demand. That “promise” provided an inherent protection to the holder and ensured that governments couldn’t print money indiscriminately.
The link between paper money and gold has been lost for many decades. With respect to the US dollar, the world’s reserve currency, it was severed during the last century during two stressful economic periods. The first official break took place during the Great Depression. The second break took place during the Nixon-era in the 70s. These events are instructive and warrant brief consideration.
While there are several contributing factors to the Great Depression, it was the money supply growth in the preceding years under the supervision of the Federal Reserve that was, in our opinion, the greatest contributor. The Federal Reserve System was created in 1913 on a promise of stabilizing the
banking system. What followed instead was an unprecedented growth in fractional reserve banking, as well as the money supply, which helped fuel the roaring 20’s. The aggressive money printing created inflated values in bonds and stocks, which peaked in 1929. When the market began its precipitous slide, and the public began to realize that stock and bond values were artificially high, the populace began to convert its cash holdings into gold. The government lacked the ability to satisfy that demand and was thus forced to renege on the currency’s founding promise of gold convertibility. It’s important to point out that without this original promise of convertibility for citizens, the currency may never have been adopted.
In 1933, The Gold Reserve Act was passed by Congress and formalized into law the breaking of the gold standard. This law provided for a controlled-currency issue through the Federal Reserve System which was non-redeemable in gold. Although the link to anything tangible had been broken, the citizens had little choice but to continue using these non-redeemable dollars as a medium of exchange. The currency had already been broadly accepted, proven convenient and a perception of safety had already become entrenched.
After forty years of continued dollar printing, in August, 1971, President Nixon effectively declared the US dollar to be a completely “fiat” currency by refusing to allow foreign governments to convert their US dollar holdings into gold. The right of conversion which had been granted under the post World War II, Bretton Woods agreement could not be honoured because of decades of money supply expansion. The original ‘promise’, which had vaulted US dollar to its status as a global reserve currency and a stable store of value, was now completely broken.
These historical events resulted in a world in which all currencies are fiat; they are not backed by gold or any other tangible asset. The supply is infinite. In fact, the production of today’s newly created paper money in relation to historical commodity-based money is akin to counterfeiting. A US dollar printed today has no ties to anything tangible and as a result carries only four cents of the equivalent purchasing power of a gold-backed dollar of 1913. It is ironic that in a poor choice of wording on Wikipedia, the definition of counterfeiting states that “it is usually pursued aggressively by all governments.” It is only because the evolution of money has occurred slowly over generations that the obvious flaw with fiat currency is not widely understood.
The demand for paper money in its various forms has remained, in our view, surprisingly high. The public has, for the most part, been content to trust paper money and hold it in various forms (cash, money-market funds and bonds), even without any yield. Presumably, this is because it is perceived as being “safe”. Bonds continue to be viewed and treated as highly conservative and ultimately “safe” monetary instruments. We are of the view that long-dated government bonds are one of the most speculative asset classes commonly held today. In order to truly value a long-dated government bond one must speculate what its future proceeds will be able to purchase in real goods and services. A prospective purchaser must try to determine the expected “real return”. In the current environment of excessive government deficits and increased debt issuance, we feel certain that long-term bond holders will be disappointed. Quantitative Easing, a radical form of monetary policy which allows for the direct printing of money by central banks in order to purchase government debt (or other undesirable bonds of even lower quality) will ensure all varieties of paper money will not enjoy nearly as much purchasing power in ten or twenty years as they do today. We believe the yields being offered today on such instruments, when compounded over their duration, will prove to be immaterial considering the total loss of purchasing power suffered by their holders.
We are gold investors because we have made a specific and calculated bet against paper money. Simply put, we are betting against paper money as a store of value. We believe its supply will continue to increase. We do not believe that the world’s major governments have any stake left in protecting it.
Government debt loads have grown so massive that printing them away has become obligatory - there is no longer any other feasible option left. In our view, the savers of the world should already be outraged by the dilution they have been forced to suffer at the hands of the Central Banks. Are we to infer that the limited reaction of savers to the combination of zero interest rates and debasement of currency is a result of “learned helplessness”?
For those that don’t accept savings dilution as the ordinary course of business, how do investors protect themselves from this loss of purchasing power? We feel a conservative approach would be to ignore nominal prices entirely and focus on building real wealth with a strong weighting towards tangible investments. As currencies are debased it is ‘relative values’ that investors should use to make investment decisions, since nominal prices can be distorted. In the case of gold, it is pointless to debate its value in US dollars. There is no longer any tie between the two and it’s clearly the value of paper money that should now be on trial, not gold. In future editions of Markets at a Glance we will continue to explore the investment themes and businesses that we feel that meet this strong relative valuation criteria.
We also wanted to prepare our readers and clients for the next leg of the gold bull market as it will prove to be extremely volatile. Gold bull markets are unique in that buying becomes driven by both fear and greed. Gold is quickly moving into the hands of those who are unwilling to gamble on fiat currencies or bonds as a store a value. The new owners of gold are unconcerned with its lack of yield but instead are focused on its historic ability to preserve wealth and its unquestionable value. Given the difficulty we have valuing paper money, it becomes extremely difficult to come up with a reasoned price target for gold. Today’s gold market is significantly different from the gold market of the 1970s for two reasons: 1) Central Banks are more likely to be buyers of gold today and 2) They clearly have little ability to dramatically raise interest rates with the massive increases in government issued debt. Thus, it is easy to envision a similar twenty-five fold increase in the gold price that was seen between 1970 and 1980, which would result in a gold price today above $6,000 per ounce. We expect the often quoted “1980 inflation adjusted high” of approximately $2,200 to be achieved in short order. These targets may well prove to be irrelevant, however, as the quality of our lives will be more greatly impacted by the continued evolution of our money and how the general public chooses to value it, or not.
"

3 More Bank Failures Bring Tally To 12 in 2010

FDIC reported late Friday -of course they would wait until people go home- that 3 more banks failed. The banks are Immokalee's Florida Community Bank in Florida with $795.5 million in deposits, First National Bank of Georgia in Carrollton  with $757.9 million in deposits and Marshall Bank of Hallock in Minnesota with $54.7 million in deposits. We are on our way at an annual rate to match last year's record 140 bank failures so far in 2010. Greenshoots and recovery sound more and more like a hallucination. Another issue this brings to mind is the century long struggle between the big Wall Street banks that have been all bailed out and the smaller regional institutions. The big Wall Street banks seem to have the upper hand in the struggle and monopolization of the banking industry throughout the country. The moral hazard issues brought on by the "too big to fail" concept come to mind once again.

Calling For the Abolishment or Transparency of The Fed Is Not Populism

Mainstream media that has huge ties to the banks and the monied interest groups are currently campaigning against the people such as Ron Paul, Bunning, and Alan Grayson who are calling for the transparency, congressional oversight, and /or abolishment of the Fed due to all the illegal manipulations and activities it engages in. This campaign is about calling such people populists, which tends to have a negative connotation. The funny part of this whole charade is that for example Ron Paul has been talking about the illegality of the Fed and the harms it brings to the American people for years before any of it became apparent to the common man as did Thomas Jefferson and Andrew Jackson who closed the Second Bank of the United States, which happens to be the predecessor of the Fed. According to the logic of this campaign people like economist Marc Faber, Nobel Prize winner Joe Stiglitz, and money manager John Hussman are populists, too. Mr. Hussman calls for the discharge of Ben Bernanke and Timothy Geithner due to illegal activities such as non-recourse loans to JPMorgan during the Bear Stearns debacle -it is against the Fed's charter- in his weekly column in his firm's website. Joe Stiglitz discussed multiple times how the Federal Reserve was doing a lot of harmful and illegal things that would harm the American people. And Marc Faber who lives somewhere in Asia outright called Bernanke a criminal on Bloomberg TV. Are these people populists, too? Are they in politics? Are they trying to get votes? No, no, and no There you go. There is nothing populist about defending the people's rights and doing things that they want you to do as people's representatives. That does not make one a populist in a negative sense. Every single one of the representatives should be doing the same thing including Mr. Change But No Change. Do not be fooled by the propaganda of interest groups and the media owned by those groups.

This is in the same category as calling prudent investors who would rather hold gold than worthless paper money "goldbugs". I ask those people: Were you better of holding a one ounce gold $20 coin back in 1930 or from even before or holding a $20 paper bill? The gold coin can buy you close to $1100 worth of goods currently if we do not consider the collectibilty value of it vs. $20 of goods with the bill. For those "smart" people saying, you could earn interest on the paper bill, the compound interest and principal would amount to $212 considering the average yield on US treasuries has been under 3% since than. So called goldbugs aren't off the mark after all.

Stuyvesant Town and Manhattan Real Estate

Tishman Speyer Properties and BlackRock Realty are handing the control of Stuy Town to the creditors rather than going through bankruptcy proceedings. The two companies paid $5.4 billion in 2006 fro Stuy Town which is currently valued at $1.9 billion. That is a 65% decline in value of the real estate. When we hear about the level of decline in real estate through government authorities or through real estate associations of course we never hear the real story about the real levels of depreciation in values of real estate. Here is a very real and undisputed proof of the true level of decline. Imagine the value of those MBS and CMBSs on the books of the banks and the Federal Reserve which is the sole market for such securities. The Fed is carrying trillions worth of worthless paper as are the banks. However, banks unloaded a lot of this paper on the Federal Reserve which will be transfered to the taxpayer. When thinking about the level of bail-out money banks got one needs to add these into account.  

CMBS Continue to Rise= Banks Are Insolvent and Things Continue To Get Worse

Here is a great post from zerohedge on the shape of the CMBS market. It is in shambles. There is no economic recovery and the banks are still insolvent and everything on the books of the Fed are worthless.

Here is the piece:
"

CMBS Delinquencies Surge To $42 Billion, Or 5.2% Of Total; Average Loss Severity Hits All Time High Of 52.7%

Submitted by Tyler Durden on 01/29/2010 18:22 -0500

• Loss Severity
• RealPoint
• Stuyvesant Town

The most disturbing observation from this month's RealPoint CMBS analysis, aside from the surge in delinquencies to an all time high of $42 billion, is that the average loss severity on CMBS liquidation has just hit a record of 52.7%. That means that on average less than half the loan is recovered in liquidation. Surely, this is not the kind of news that REITs are looking for as they perch from atop 52 week highs.

More from RealPoint:

In December 2009, the delinquent unpaid balance for CMBS increased by another $3.7 billion up to $41.64 billion from $37.93 billion a month prior. This includes the $4.1 billion Extended Stay Hotel loan from the WBC07ESH transaction. Pursuant to an amended cash management agreement, all excess funds are being held in a reserve account while the master servicer is only passing through what is deemed recoverable. Realpoint expects the delinquency reporting for this loan to continue in the nearterm, accompanied by new delinquency from other large watchlisted assets where borrowers have begun asking for debt relief and loan restructuring (such as the $3 billion Peter Cooper Village / Stuyvesant Town loan spread through multiple CMBS deals via pari passu structure, which may soon be delinquent).

Otherwise, the overall delinquent unpaid balance is up 380% from one-year ago (when only $8.68 billion of delinquent balance was reported for December 2008), and is now over 18 times the low point of $2.21 billion in March 2007. An increase in four of the five delinquent loan categories was noted in December (30-day category decline), while the distressed 90+-day, Foreclosure and REO categories grew in aggregate for the 24th straight month – up by another $2.53 billion (11%) from the previous month and over $21.52 billion (475%) in the past year (up from only $4.53 billion in December 2008).

The total unpaid balance for CMBS pools reviewed by Realpoint for the December 2009 remittance was $797.18 billion, down from $806.11 billion in November. Both the delinquent unpaid balance and delinquency percentage over the trailing twelve months are shown in Charts 1 and 2 below, clearly trending upward. The resultant delinquency ratio for December 2009 of 5.22% (up from the 4.71% reported one month prior) is over five times the 1.025% reported one-year prior in December 2008 and 18 times the Realpoint recorded low point of 0.283% from June 2007. The increase in both delinquent unpaid balance and ratio over this time horizon reflects a steady increase from historic lows in mid-2007.

And RealPoint's short-term forecast:

• Over the past three months, delinquency growth by unpaid balance has averaged roughly $3.3 billion per month. Assuming ongoing monthly pay-down and liquidation activity, if such delinquency average were increased by an additional 25% growth rate, and then carried through the first quarter 2010, the delinquent unpaid balance would reach $54 billion and reflect a delinquency percentage slightly above 6.8% by March 2010. Carried through mid-2010,the delinquent unpaid balance would top $66 billion and reflect a delinquency percentage above 8.5% by June 2010.

• In addition to this growth scenario, if we again add-in the potential default of the $3 billion Peter Cooper Village / Stuyvesant Town loan, the delinquent unpaid balance would reach $57billion and reflect a delinquency percentage above 7.2% by March 2010. Carried through mid-2010, the delinquent unpaid balance would top $69.4 billion and reflect a delinquency percentage close to 9% by June 2010.

Full RealPoint report here
"

US Exports: Nothing But Weapons and Bank Bailouts

Here is another chart from Jesse showing the make up of the US exports. You guessed it right. They are mostly weapons. A good movie about this is "Lord of War" with Nicolas Cage.


Here is Jesse's comments:
"

The Economic Recovery: Banks and Bullets

The consumer and the organic economy are flat on their back.

The US recovery is centered on the financial bailouts and military spending.


"

People Who Denied The Tech, Housing, Banking And Credit, and Risk Bubbles Are the Most Vocal In Calling Gold A Bubble

...says Jesse's Cafe Americain, one of our favorite blogs. And adds the fact that these people are also tied to international monied fraternity. How could anyone trust such a group of people who denied or plainly did not see the aforementioned crazy bubbles. Gold is far from a bubble and Jesse explains part of why this is the case.

Here is the article:
"

Official World Gold Holdings And the Evolution of Global Trade and Wealth

What fascinated me about this information is that countries that have much less of the official gold, that is gold held by the governments, are leading the effort to recast the SDR with some gold content in the changes scheduled to take place later this year. And they tend to be the high growth nations with the greatest commitments to exports.

And it was a bit of a surprise to see that the Eurozone exceeds the US in total assets by volume. I did not know that. Of course, one may argue about the qualitative unity of the Eurozone. But the big holders of gold there are clearly the core of the union.



This chart does not address the issue of gold holdings which may be leased out and sold to the private sector but still listed as an asset, but held as hedges, derivatives, and deep storage, that is, claims on ores yet to be extracted and in some cases even discovered.

What is also fascinating, as shown below, is that if one looks at the gross levels of official gold holdings the total was steadily decreasing up until last year.



Since there is an annual increase in total gold from mining activity, and very little loss through industrial use that is not subject to later salvage, it appears that there was a steady transfer from the public to the private sector.



Essentially the private sector has been taking all the new gold production and official sales for an extended period of time. We have to wonder what sparked the spectacular bull run in gold starting around 2001 from about $250 to $1000+ per ounce? I can assure you, the bankers of the world think about this, and frequently.

Since we are denominating gold here in US Dollars, there is an obvious negative correlation of sorts as the dollar moves higher and lower in perceived value by the world. But that does not explain the fact that gold is in a bull market in most of the world currencies except for a few of the commodity exporters and safe havens.

Is gold a bubble? As someone who has been a close observer of bubbles for the past ten years the data does not recommend that conclusion. And what makes me even more curious about this point of view is that the very people who for the most part denied the existence of the obvious bubbles in tech, housing, risk, banking and credit, even to the point of absurdity, who could not or would not see a bubble if it perched on the end of their nose, who are card carrying members of the international monied fraternity, are the most vocal in calling gold a bubble with emotional arguments lacking any fundamental data. What's up with that?

Some people, like Willem Buiter, have recently made silly and distracting arguments regarding their very subjective opinion about gold. That opinion does not bear all that much weight given gold's long history and broad use as a store of value, more enduring than anything else in recorded history. In other words, an opinion is like a vote, and you are casting your one vote in the face of countless votes of millions of people over the span of ages -- so your opinion is worth what it is worth, to you.

It is the supply and demand that interests me. And it surely interests the monied powers, who seem to come out strongly in disfavor of gold and silver at certain intervals when they start getting nervous about the grip they have on the reins of the world's financial markets in paper. The sillier and more baseless their comments, the more my interest.

So you will forgive me for seeming rude, but I do not care about your opinion, whoever you may be. I do not even care for my own opinion. I only care for what can be known.

A good part of me is on the hunt for knowledge here, and whether you believe it yet or not is of little consequence to the outcome. You may as well spin opinions about the likely path of a truck as it bears down upon you where you stand. Only the trajectory and the mass of the truck matters, and the ability to step out of its way in a lively manner.

Given the price action, it is hard to find a more 'popular' commodity as expressed in the action of buying by private individuals with disposable wealth, that at the same time is so seemingly 'unpopular' with public officials, and a genuine antipathy by the world bankers, and so little noted by the general public. The 'gold parties' that people were pointing to as a sign of a top were for companies to BUY gold in the form of old jewelry from the public, not for SELLING it to them and often at preadatory prices, despite the misleading spin from the mainstream media.

I like data anomalies. They are so interesting. As Holmes observed in the story Silver Blaze, "Why didn't the dog bark?"

Gregory of Scotland Yard: "Is there any other point to which you would wish to draw my attention?"
Holmes: "To the curious incident of the dog in the night-time."
Gregory: "The dog did nothing in the night-time."
Holmes: "That was the curious incident."

I cannot think of any single economic phenomenon that is more interesting in recent time, say the past 100 years, than the evolution of global trade, the basis for its exchange, and of course the official reserve holdings that are a natural outcome of this.

For if one understands that the power to set and control the currency essentially trumps all local fiscal policy issues, there is almost nothing more important than the path which this evolution takes. Valuation and the ownership of the 'standard' of monetary valuation is key, and yet so little remarked, so little discussed in public.

I try to resist the temptation to suspicion that statists are driving towards a unified command and control economy. I do not think that this agenda is the basis for formal discussions, except perhaps tangentially in the hallways of Davos. There is an impetus to power, and more power, that can create the same effect in groups of men without the need for formal discussions. Financial engineers and bankers will alway seek more control and more power, because they are seeking to master something that is a portion of human nature, that does not lend itself easily to linear manipulation. As their plans fail, they need to keep expanding to prevent a collapse and their personal humilitation. This is inherent in what they do. This is how dictatorships are created; they seem to be the easier path to inability, if not incompetency.

But it is obvious that the theme since the 1980's at least has been the will to power, the knocking down of laws and regulations, to allow the most powerful to do what they will, to take an even greater share of the riches of the world, to the disadvantage of the many. And my hypothesis is that the global reserve currency is a key plank in this agenda.

Perhaps this is such a perennial theme that is almost a tautology to remark about it, like a boy who first discovers the wonders of love, and thinks himself a Balboa discovering new oceans. Perhaps this boy is just discovering in a more profound way the deep roots of the darker side of human nature, the basis of evil: pride, greed, and deceit.

But there is an ebb and flow in the tides of men, and the rise and fall of nations, ideas, and fundamental values like freedom, justice, honour, duty, mercy, equality, and hope. And we are certainly at the cusp of a trend change, a trend in place since the second Great War, and the dog is not barking.

The game is afoot.

"

Peak Gold: Gold Will Be Going Up For Years To Come

Here is again an article from GATA.org from John Embry of Sprott Asset Management about the history of gold manipulation and events in the gold markets as well as demand and supply imbalances. It is long, but a great read for people trying to understand part of the bull case for gold and how people like George Soros, who are talking their books of short term trading, are dead wrong in calling gold overvalued or a bubble. Never trust the investment advice of a guy who is speaking his own book or tries to mess up countries through manipulation or one with a horrendous reputation.

PS. On the history of gold I recommend Peter Bernstein's "The Power of Gold: The History of an Obsession". In that book concentrate on the facts rather than Mr. Bernstein's opinion as he contradicts his own facts and as a person closely tied to the banking industry has advisory conflicts as expected. Although, at times his opinions do suggest that gold is the ultimate money and a solution to the problems caused by fiat paper money.

Here is the article:
"

John Embry: Why gold will keep going up for years

Submitted by cpowell on Fri, 2010-01-29 20:46. Section: Daily Dispatches

Remarks by John Embry
Chief Investment Strategist
Sprott Asset Management, Toronto
Vancouver Resource Investment Conference
Hyatt Regency Hotel
Vancouver, British Columbia, Canada
Monday, January 18, 2010
Good afternoon. It is once again a great pleasure for me to address a knowledgeable gathering at Joe Martin's always excellent Cambridge Conference.
When I was here last year gold was around $850 and there was the usual angst among mainstream commentators fearing a drop to $600 per ounce or worse. Today the price is roughly $300 higher and the same individuals continue to try to frighten the public with prophesies of vertiginous falls in the gold price. Despite this ongoing aggravation, I am even more bullish on the prospects for gold than I was a year ago.
However, despite my consistent enthusiasm for the yellow metal once termed a "barbarous relic" by Lord Keynes, I still have the strong feeling that the vast majority of investors outside this room still haven't got a clue about gold and they are certainly not aware that gold is experiencing a historic bull market with much, much further to go. What we have seen to date is merely a prelude, and the appreciation we are going to see in future years is going to greatly exceed what we have seen to date. This opinion is based on a number of factors I will expand on, but the predominant theme is that gold is re-establishing itself as money.
It has been money for thousands of years, a reality that was succinctly summed up by J.P. Morgan in 1912 when he said, "Gold is money and nothing else." But we go through periods when that reality is obscured, and the decades of the 80s and 90s represent living proof of that. Gold retreated to commodity status in that era, when disinflation was in vogue and the real returns on financial assets were truly remarkable in historic terms.
Gold fell from a peak of $850 per ounce in January 1980 to a low of $252 in July 1999 in an extended bear market. To be fair to gold, it got a significant push to the downside in the latter part of that period from the central banks that were dumping enormous quantities of gold by leasing it through their bullion bank cronies. I would contend that the gold price overshot its economic value by perhaps $150 on the downside. Contributing to this fiasco was the ludicrous auction of half the British gold reserves within 10 percent of the bottom. Today this egregious error is referred to as "the Brown bottom" in recognition of the idiocy of the current British prime minister, who was then finance minister.
However, this is all water under the bridge and I don't particularly want to dwell on it other than to say that we are now in the phase of the gold market where we are about to benefit mightily from the central bankers' awesome stupidity at that time.
It is important, though, that everyone realize exactly what happened. The Western central banks supplied massive quantities of gold to the market for at least the past 15 years. Initially this facilitated excessive producer hedging. Then it helped to fund a huge carry trade that greatly enriched their bullion bank cronies. Now it occurs in large part to protect existing huge short positions held by those same banks.
You might be inclined to ask why the central banks would do such a thing. The official explanation for the transparent portion of their activities (i.e., direct sales) was to diversify their reserves. Essentially, why hold gold when you can own an interest-bearing piece of paper in its stead?
But that explanation is purely fatuous and a total smokescreen. The whole process, with the clandestine leasing and swapping of huge quantities of gold, was orchestrated by the United States. It was designed to reduce critical scrutiny of the central banks' increasingly reckless monetary policy, to allow interest rates to remain at unrealistically low levels and to maintain the U.S. dollar's supremacy. That this undertaking would inevitably spawn serial financial bubbles, the very same bubbles that brought the world financial system to its knees, was conveniently ignored.
This was all foreshadowed by some remarkable comments by then-Federal Reserve Chairman Alan Greenspan at a Federal Open Market Committee meeting in the early 1990s, remarks that came to light only recently when a transcript of that meeting was scrutinized. Greenspan referred to gold as a "thermometer" and speculated that if the Treasury Department sold a little gold in the market and the price broke as a result, not only would the thermometer no longer be a measuring tool but the lower gold price could affect underlying psychology. Greenspan was unfortunately right in his perverse judgement and shortly thereafter the systematic dumping of gold by the Western central banks moved into high gear.
It really makes you love free markets, doesn’t it?
But what a sorry mess they have created. While in the '90s, their gambit played out spectacularly with gold collapsing and financial assets flourishing, it sowed the seeds for what has happened subsequently: a robust bull market in gold since 2001 and increasing chaos in the stock, debt, and real estate markets worldwide. To this day the central bankers have remained undaunted and have increasingly intervened in all markets, but despite their annoying periodic raids, their influence is waning dramatically in the gold market.
I would suggest that today central banks are discovering to their increasing discomfort what history has always demonstrated -- and that is that manipulation of the free-market process ultimately fails. No amount of government interference and price manipulation can change the reality of the free market over the long term.
In the whole sordid process of the gold suppression scheme for the past 15 years, what has been particularly intriguing to me is that an earlier generation of central bankers unsuccessfully tried to same ploy with gold in the 1960s. Using the considerably more transparent London Gold Pool, they succeeded in holding gold at the then-official price of $35 per ounce for a number of years before being overwhelmed by the reality of the situation. In the following decade of the 1970s, gold rose a mere 2,300 percent.
Armed with the knowledge of that fiasco, one would have surmised that our current central bank geniuses might have considered that their new attempts at price control, albeit considerably more secretive, could meet a similar fate. Alas, the hubris of central bankers is well known, and this just represents another graphic example of their arrogance and awesome incompetence.
However, what remains to play out is the denouement of their current folly. Markets that have been artificially capped tend to catapult upward when the suppression inevitably fails. In my opinion the last experience in the '60s and '70s was a mere bagatelle in comparison to what is unfolding today. It has always been accepted that "the greater and longer the manipulation, the greater the eventual price rise is going to be."
In the latest episode, there has been dramatically more central bank gold expended. Credible estimates suggest that more than 15,000 tonnes, or roughly half of the central banks' supposed reserves, have already hit the market and are long gone, dangling from the wrists and necks of Indian women, filling vaults in the Middle East and Russia, and, in ever-greater quantity, migrating to China.
In the era of the London Gold Pool, only around 3,000 tonnes were sold to maintain the $35 price. This time the exercise has been dramatically larger and has occurred over a much longer time frame against the backdrop of a considerably more fragile financial structure, particularly in the West. So all of you are free to use your imagination to estimate how high gold is going to go this time.
It is critical to understand what the central banks have done because, in the absence of that knowledge, one cannot appreciate the whole gold story and will find it extremely difficult to recognise the investment opportunity being presented.
However, that is only one critical factor, and, as I said at the outset of my remarks, it is gold's return as money that is going to be really instrumental in driving gold to prices that would seem fanciful to most at the present time. In reality, it isn't gold that is changing, because it has been a constant store of value for 6,000 years. It is the value of fiat paper money in which gold is priced that is on the slippery slope to oblivion.
I could talk extensively about what is happening to the value of paper money, but to shorten things up, there is only one expression that you have to know: "quantitative easing." What a joke that is!
The authorities would have you believe it is some sort of magic elixir and a panacea, but all it represents is the monetization of various forms of debt by unfettered printing of money by central banks. Because the inflationary impact has yet to occur, the linear thinkers would assure you that it isn't going to be a problem. However, because of ongoing deleveraging and falling velocity of money in the short term, it is only being delayed.
As sure as death and taxes, continuing excessive money creation by the central banks will lead to accelerating inflation. When it begins to manifest itself, the velocity of money will pick up rapidly as people around the world rush to get rid of their increasingly worthless paper currency. In that event, we will rapidly progress from relatively benign inflation to truly frightening levels in a fairly short time.
At this point, I would like to repeat a quotation I used in a recent Investor's Digest article. It comes from Ludwig Von Mises, the brilliant originator of the Austrian school of economics, which is the only formal economics that makes much sense to me. Long before I was born, which was a long time ago, Von Mises observed:
"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner, as the result of a voluntary abandonment of further credit expansion, or later, as a final and total catastrophe of the currency system."
That comment is pretty germane to what is unfolding today. Following what was arguably the most abusive credit cycle in history, Fed Chairman Ben Bernanke and his central banking confreres have clearly chosen the latter option, and accordingly, in my opinion, all forms of fiat paper money are headed for a train wreck. Ironically, Bernanke tipped his hand seven years ago in the infamous speech he gave before becoming Fed chairman. He claimed that he could combat deflation by the use of a printing press or, if need be, by dropping money from helicopters to sustain demand. To me his theories were ludicrous at that point and remain so today. Yes, he may avert deflation for a considerable time but at the very probable cost of hyperinflation and the social chaos that inevitably results.
Today the only question in my mind is whether investment demand for gold is going to go berserk as the result of a U.S. dollar collapse or because all the fiat currencies go down the drain together. The U.S. dollar is in its death throes, but will other countries print massive quantities of their own currencies to buy the dollar in an attempt to depress their currencies and keep their economies relatively competitive? To date, I would say that despite the considerable weakness in the dollar, there is abundant evidence that many other countries are printing aggressively to prevent their currencies from rising too much against the dollar.
In any case, I believe we are fated to see a continuing policy of ridiculous monetary ease around the globe, despite rhetoric to the contrary. This will occur because the idea of a double-dip recession or depression, as the case may be, is anathema to the powers that be. Very simply, withdrawing any significant amount of stimulus, be it monetary or fiscal, in the foreseeable future would virtually guarantee another deflationary event, and this time it may be impossible to stop.
Clearly, the United States is the lynchpin of the whole debacle, but most other countries are up their necks in the mess as well.
To begin, let us consider the United States' fiscal quandary, with a federal government deficit currently running above 10 percent of gross domestic product and representing roughly 40 percent of government expenditures. These numbers are horrific for a country that is providing the world's reserve currency. A recent study looked at the 28 examples of hyperinflation in various countries since 1980 and included Argentina, Zimbabwe, and many other banana republics. It noted that one common trait was that when the national government deficit exceeded 40 percent of expenditures, the point of no return had been reached. The U.S. is there as we speak and the $389 billion deficit in the first quarter of the 2010 fiscal year was far from reassuring.
While the preceding information is historical and thus factual, there is the matter of the Obama administration having recently admitted that its budget deficits would total $9 trillion (a number that I believe to be wildly optimistic) over the next 10 years. The question that obviously has to be asked is: What person, institution, or government, for that matter, in its right mind would lend money to the United States for the pathetically low interest rates currently on offer?
In reality, who would really be comfortable lending the United States money at any interest rate in the current circumstances, considering that higher rates would just ensure even higher deficits?
So it seems reasonable to assume that more of the deficits will have to be monetized, the dollar will inexorably decline as a result, and the question of confidence will become paramount. If confidence in the dollar is lost, chaos will ensue and those trapped in dollar-based fixed-income assets will see their wealth destroyed, the same fate that befell those who believed in the system in the Weimar inflation in Germany after World War I.
But the United States is far from the only country that is in serious difficulty. Things are as bad, and in certain cases worse, in many other countries. For example, Great Britain is a basket case, which incidentally looks real good on that hypocritical jerk Gordon Brown, who has led his country to ruin. Britain's central bank has been forced to intensify its quantitative easing program several times to keep the economy barely afloat and its financial system semi-intact.
Japan, with its rapidly aging population, has seen its accumulated public debt reach 200 percent of GDP with no end of that trend in sight.
Europe is no bed of roses either. Despite the soothing words of the head of the European Central Bank, Jean Trichet, and some very vocal comments about current monetary excess from Germany's Angela Merkel, they appear to have little choice but to keep the money flowing to save Club Med, Ireland, and a whole swath of eastern Europe from oblivion.
China, that paragon of all things economic and financial, had to resort to mandating a humongous increase in bank lending in the first half of last year to keep its economy moving. The ultimate outcome of this endeavor remains to be seen, although it certainly had a salutary impact on Chinese share prices and world commodity quotes. Unfortunately, the resulting massive over-capacity throughout the entire Chinese economy may become an issue.
That brings us to the favorite country of everyone in this room, Canada. I suspect that the Canadian authorities will be forced to deal with reality soon. Despite the hedge funds' love affair with the Canadian dollar, the economic and financial fundamentals in this country don't support the current level of the loonie. We are attached at the hip economically to the United States and as our dollar rises, our manufacturing industries or what's left of them are being destroyed. Budget deficits are exploding at all levels of government.
One year ago the feds didn't have one, but now the deficit is annualizing somewhere north of $60 billion. Ontario is homing in on $25 billion and even hydrocarbon power Alberta has ruefully admitted that its deficit forecast has risen to $6.9 billion, as very low natural gas prices, among other things, take their toll.
Bank of Canada head Mark Carney and Finance Minister Jim Flaherty know these problems all too well, although much of the public seems blithely unaware, and I am eagerly awaiting Carney and Flaherty's response. Rumors of aggressive quantitative easing are growing, adding yet another nation to the expanding list practicing this dark art.
Why is all of this significant?
Very simply, it ensures that the demand side of the gold-silver equation is baked in the cake. Investment demand is exploding on a worldwide basis as those with wealth to protect are beginning to comprehend the true extent of the monetary debasement under way. This is only going to intensify as inflation begins to rear its ugly head as the result of the money-printing orgy.
As I mentioned earlier, the velocity of money is going to accelerate as people figure out what is occurring. Why would anyone want to hold a rapidly depreciating monetary asset when it yields next to nothing? At that juncture we will see if the powers that be have the courage to remove significant amounts of stimulus. Since I believe that our debt-logged economies will remain relatively weak and our financial structure exceedingly fragile, I don’t believe they will.
So I find it laughable when people concern themselves with reduced jewellery demand as a factor in the pricing of gold in the current circumstances. Any decline is being dramatically exceeded by rising investment demand, and this phenomenon is only going to intensify. Besides, all great bull markets in precious metals are driven by investment demand as gold reasserts itself in its true role as money. They most certainly don't occur as the result of gold's attraction a bauble or as an adornment.
However, as bullish as I am on the demand side of the equation, an equally compelling case can be made on the supply side, which consists of three primary elements -- mine supply, scrap recovery, and central bank dispositions. The least important is scrap recovery, but it was briefly a negative in early 2009, when a lot of people around the world couldn't wait to get rid of their jewelry and realize a little cash for the gold contained in it. However, that sharply abated in the second half of the year and the focus is now back where it should be, on mine supply and central bank dispositions.
One of the key factors that is going to contribute to the ongoing bull market is mine supply, or more accurately stated, lack thereof. Mine supply has been in a steady decline since early in the new century despite the constant rosy predictions of greater supply from the alleged industry expert GFMS Ltd. I have long been of the mind that the decline will continue for some time irrespective of what the gold price does. I base my opinion on numerous factors, including a dearth of quality projects ready for mining, continuing geopolitical and environmental issues, less high-grading as the gold price rises, ongoing capital constraints, and a chronic shortage of skilled miners and mine builders.
Thus I was fascinated when Aaron Regent, the new head of the world's largest gold company, Barrick Gold, was quoted at RBC's annual gold conference in London lamenting the state of the gold mining business. He went so far as to suggest that global gold production was in terminal decline despite record prices and Herculean efforts by mining companies to discover new orebodies in remote areas. He alluded to "peak gold," implying that production has reached levels that can't be exceeded, an expression that is commonplace in the oil industry, where the subject has been under discussion for some time.
Following this pessimistic assessment, a more horrifying prediction was revealed in the South African Journal of Science. Chris Hartnady, the research and technical director of a Cape Town based consultancy, stated that South Africa's famous and extremely prolific Witwatersrand gold fields are around 95 percent exhausted and predicted that production rates should fall permanently below 100 tonnes per year within the next 10 years.
This is truly shocking in that gold production from the Witwatersrand, the largest gold field ever discovered, peaked at around 1,000 tonnes per annum in 1970 and, though falling steadily since, still contributes around 230 tonnes per year or roughly 10 percent of world production.
In view of these two evaluations by knowledgeable industry players, my negative view on production has been reinforced. Gold mine production is in the neighborhood of 2,350 tonnes per year, and I continue to believe that odds strongly favor it continuing to fall rather than show any meaningful increase for the next several years.
That brings me back to the central banks, and I apologize if I am belaboring the point, but I believe their role in the whole saga is neither widely appreciated nor well understood. Because of the remarkable obfuscation in the area, most observers do not realize how much central bank gold has entered the market in the past 15 years to fill the huge and growing gap between true demand and mine and scrap supply.
This is the direct result of misleading accounting by the central banks -- accounting, incidentally, that has been endorsed by the International Monetary Fund, the very same IMF that has been threatening the gold market with potential massive sales for a number of years. The central banks have been permitted to use a one-line entry on their balance sheets, which does not differentiate between gold in the vault and gold receivables.
There is copious evidence, if you look for it, that supports the contention that gold receivables have grown dramatically as the result of central banks surreptitiously mobilizing their gold through leasing and swaps. This gold has been dumped in the market and has been essential in filling the natural demand- supply gap, which has probably exceeded 1,000 tonnes per year in most of the years since the mid- to late 1990s. That it also served to significantly depress the price wasn't an accident.
The significance of the 1,000-tonne-per-annum number is two-fold. First, it represents in the neighborhood of 25 percent of the physical gold supply during the period, showing how truly deficient real sustainable supply is. Second, it virtually guarantees that Western central banks are getting dangerously short of reserves to continue this activity. Just as importantly a number of Eastern central banks -- including China and Russia, to name but two -- have acknowledged their intentions and are accumulating and will continue to accumulate gold as one avenue to diversify their reserves away from the U.S. dollar.
But India may have stolen a march on all of them when it announced recently that it had purchased 200 tonnes of the well-advertised and long-awaited IMF sale. This was the event that really kicked off the latest leg in the gold bull market, and unquestionably the Indian move drew widespread attention to a historic shift in the attitudes of central banks toward gold. It coincided with a complete cessation of selling by the European central banks, which under the terms of the recently renewed European Central Bank Gold Agreement could sell up to 400 tonnes per year.
Thus just as the Western central banks are being forced to wind down their incessant selling and leasing, the Asians have stepped up as buyers. This is a truly dramatic development and is going to have extremely positive ramifications for the gold price.
In view of the foregoing powerful positive fundamentals for the gold price, I find it almost nauseating that various pundits are referring to gold as overpriced and in a bubble phase. Nothing could be further from the truth, and, in reality, gold continues in its stealth bull market, which has now seen nine consecutive higher year-end closes. Despite this, as I mentioned earlier, it has attracted very little attention from the investing public in general.
The dedicated goldphile has participated throughout, and a number of sophisticated financial players have come on board recently, the latest being the legendary trader Paul Tudor Jones. But the average investor remains uninterested. It is instructive to remember that at the end of the last bull market in 1980, people were lined up around the block outside the Bank of Nova Scotia in downtown Toronto to purchase physical gold. Today the only lines that have formed are outside emporiums set up so the unsuspecting public can unload their gold jewelry for cash. To have a bubble of any significance, there has to be wide public belief, and it certainly isn't on display in the gold market.
More importantly, if gold were overpriced, the gold producers would be experiencing an earnings bonanza. A close examination of the recent earnings statements of most major gold companies reveals that they are earning very little and are certainly not achieving the return on capital necessary to justify their involvement in a very risky and difficult business.
I find sentiment in the sector to be remarkably subdued in the face of compelling fundamentals. Many attractive junior gold stocks are not even keeping up with the rise in the gold price. If history were any guide, these stocks would be rising at three to four times the rate of the gain in the gold price, but investor skepticism is holding them back.
From a media perspective, if we were approaching the end of a bull market, the newspaper articles and television clips would be universally bullish touting the obvious merits of the yellow metal. There is indeed more coverage recently because of the relentless price rise, but it tends to be skeptical with the bearish commentators continuing to get the most exposure despite having been continuously wrong.
There is no better example of this than an individual who my compliance department would prefer that I not identify. However, I’ll give you a broad hint -- he writes virtually daily for a noted Canadian gold Internet site. Dubbed the Tokyo Rose of gold commentators, he is always quoted in articles with a negative slant despite having been consistently wrong since the inception of gold's bull market. In my opinion, as long as he gets any press at all, we are a long way from the end of this bull market in gold.
Finally, it is widely acknowledged that if the peak gold price in the last great bull market ($850 in January 1980) were to be adjusted to reflect the U.S. inflation rate in the intervening period, it would be equivalent to $2,300 today. That the current gold price is approximately half of that should put to rest any suggestion that this is a bubble.
That's not to say there aren't several bubbles forming in other financial markets (most notably in government debt instruments) as a result of a new bout of central bank madness, but gold is not on the list. In fact, I believe that we are many years and several thousands of dollars in price away from the end of this powerful bull market.
In conclusion, I now firmly believe that the chances of gold ever trading below $1,000 per ounce are remote. The only caveat I would offer is that if the world suffered a catastrophic deflationary collapse, an outcome long predicted by the noted Elliot Wave theorist Robert Prechter, gold could briefly be swept under but would then re-emerge with even greater relative strength as the only true safe haven. However, in a world of pure fiat currency, I think that a near-term deflationary outcome is highly unlikely. In fact, I strongly suspect that gold is going to stage a parabolic rise from current levels in the not-too-distant future, a development that will come as a shock to the many detractors of the world's only real money.
Gold is the only real money because it isn't someone else's liability.
This remains one of the best supply-demand imbalance stories I have encountered in my long career and it will only be enhanced by the existence of massive short positions that will be impossible to cover amid myriad paper claims on gold that dwarf the physical supply, which, by the way, is a subject for another day.
Thanks very much for listening. It has been an honor to speak to you.

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So Called Conspiracy Theorists May Not Be So Crazy After All

Here is a Bloomberg article by David Reilly that was brought to our attention by the great work of GATA.org which does a great work to increase awareness on gold manipulation by the Federal Reserve and how the Federal Reserve serves the Banking cabal at the expense of Americans as well as the rest of the world.

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By David Reilly
Bloomberg News
Friday, January 29, 2010
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aaIuE.W8RAuU
The idea of secret banking cabals that control the country and global economy are a given among conspiracy theorists who stockpile ammo, bottled water, and peanut butter. After this week's congressional hearing into the bailout of American International Group Inc., you have to wonder if those folks are crazy after all.
Wednesday's hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.
We're talking about the Federal Reserve Bank of New York, whose role as the most influential part of the federal-reserve system -- apart from the matter of AIG's bailout -- deserves further congressional scrutiny.
The New York Fed is on the hot seat for its decision in November 2008 to buy out, for about $30 billion, insurance contracts AIG sold on toxic debt securities to banks, including Goldman Sachs Group Inc., Merrill Lynch & Co., Societe Generale, and Deutsche Bank AG, among others. That decision, critics say, amounted to a back-door bailout for the banks, which received 100 cents on the dollar for contracts that would have been worth far less had AIG been allowed to fail.
That move came a few weeks after the Federal Reserve and Treasury Department propped up AIG in the wake of Lehman Brothers Holdings Inc.'s own mid-September bankruptcy filing.
Treasury Secretary Timothy Geithner was head of the New York Fed at the time of the AIG moves. He maintained during Wednesday's hearing that the New York bank had to buy the insurance contracts, known as credit default swaps, to keep AIG from failing, which would have threatened the financial system.
The hearing before the House Committee on Oversight and Government Reform also focused on what many in Congress believe was the New York Fed's subsequent attempt to cover up buyout details and who benefited.
By pursuing this line of inquiry, the hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking. This insight is especially valuable given that the New York Fed is a quasi-governmental institution that isn't subject to citizen intrusions such as freedom-of-information requests, unlike the Federal Reserve.
This impenetrability comes in handy since the bank is the preferred vehicle for many of the Fed's bailout programs. It's as though the New York Fed was a black-ops outfit for the nation's central bank.
The New York Fed is one of 12 Federal Reserve Banks that operate under the supervision of the Federal Reserve's board of governors, chaired by Ben Bernanke. Member-bank presidents are appointed by nine-member boards, who themselves are appointed largely by other bankers.
As Rep. Marcy Kaptur told Geithner at the hearing: "A lot of people think that the president of the New York Fed works for the U.S. government. But in fact you work for the private banks that elected you."
And yet the New York Fed played an integral role in the government's bailout of banks, often receiving surprisingly free rein to act as it saw fit.
Consider AIG. Let's take Geithner at his word that a failure to resolve the insurer's default swaps would have led to financial Armageddon. Given the stakes, you might think Geithner would have coordinated actions with then-Treasury Secretary Henry Paulson. Yet Paulson testified that he wasn't in the loop.
"I had no involvement at all, in the payment to the counterparties, no involvement whatsoever," Paulson said.
Fed Chairman Bernanke also wasn't involved. In a written response to questions from Rep. Darrell Issa, Bernanke said he "was not directly involved in the negotiations" with AIG's counterparty banks.
You have to wonder then who really was in charge of our nation's financial future if AIG posed as grave a threat as Geithner claimed.
Questions about the New York Fed's accountability grew after Geithner on Nov. 24, 2008, was named by then-President-elect Barack Obama to be Treasury Secretary. Geither said he recused himself from the bank's day-to-day activities, even though he never actually signed a formal letter of recusal.
That left issues related to disclosures about the deal in the hands of the bank's lawyers and staff, rather than a top executive. Those staffers didn't want details of the swaps purchase to become public.
New York Fed staff and outside lawyers from Davis Polk & Wardell edited AIG communications to investors and intervened with the Securities and Exchange Commission to shield details about the buyout transactions, according to a report by Issa.
That the New York Fed, a quasi-governmental body, was able to push around the SEC, an executive-branch agency, deserves a congressional hearing all by itself.
Later, when it became clear information would be disclosed, New York Fed legal group staffer James Bergin e-mailed colleagues saying: "I have to think this train is probably going to leave the station soon and we need to focus our efforts on explaining the story as best we can. There were too many people involved in the deals -- too many counterparties, too many lawyers and advisers, too many people from AIG -- to keep a determined Congress from the information."
Think of the enormity of that statement. A staffer at a body with little public accountability and that exists to serve bankers is lamenting the inability to keep Congress in the dark.
This belies the culture of secrecy obviously pervasive within the New York Fed. Committee Chairman Edolphus Towns noted during the hearing that the bank initially refused to disclose even the names of other banks that benefited from its actions, arguing this information would somehow harm AIG.
"In fact, when the information was finally released, under pressure from Congress, nothing happened," Towns said. "It had absolutely no effect on AIG's business or financial condition. But it did have an effect on the credibility of the Federal Reserve, and it called into question the Fed's penchant for secrecy."
Now I'm not saying Congress should be meddling in interest-rate decisions, or micro-managing bank regulation. Nor do I think we should all don tin-foil hats and start ranting about the Trilateral Commission.
Yet when unelected and unaccountable agencies pick banking winners while trying to end-run Congress, even as taxpayers are forced to lend, spend, and guarantee about $8 trillion to prop up the financial system, our collective blood should boil.

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DVD Rental Sector Overview and Opportunities: Redbox, What Would Peter Lynch Do?

Netflix reported earnings Wednesday January 27, after the close. The numbers were better than expectations of analysts so the stock was up more than 20% in the after hours and the next day. One of the better than expected numbers was the number of subscribers as well as the lower ratio of free trial members to paying members. So the company is doing well in an era where Blockbusters, Movie Gallery, and other mom and pop small shops are closing down. There is, also, the topic of online movie rentals which Netflix offers an unlimited amount with a paying membership, which sounds like an amazing deal for computer savvy people that can connect their computers to their TVs or people who are content to watch a movie on their computer monitor which is not the best movie watching experience for sure. A similar concern is that not a lot of people are that computer savvy. At least when you check the demographics of people who watch a lot of movies -the kind of people Netflix and other movie rental businesses would love to have as customers- you see that they tend to be lower educated, lower income people who do not own the best equipment and who lack the technical skills. This is one of the roadblocks for online rental businesses and the reason why video on demand from cable companies despite being overpriced makes over a billion dollars a year.

As you have heard me say about other stocks before, Netflix, too, is a great company, but not necessarily a great stock. From any valuation perspective you look at the stock you realize it is very overvalued and the expectations are too high for the future. The industry is and will increasingly face more issues with the studios who will most likely want a bigger piece of the pie as their industry is in shambles and the DVD sales and rentals are going down the tube. They might even start their own online rental businesses and if I were their managers, I would be pushing the company in that direction since I would have the resources and most importantly the content and that would put my company in a great advantage and the others such as Netflix at a huge disadvantage. Netflix for all I know might be better of buying a studio if they can afford it. 

On a trip down south (anything lower than NYC on a map that is) I ran into a new way to rent DVDs. There were these red kiosks, or boxes, in Walmarts and grocery stores and even some McDonald's stores. It reminded me of the first book I read about stock markets: One Up On Wall Street by Peter Lynch and I decided to a little research on the company that produces and runs these kiosks. It turned out that the producer is Flextronics and the company that runs these is Redbox. Redbox is owned by Coinstar. Coinstar started by a Stanford graduate as an automated coin counting machine company grew over time nationwide and currently provides self-service kiosks that are used in coin counting/turning into paper money, pay as you go retailer products/solutions, money services, and DVD rentals via Redbox. Personally, I am not a huge of of most of the businesses of Coinstar in the sense that I do not find them lucrative enough. However, the Redbox business by itself could be worth more than the current market cap of the company, which means you get all the other business as a bonus if you agree with my analysis. To make it as simple as possible here is how I look at it:

Redbox started as part of McDonald's Ventures LLC in 2002 to drive more traffic to the McDonald's restaurants. By 2005 these kiosks were placed in over 800 restaurants. In November 2005, Coinstar bought 47.3% of the business and in February 2009 purchased the remainder of the business for an amount between $169 million to $176 million. Today Redbox has around 19,000 kiosks in several states in a variety of stores such as Walgreens, other leading grocery stores, 7-Elevens, Walmarts, McDonald's among others as well as stand alone machines and other small businesses. Each box holds around 200 titles and 630 DVDs. These are rented at $1 per night and if a renter loses or holds it for more than 25 days (in which case they can just keep the DVD) they pay $25 dollars and own the DVD. Just doing simple math, if we assume a modest rental rate of about 10 DVDs each day, that would make 10 times 365 times 19,000 which is $69,350,000 of sales. Currently the kiosks amount to around 19% of the DVD rental market which is bound to go up with the bankruptcies and closings of the traditional DVD rental stores. They are being replaced by these lower cost kiosks. In that sense there is a huge potential in the next several years. Depending on the growth rate you assign to this business, which I personally would assign a big one, you realize that the CSTR stock could be an opportunity at current levels and the multiples it is trading at especially when you compare it to overpriced companies such as NFLX. 

Economic Growth vs. GDP Growth plus The Gimmicks and Hedonics

Commerce Department reported 5.7% annualized economic growth in the economy in the fourth quarter of last year. This number is not representative at all of the economic realities, most importantly that related to unemployment pains and prosperity of the people of the United States. There are several problems with a percentage growth number such as a positive 5.7%. For one, it doe not tell you anything about what has been going on before that period. For example the economy could have shrunk 30% in the year or period before and a little bounce of 5.7% does not do anything to make up for the losses. For one we are starting at 70% of the previous, so in absolute terms that 5.7% is actually 5.7% times 70% which is 3.99% of the original level. So you cannot take these numbers at face value, especially in an area where even 0.25% makes a humongous difference. There is another problem. A lot of that growth came from government stimulus plans and other government related activities. Also, a lot of the jump came from the huge stock market jump be it from blatant manipulation or not. The likelihood of another 70% jump in the market is slim, so that growth is not going to continue. Similarly, according to the Commerce Department 60% of the growth came from a sharp slowdown in inventory reduction by companies. That, too, is a one time effect.


One more issue is the level of the dollar. Government is still using 2002 stable dollars. That level is roughly 40% higher than today's dollar. That gives a double boost to net exports. First making imports cheaper. Second getting advantage of the lower dollar in terms of increased exports, but valuing them at the higher 2002 prices. In economics 101 terms, it is taking advantage of both the price effect and the volume effect. We all know this is a serious case of having your cake and eating it, too. This whole scheme is adding at least 0.75% to 1.50% to the overall number depending on the quarter.


Third thing is hedonics, which I am attaching a video by Chris Martenson -who has great videos on his website www.chrismartenson.com called the Crash Course which I highly recommend all of you to watch. Hedonics are effective in both inflation numbers and GDP numbers. Martenson's video explains this really well, but to give an example, government is including a number for people who own their homes in the GDP number as if these people are paying themselves rent. This is obviously a non-cash event and does not belong in the GDP. There are several other gimmicks in the GDP data some of which Martenson talks about. 


Similar gimmicks in inflation data affect the GDP numbers through the GDP deflator which is almost consistently understated showing the inflammatory effect of inflation as if it were real growth. Martenson talks about this in his video, too.


Here are the videos:

Bartiromo Needs To Get Rid Of The Glasses

Maria Bartiromo is surely one of the most annoying characters on TV. She is a person who thinks she is smarter, prettier, cooler, and more important than she is. The alleged adulterer (mile high club with an ex-Citi executive) is seen below with her pretentious glasses. Message to Bartiromo: You're no Audrey Hepburn sweetheart. Try losing 30 pounds and heavy plastic surgery. Although, even that won't be enough. She still would have to change her annoying character and should really just not open her mouth.

Also, we know you are in Davos, Maria. It is right there on the TV. You do not need to wear the glasses and your couple thousand dollar jacket indoors while interviewing guys in just suits or even just shirts. You are clearly indoors. You do not need to show off that you are on the Swiss Alps.

Congressional Oversight Panel Chair Elizabeth Warren On the US Banks

Here is Elizabeth Warren a Harvard professor and Chair of the Congressional Oversight Panel on  the TARP talking about the problem with the US Banks and how they try to rule the country. Quite interesting. This was brought to our attention by Jesse's Cafe Americain, a great financial blog.

Bernanke and Geithner's $30 Billion Gift To Goldman, Merrill And A Few Others

The following is from NY Times brought to our attention from GATA.org. It speaks for itself. Goldman would have had to pay back $7.1 billion according to MS says the article. Geithner and Bernanke said it was not necessary. What's $7.1 billion among friends, right????

"By Gretchen Morgenson and Louise Story

The New York Times
Wednesday, January 27, 2010

http://www.nytimes.com/2010/01/27/business/27aig.html?ref=business

Weeks after rescuing the American International Group with an $85 billion taxpayer loan in late 2008, Federal Reserve Board officials rejected a proposal that would have forced the insurer's trading partners to return $30 billion in cash that they had received from AIG in the preceding months.

The Fed chose instead to let the banks keep the cash and to receive additional billions from taxpayers. This decision was made, internal documents show, after two Fed governors expressed concern that such a plan might be "a gift" to the company's trading partners, including Goldman Sachs and Societe Generale, a major French bank. The documents were provided to Congressional investigators by the Federal Reserve and were obtained by The New York Times.

Lawyers for the Fed argued in the documents that it did not have the legal authority to guarantee AIG's obligations. The New York Fed's chief counsel is expected to reiterate this point in Congressional testimony on Wednesday.

Of all the government rescues undertaken during the credit crisis of 2008, none has stirred more outrage and raised more questions than the bailout of AIG, a global insurer that has received $180 billion in taxpayer commitments since its collapse 16 months ago. More fireworks are expected Wednesday as lawmakers hear testimony about the insurer's rescue from the two men most closely associated with it: Timothy F. Geithner, the Treasury secretary and former president of the New York Fed; and Henry M. Paulson Jr., the former secretary of the Treasury.

The hearing, convened by the House Committee on Oversight and Government Reform led by Edolphus Towns, Democrat of New York, is expected to focus on the Fed's decision to pay billions to the large banks doing business with AIG to unwind the insurance contracts they had struck with the company.

Of particular interest to many in Congress is why those negotiating on behalf of the taxpayers did not push the banks to make concessions like returning the collateral to AIG or accepting less than full value for their contracts with the insurer.

"I really want to find out what led them to pay 100 percent to the counterparties," Mr. Towns said Tuesday. "The whole credibility of the Federal Reserve is called into question when you do things like that in secrecy, and that is something we need to change the culture of."

The hearings come at a difficult moment for the Obama administration, which is still recovering from the loss of the Massachusetts Senate seat in a special election last week. While the A.I.G. bailout was conducted during the previous administration, its oversight by Mr. Geithner makes the rescue a problem for the current administration.

Democrats and Republicans appear eager to pillory him at the hearing for his role in the bailout.

Ben S. Bernanke, the chairman of the Fed who is facing confirmation for a second term, is not among those called to testify on Wednesday. But the Fed's involvement in the bailout has raised doubts about him among some lawmakers, who have withdrawn their support for him.

Donald L. Kohn, the vice chairman of the Federal Reserve Board, has also come under fire for his role in the AIG bailout. Testifying before Congress last March, Mr. Kohn refused to identify those banks that received taxpayer funds as AIG counterparties, saying that the stability of the financial markets would be undermined if the insurer’s trading partners were disclosed.

According to the documents, Mr. Kohn is one of the two Fed governors -- the other was Kevin M. Warsh -- who expressed worry that paying the counterparties receipt of 100 cents on the dollar to unwind their insurance contracts could be a gift to the banks.

Lawmakers may also ask Mr. Paulson about the extensive bailout work done by Dan Jester, a Treasury adviser who was a top executive alongside Mr. Paulson at Goldman Sachs. Mr. Jester, who did not return calls seeking comment, was instrumental in the Treasury's handling of AIG until a new person was hired by the Treasury to handle the bailout. Mr. Jester ceased having any role in late October because of his stockholdings in Goldman Sachs, according to a person briefed on the matter who was not authorized to discuss it and so asked for anonymity.

Goldman, which was later identified as AIG's largest trading partner, received the most money -- $12.9 billion -- in the payments to counterparties.

AIG got into trouble after its Financial Products unit wrote insurance on mortgage bonds held by large banks and financial institutions. Merrill Lynch, Goldman Sachs, Deutsche Bank, and Societe Generale were among the buyers of AIG's credit insurance, which promised to pay them if their bonds went bad.

Under the terms of these contracts, the banks had the right to demand that AIG put up cash or securities as collateral when the market value of the insured bonds fell or when AIG's credit rating was cut.

When the mortgage market went south in 2007 and 2008, the banks to whom AIG had sold credit insurance demanded billions of dollars in collateral. The payments weakened the insurer's financial position significantly and brought it to the brink of failure. On Sept. 16, 2008, the government stepped in.

Although that rescue provided $85 billion, the company's problems continued to grow, requiring it to deliver additional collateral to its counterparties. By late October 2008, AIG had put up nearly $30 billion to satisfy the banks, about half the value of the mortgage bonds they held.

Amid this increasingly perilous situation, Fed officials discussed how to eliminate the risk of even more collateral calls, the internal documents show. One proposal involved the government guaranteeing the contracts; this meant the banks would no longer be able to demand collateral because the government would cover any losses on the mortgage bonds. Many of the bonds on which AIG had posted collateral had not defaulted; instead, their market prices had dropped.

Under this proposal, the $30 billion in collateral would have been returned to the insurer to help pay off some of its loan from the Fed, the documents show. AIG executives may have preferred this approach because it would have reduced the company's reliance on the government rather than expand it.

This alternative, though, would have most likely met with opposition from the company's counterparties, which would have had to return to AIG all the collateral they had received over the previous year. But with the failure of Lehman Brothers and the seizing up of the money markets still fresh in everyone's minds, bankers wanted to keep as much cash on hand as possible. According to an Oct. 26, 2008, presentation by Morgan Stanley, an adviser to the Fed, Goldman would have had to return $7.1 billion to AIG and Merrill, $3.1 billion.

The debate within the Fed centered on which part of the government could provide the guarantee, according to the documents. Staff at the Board of Governors told Fed officials in New York that a Fed guarantee "was off the table," according to an e-mail message to Mr. Geithner and others on Oct. 15 from Sarah Dahlgren, the New York Fed official overseeing the AIG rescue.

"We countered with questions about why it was so clearly off the table and suggested, as well, that perhaps this was something that Treasury could do," Ms. Dahlgren continued.

Supporters of the plan considered a guarantee a good option because AIG's debt rating was at risk of a downgrade by the credit rating agencies and the company would then have to post more collateral with the banks.

"If a ratings downgrade happens at any time in the next three weeks or afterward, we will need this to protect any value in the insurance companies and, importantly, to avoid a disorderly seizure," Ms. Dahlgren wrote.

The New York Fed pursued the guarantee option with the Treasury, the documents indicate. But by Oct. 23, the Treasury had refused to provide the guarantee, according to an e-mail message sent by Ms. Dahlgren to Mr. Geithner. In early November, the Fed decided to make the counterparties whole on their insurance contracts.

"