The GOLDEN question, who sold to BIS?

[Mega]

http://www.telegraph.co.uk/finance/m...he-market.html
Mike

[big67]

Re: The GOLDEN question, who sold to BIS?

http://noir.bloomberg.com/apps/news?...8uhqUVg&pos=11
Gold Makes Dead Portuguese Dictator Top Investor Without Gains

Strange article Mega, isn't it? Looks a little bit clueless, but as it goes, the first hen singing laid the egg?

[Rajiv]

Re: The GOLDEN question, who sold to BIS?

Gordon T. Long's take on this - SULTANS OF SWAP: Gold Swaps Signal the Roadmap Ahead

SULTANS OF SWAP: Gold Swaps Signal the Roadmap Ahead

BIS - The Super SIV Solution

The news rocked the global gold market when an almost obscure line item in the back of a 216 page document released by an equally obscure organization was recently unearthed. Thrust into the unwanted glare of the spotlight, the little publicized Bank of International Settlements (BIS) is discovered to have accepted 349 metric tons of gold in a $14B swap. Why? With whom? For what duration? How long has this been going on? This raises many questions and as usual with all $617T of murky unregulated swaps, we are given zero answers. It is none of our business!



Considering the US taxpayer is bearing the burden of $13T in lending, spending and guarantees for the financial crisis, and an additional $600B of swaps from the US Federal Reserve to stem the European Sovereign Debt crisis, some feel that more transparency is merited. It is particularly disconcerting, since the crisis was a direct result of unsound banking practices and possibly even felonious behavior. The arrogance and lack of public accountability of the entire banking industry blatantly demonstrates why gold manipulation, which came to the fore in recent CFTC hearings, has been able to operate so effectively for so long. It operates above the law or more specifically above sovereign law in the un-policed off-shore, off-balance sheet zone of international waters.

Since President Richard Nixon took the US off the Gold standard in 1971, transparency regarding anything to do with gold sales, leasing, storage or swaps is as tightly guarded by governments as the unaudited gold holdings of Fort Knox. Before we delve into answering what this swap may be all about and what it possibly means to gold investors, we need to start with the most obvious question and one that few seem to ask. Who is this Bank of International Settlements and who controls it?

BANK OF INTERNATIONAL SETTLEMENTS (BIS)

The history of the BIS reads with all the intrigue of a spy noveland comes with a very checkered past. According to the BIS web site, as a privately held bank, it decided in recent years to become wholly owned and controlled by the Central Banks of the world - a highly unusual decision for a private enterprise. Lengthy court cases in Le Hague were involved by private members who objected. Something like this is usually called a buy out or takeover, but there are no public records of any of the central banks making such an acquisition - an extremely strange set of events with little media coverage.



I am sure it can all be explained very logically until we get to the size of the balance sheet. We are talking close to a half trillion dollar balance sheet, or more specifically 259 billion SDR’s, which is approximately $400B. Where did the capital or deposits come from? The BIS goes out of its way to specifically assert it only accepts deposits from member central banks, though it does also state confusingly in the financial notes that there are deposits from previous financial statements from recognized international banks. Therefore, are we to conclude that the US Federal Reserve has huge deposits at the BIS? Though I couldn’t find the assets on the Fed’s balance sheet, I’m sure they are there in the small print or on the New York Feds balance sheet somewhere. It would be a legal requirement. It is a forensic accounting nightmare to find these items based on public documents of the various private organizations. Apparently it is just none of our business. For such a major element of the world’s operating financial structure to have such poor visibility, it seems preposterous until you actually do the research. It should be laid out so a freshman Economics class could easily follow the ownership acquisition and money flows. It isn’t and it appears to this researcher that it is intentionally opaque.

Since the BIS goes out of its way to ensure readers in its annual financial report that no private funds are accepted, maybe all we really need to know is what the BIS officially tells us. The BIS is owned and controlled by their member Central Banks. Therefore if the BIS was to do a gold swap of the magnitude of 349 metric tonnes, then board member Ben Bernanke would have known of it in advance and approved it. He would know exactly who the transaction was with and why. If he didn’t then he is legally negligent in his fiduciary responsibility as a BIS boardmember, because of the size of the transaction and its material effect. Other board members include: Mervyn King, Governor of the Bank of England, Jean-Claude Trichet, President of the European Central Bank, Axel Weber, President of the Deutsche Bundesbank and William C Dudley, President of the Federal Reserve Bank of New York. You can’t have it both ways.

Though we can suspect many things, there is no other conclusion we can reach than the swap is part of an agreed upon plan or concurrence between these board members. So what is the possible understanding or plan?

WHO GAVE UP THE GOLD?

There are not a lot of institutions who possess 349 metric tonnes of gold. So who needs $14B worth of cash and has this amount of gold? That shouldn’t be too hard to find.

Sovereign governments have historically created their wealth by invading other countries to pillage their treasuries which held gold, silver and the crown jewels. The winning and seizure of more land allowed the sovereign to give it to the nobles who used it to tax and tithe the feudal tenets. Recurring wealth flowed upward to the sovereign treasury.

Considering today’s EU membership, where sovereign countries can no longer print their own currency (the politicians first weapon of choice), there are three channels (other than the very politically unpopular increase in taxes and fees) open in modern times to raising money for the treasury:

1-The public sale of debt offerings instruments such as Bills, Notes and Bonds
2-The more recent and stealthy approach of selling assets, including revenue streams from such things as taxes, fees, licensing etc.. These are sold into the securitization market through complex derivative structures such as Interest Rate and Currency Swaps contracts. This approach, as recently discovered, has been rampant throughout Europe even prior to the creation of the EU.
3-When you exhaust all of the above, you then sell the family jewels – the sovereign treasury of gold holdings.

The BIS was very quick to respond to public speculation about the massive gold swap when they immediately clarified that the gold swap was with a commercial bank. Since by its own statements, as I mentioned above, it doesn’t accept deposits from non member banks, this seems confusing on the surface. Does it or doesn’t it accept private deposits? It would be respectful to assume that the BIS is telling the truth and that they did in fact conduct the transaction with a private bank who was transacting the swap on behalf of a central bank or sovereign treasury. This would sort of make everything work. For the BIS to be telling the truth in all their statements, the transaction must be with a member central bank with the involvement of an intermediary commercial bank. But something still isn’t right here.

When you work through the details you quickly arrive at an astounding coincidence. Portugal shows it has 348 tonnes of sovereign gold. The swap was for 346. Portugal is a member bank, though does not sit on the Board, but attends the General Meeting as an observer only. Portugal, as a member of the PIIGS, only days after the unearthing of the swap, was again downgraded by Moody’s, thereby making its lending costs even higher than the already elevated levels being demanded by the financial markets. There is a very strong possibility that the swap is with Portugal. Though who the swap is with is important to those trading debt and credit derivatives it isn’t quite as important to those interested in the gold market.

Ben Davies the CEO of Hinde Capital in London and a player in the gold market suspects (12:40) we may have a modified form of swap emerging. There is the possibility that the commercial bank is in fact a major gold bullion bank. Some of the bullion banks have major short positions on gold that far outstrip the annual physical production of gold. The disconnect between physical and paper gold along with rising gold prices is likely causing serious strains on their balance sheet. As Davies points out the gold may be transacted from a central bank to the BIS through a bullion bank while the gold physically remains with the originating central bank; is classified as ‘unallocated’ at the BIS but in fact remains on the books of the bullion bank. It effectively is double accounted for. The increase in gold would allow gold prices to be pushed lower, which in fact is what has been happening. A careful reading of the BIS financial statements shows more clearly the accounting for such a transaction.

The March 31 2010 Financial Statement of the BIS shows 43.0B SDR’s of gold or 16.6% of total assets. According to note #4 to the BIS Financial Statements: “ Included in ’Gold bars held at central banks” is SDR 8,160.1 million (346 tonnes) (2009: nil) of gold, which the Bank held in connection with gold swap operations, under which the Bank exchanges currencies for physical gold. The Bank has an obligation to return the gold at the end of the contract.” It is very important to appreciate this note is pertaining specifically to BIS ‘assets’ which in the case of banks are what the reader would consider ‘loans’. Under Financial Policy notes #5 to the Financial Statement the BIS is clear that under banking portfolios “all gold financial assets in these portfolios are designated as loans and receivables”. Separately, but very interestingly the BIS additionally states “ the remainder of the Banks equity is held in gold. The Bank’s own gold holdings are designated as available for sale”.

There can be little doubt that the Gold Swap is with a central bank where the physical gold remains. The transaction is considered a deposit at the BIS (liability) but has been lent to a commercial bank (likely a bullion bank) as a loan (asset). The question is only why a bullion bank needs to borrow this quantity of gold, remembering it never gets the physical gold because it remains at the originating central bank. The reader is encouraged to read the Financial Policy notes #4,5, 6, 13, 14, 15, 16, 17 and 19 within the BIS Financial Statement for a clearer understanding along with Notes to the Financial Statements #4 and #11.

The BIS is known as the central bank to the central bankers.
The BIS may equally be referred to as the Central Gold Bullion Bank to the Gold Bullion Banks.

SPECIAL DRAWING RIGHT (SDR)

If problems get worse for Portugal, as possibly the global economic climate worsens, then the gold may never legally belong to Portugal. The contracted swap terms at some point may simply reclassify it a net zero sale, if Portugal fails to return the cash portion of the swap. The BIS would have 346 tonnes of gold and Portugal the $14B of Euros it has long since spent to solve a 2010 problem. By then Portugal likely would need even more loans in whatever currency would replace a crumpling or possibly extinct Euro.

Up until 2004 the BIS denominated its financial statements in Gold Francs. It now has made a major shift to denominating itself into Special Drawing Rights (SDRs). The calculation is exactly the same as used for the IMF. The SDR is operating as a defacto currency.

It takes a little arithmetic (which is not done in the financial statements) to be able to get values in any currency that can give the reader a perspective of the scope of the activities at the BIS. The SDR reporting obscures the BIS’s significant size and scope.

FUNDING

For those who followed the European Sovereign Debt Crisis and the negotiations with Greece, you know that the IMF was an unwelcomed intruder into EU financial affairs. Greece on more than one occasion held the IMF as a negotiating ploy and as a funding alternative to the EU’s procrastination and lack of decisiveness.

The IMF’s willingness to interfere created a lot of bad feelings within the EMU and Germany specifically. As Ambrose Evans-Prichardreported: “The ECB is barely on speaking terms with the IMF – the "Inflation Maximizing Fund" as it was dubbed in a Bundesbank memo - - The IMF has not caught up to the reality in Europe said ECB über-hawk Jürgen Stark on July 9^th” The final EU bailout in fact heavily involved the IMF participation. The very busy IMF is the dominant crisis lender of last resort throughout all Central & Eastern European current financial problems.

What we are seeing is the emergence of another funding structure based on the SDR - SDR’s that have a degree of gold backing. The BIS now has a total of 12.4% of its deposits (32B SDR) in the form gold deposits. Note #11 to the BIS financial statements states: “Gold deposits placed with the Bank originate entirely from Central Banks. They are all designated as financial liabilities measured as amortized cost”.

ARE WE SETTING THE PINS UP FOR AN ALTERNATIVE RESERVE CURRENCY?

Are we moving towards the BIS and IMF being fractional reserve banks that will create money & credit - a reserve currency that will satisfy Russia and China with an element of Gold backing? A bank such as the BIS could easily assume this role (if it hasn’t already) as could the IMF with possible banking charter adjustments.

The chances are high that this is the roadmap we will find ourselves taking. Like all banking that started as Gold backed you could expect that in this case the little gold backing that starts the process is quickly diminished so a limitless money machine could begin functioning. The gold backing would likely be an initial requirement by Russia and China. The partial gold backing would lend credibility to the acceptance and a possible reserve currency alternative and eventual establishment as the global reserve currency.


SHADOW BANKING REPLACEMENT

The collapse of the Shadow Banking system and its attendant SIV / CDO structures were at the root of the financial crisis. That structure which is representative of a huge amount of the credit growth since the dotcom bubble burst isn’t coming back soon, if ever. The world needs more liquidity than the central banks or sovereign treasuries can currently deliver politically. The central bankers, huddled in their bimonthly board meeting at the BIS in Basel, Switzerland, know this better than anyone. Their discussions in the very halls of the BIS must resonate with them to use all the tools available at their disposal - quickly.



Paul McCulley and Richard Clarida at Pacific Investment Management Co. (PIMCO) have written extensively about the Shadow Banking System and its growth. An extensive slide presentation on the Shadow Banking System can be found on my web site at TIPPING POINTS. I won’t go into the detail here, but suffice it to say that the shadow banking system collapse has created a massive hole in credit creation that central bankers can’t fill in the manner in which they presently appear to be approaching the problem. Of course appearances can be deceiving

The problem has now reached crisis proportions and the central bankers know they must urgently act in a coordinated manner. Deflation now has a firm hand on the global economy and this must be reversed. I have been calling for a US Quantitative Easing QE II of $5T in my writings for some time. This amount is required for the US alone. The entire global requirement is three to four times this amount.

The above chart serves as an illustration to simplify the essence of the Shadow Banking System . The international bankers prefer to refer to the process as Capital Arbitrage. An arms-length agreement allowed the banks to invest in a Structured Investment Vehicle (SIV) as an affiliate investment. The large spread that an SIV captured made it an excellent investment, but more importantly it allowed the banks to use their fractional reserve (10X) money creation abilities to buy risky securitization products without them appearing on their balance sheet. The banks received huge multiplier leveraged returns from the high yielding Collateralized Debt Obligations (CDOs) until the crisis imploded the game.

HOW MUCH LEVERAGE WILL THE CENTRAL BANKER CHOOSE TO COMPOUND? => “x” times “y”

When the financial crisis unfolded you may recall that then US Treasury Secretary Hank Paulson’s (former Chairman and CEO of Goldman Sachs during the explosion of Shadow Banking structures) first solution was to create a $100B Super SIV. The SIV leverage thinking was so entrenched that this was the first ‘go to’ solution to fight de-leveraging. If we were to jump forward to today when we are further along in increasing and unprecedented de-leveraging, what the central bankers need to replace the shadow banking system is a vehicle that will deliver the previous scale of leverage PLUS an order of magnitude more. The answer is the Bank of International Settlements. The SIV model is used as illustrated ‘Shadow Central Banking System’ above.

With the use of the SDR ‘currency’, central bankers can compound fractional reserve lending.

IT’S ALREADY HAPPENING

It is my view this process is already well along. The following Bloomberg global money supply growth chart graphically shows this. As the circles indicate, once again money is flowing into the pipeline or at least into global bank reserves.

CONCLUSION

The advantage of this approach is:

1.Leverage: Compounding money creation between banks
2.Partial gold backing: Present BIS levels of 12.4%
3.SDR: Offers a basket of currencies approach versus a single currency dependency.
4.Former Communist bloc regime backing: China and Russia would likely support this approach for a number of reasons, which they have already expressed as short comings to the current global reserve situation.
5.Reserve Currency: The SDR approach offers a migration path from today’s US$ reserve currency to an alternative bank reserve currency to a future global reserve currency.

This may be the final lever required to initiate a Minsky Melt-Up (see: EXTEND & PRETEND - Manufacturing a Minsky Melt-Up) and the $5T in QE II (see:EXTEND & PRETEND: A Guide to the Road Ahead) I have been writing about for some time now.

There are many questions that are raised in the above discussion - many about the future role and safety of gold. Time and space don’t allow for this here. I hope to work through the answers in forthcoming articles.

[thriftyandboringinohio]

Re: The GOLDEN question, who sold to BIS?

Thanks Rajiv. As noted on another thread http://www.itulip.com/forums/showthr...216#post164216, the IMF appears to assign two very different values to gold. They hold it as an assett at only $71/oz, but buy and sell at market. Such a spread (17:1) could be a useful part of leverage in the scheme above.

[Rajiv]

Re: The GOLDEN question, who sold to BIS?

Thanks Rajiv. As noted on another thread http://www.itulip.com/forums/showthr...216#post164216, the IMF appears to assign two very different values to gold. They hold it as an assett at only $71/oz, but buy and sell at market. Such a spread (17:1) could be a useful part of leverage in the scheme above.

It appears that the thread you refer to is in the select area -- and as such I cannot access it.

[Rajiv]

Re: The GOLDEN question, who sold to BIS?

See also How to Manufacture a Minsky Melt-up referred to above in Long's article above

What does this chart to the right say about where banks view asset prices to be headed?





Banks win on asset inflation. Banks potentially lose on asset deflation.

Rising asset prices:

1- Make Collateral more valuable or easier to secure for banks
2- Raise borrowing levels with which to finance higher priced asset prices which increase interest payments and fees.






If banks thought collateral values were headed lower, here is what they would do:

1- Freeze new loans secured by collateral that will potentially deflate	In Process
2- Seize existing loan collateral on defaulted loans before collateral falls below book value	In Process
3- Demand higher collateral levels for loans	In Process
4- Charge higher rates and tighter terms	In Process

Banks need asset values to continue to climb. Now that the markets have reached ‘nose bleed’ levels and appear to be at the stage of looking for a consolidation, the banks need another strategy to ignite asset prices further. The banks must see higher asset prices to have any hope of achieving satisfactory Capital Ratios with the known amounts of bad and toxic debt still on their books. Is it any wonder banks are now making their profits primarily in their trading operations driving asset prices higher and with their Interest Swap where they are squeezing collateral call levels? (see: SULTANS OF SWAP: The Get Away!)

MANUFACTURING A MINKSY MELT –UP

If the banks wanted to get collateral values up, and manufacture a ‘Minsky Melt-Up' here is what some of their strategy elements would call for:

1- Have the Federal Reserve reduce Fed Funds Rate to Zero	Done
2- Have the Federal Reserve hold down rates for a historic length of time i.e. a “very extended period”	Done
3- Have Federal Reserve flood market with money (i.e. Quantitative Easing)	Done
4- Have Government initiatives that support asset appreciation (i.e. housing, auto programs)	Done
5- Have accounting changed that forced asset liquidation for mal-investments (see Accounting)	Done
6- Change Margin requirements or Leverage Pricing
ISE had instituted special rebates for specific option liquidity providers – April 1	Done
NYSE Euronext's U.S. Options Exchanges Announce New Pricing and Fee – April 5	Done
ISE to Introduce a Modified Maker/Taker Fee Schedule – March 29	Done
New interest rate futures contracts and futures options on Eurodollar & US Treasuries	Done
7- Spin or exaggerate economic news through the media in a positive manner only	In Process
8- Decrease risk premiums and increase levels of speculation	Returning
Phantom volume at 3 am on Sunday night	In Process
Is volume merely hiding in plain sight, dark pools and structured notes?	In Process
The obvious overhang of CFTC position limits	In Process
The cross-pollination of inter-continental routing capabilities	In Process
9- Establish a Carry Trade that will flow monies to US assets (i.e. re-establish Yen Carry Trade)	In Process
Market Melt Up? More Like Yen Meltdown	In Process
10- Weaken the US$ to solidify Carry Trade returns and reduce currency risk	Expect
11- Give the market a surprise jolt - like China revising it's currency peg (China biggest US collateral holder)	Expect
12- Increase the Velocity of Money by instilling an inflation worry in the public	Mixed
13- Place restrictions on market shorting (i.e. shortages on key dates)	Expect

I am not saying that a successful Minsky Melt-Up will be achieved or in fact could be successfully manufactured. Frankly, I would be very skeptical if it weren’t for the fact that former Federal Reserve Chairman Alan Greenspan specifically said this could not happen (He also stated that market bubbles could not be identified by the Fed nor addressed with Monetary Policy (yeh right)). His views have typically been my contrarian indicator which has given me an investment edge over the years. Before reading Alan Greenspan’s ‘Greenspeak’, consider that we presently have unstable economic policies, risk premiums have been high and the Fed has successfully inflated a bubble in the Bond Market over the last 20 months through QE (Quantitative Easing).


…Greenspan said “because the markets themselves are asymmetric: they melt down, but don’t melt up!” Mr. Greenspan argues:

(1) the ironic result of successful stabilization policies is a journey to excessively-thin risk premiums, and if
(2) history has not dealt kindly with the aftermath of protracted periods of low risk premiums, and if
(3) asset prices do not tend to melt up but do tend to melt down, then
(4) logic implies that the fattest fat-tailed secular risk to price stability is deflation, not inflation.

How so? If bubbles are the ironic externality of successful stabilization policies, then those policies can be successful only so long as there are asset classes that the central bank can inflate into a bubble. When there are no more free and clear assets to lever up, the game ends in a debt-deflation. As the great Hyman Minsky intoned, stability is ultimately destabilizing! That is the logical consequence of too-successful inflation stabilization. Don’t call it a conundrum, but rather a dilemma, if the Fed were to set and achieve a too-narrow target zone for inflation. (2)



If according to Hyman Minsky, protracted periods of market stability leads to instability and a market meltdown, does this preclude therefore that protracted periods of market instability negate the possibility of a market melt-up (per Greenspan)? I intentionally phrased the logic for this argument in perfect ‘Greenspeak’ fashion so we can all remember exactly how we got ourselves into this global predicament in the first place.

CONCLUSION

This is a well executed strategy. It has been almost militaristic in its execution - all the elements from a solid communications program (i.e. CNBS hype), accounting and regulatory changes (FASB 157, 166, 167 deferrals et al ), government statistics (does anyone actually still believe the CPI, Labor Report or other government statistics any more?), and public’s sentiment through the controlled market perception barometer pumped at them every evening on how well the DOW Industrials are doing. The US economic and financial situation has now reached a point where the potential crisis could be referred to by our government interventionists as a matter of national security. This is precisely why I am leaning towards a Minsky Melt-Up being successfully manufactured.

There is an old market saying: “Don’t fight the Fed!” This market guideline has never been truer. In fact today it is more appropriate to say:

“It is impossible to fight central bank planning”

To fight the central party planning (i.e. shorting an artificial market) exposes your wealth to being officially confiscated!

[Rajiv]

Re: The GOLDEN question, who sold to BIS?

Three other relevant peices of information.

The first two from Zero Hedge - Will The Government's Entry Into Small Dollar Lending Mean Bernanke Is About To Start Handing Out Cash To Everyone?

Deep in the bowels of Donk (DOdd-fraNK Financial abomination bill, whose 2315 pages nobody has read in their entirety), in Title XII: IMPROVING ACCESS TO MAINSTREAM FINANCIAL INSTITUTIONS, section 1205 is a provision titled "Low-cost alternatives to payday loans" in which the government outlines its plans for establishing what is essentially a payday loan advance business (and even odder, the title of Sec. 1205 in the Index references "payday" loans while the actual title of the section is "small dollar" loans - was mere "payday loans" too narrow a definition for the government and got changed in drafting, with the index remaining unchanged?)



In Section 1205, LOW-COST ALTERNATIVES TO SMALL DOLLAR LOANS we read:

(a) GRANTS AUTHORIZED.—The Secretary is authorized to establish multiyear demonstration programs by means of grants, cooperative agreements, financial agency agreements, and similar contracts or undertakings, with eligible entities to provide low-cost, small loans to consumers that will provide alternatives to more costly small dollar loans.

(b) TERMS AND CONDITIONS.—19 (1) IN GENERAL.—Loans under this section shall be made on terms and conditions, and pursuant to lending practices, that are reasonable for consumers.

Does this mean the government is going into the business of direct lending and bypassing the stingy banks completely? As payday loans tend to be the most usurious of all short-term credit instruments for the lower classes, will the government's intervention into this most recent arena result in the obliteration of the existing business model for payday lenders? But far more importantly, will the government use this platform as a means to provide cash to virtually anyone in exchange for shoddy collateral and mere promises to repay the loan? And nowhere in the text is it said the loans are even collateralized with something like a deferred paycheck: these loans could very easily be on par or even worse than NINJA loans, in which the ability to breathe and walk at the same time is sufficient for eligibility, while the ability to actually repay never even figures in the loan officer's mind?


And lastly, what will be the penalties for delinquency and/or charge offs? Since this will come straight from the government's balance sheet (i.e. the Treasury), without bank intermediation, this will be the perfect forum for the government to lend out at any terms it desires, with the implicit understanding that it has no interest in getting paid back.


Is Ben loading up the chopper for one more flight in which he will start handing out non-recourse, no-collateral, no interest rate loans to all of America in one final, valiant attempt to reflate the economy?

Did The Credit Agencies Just Go Extinct?

The recently passed Donk (Dodd-Frank) Finreg abomination, which nobody has yet read is finally starting to disclose some of the interesting side effects of its harried passage. Such as that the rating agencies may have suddenly become extinct. As the WSJ's Anusha Shrivastava discloses: "The nation's three dominant credit-ratings providers have made an urgent new request of their clients: Please don't use our credit ratings." The Moodies of the world suddenly have good reason to not want their name appearing next to those three A letters (at least in Goldman CDO and bankrupt sovereign cases) out there: "The new law will make ratings firms liable for the quality of their ratings decisions, effective immediately." In other words, "advice by the services will be considered "expert" if used in formal documents filed with the Securities and Exchange Commission. That definition would make them legally liable for their work, meaning that it will be easier to sue an firm if a bond doesn't perform up to the stated rating." And since ratings are officially a part of a vast majority of Reg-S filed documentation, the response by issuers has been a complete standstill in new issuance, especially asset-backed underwriting and non-144A high yield issues, as the raters evaluate how to proceed. Alas, as there is no easy fix, underwriters' counsel and issuers will promptly uncover new loopholes and ways to issue bonds without the rating agencies' participation. Did Moody's and S&P just become extinct?
More from the WSJ:

Standard & Poor's, Moody's Investors Service and Fitch Ratings are all refusing to allow their ratings to be used in documentation for new bond sales, each said in statements in recent days. Each says it fears being exposed to new legal liability created by the landmark Dodd-Frank financial reform law.

There have been no new asset-backed bonds put on sale this week, in stark contrast to last week, when $3 billion of issues were sold. Market participants say the new law is partly behind the slowdown.

"We are at a standstill right now," said Bingham McCutchen partner Ed Gainor, who specializes in asset-backed securities.

Several companies are shelving their bond offerings "indefinitely," according to Tom Deutsch, executive director of the American Securitization Forum, which represents the market for bonds backed by assets such as auto loans and credit cards. He said he knew of three offerings scheduled for coming weeks that are now on hold.

For those who are still confused as to just how our reptilian legislative system works, here it is. Moody's found out the hard way. Of course, the fact that those short the stock are about to make a killing likely had no bearing in the final outcome of Donk:

The change caught the ratings agencies by surprise. The original Senate version of the bill didn't include the provision. It was only on June 30, when the Dodd-Frank bill was passed, that the exemption was removed. The Senate passed the amended version on July 15. The offices of Sen. Christopher Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.) didn't immediately respond to a request for comment.

And just like the "scientists" used by BP to validate that the seep caused by the Macondo is not really from the Macondo (until it is proven beyond a reasonable doubt it is from the Macondo, but with sufficient dilution of responsibility that nobody will be impacted), so the rating agencies have been a useful idiot for all the other lazy idiots who refused to do an iota of work an relied on Moodys and S&P. It appears these same dumb money charlatans will once again have to learn what leverage and coverage ratios are.

Ratings providers became a lightning rod for criticism after the financial crisis. Their overly rosy assessments of many bonds, particularly complex securities and bonds backed by subprime mortgages, were blamed for helping fuel the meltdown of the credit markets.

In response, the Dodd-Frank bill revamped how the government treated credit-ratings firms, which receive a special government designation that allows them certain privileges and market access

Once the bill is signed into law, advice by the services will be considered "expert" if used in formal documents filed with the Securities and Exchange Commission. That definition would make them legally liable for their work, meaning that it will be easier to sue an firm if a bond doesn't perform up to the stated rating.

One possible resolution is for the entire underwriting process to go the private route:

One solution to the logjam is for sellers of bonds to offer their deals privately. That means they would offer ratings that can be used in private transactions but not in deals registered with the SEC and sold to the general public. The private market is much smaller and more expensive than the public one.

Alas, as this will immediately cut off a major portion of the end demand market (the Reg-S, non-144A), the supply-demand equilibrium will likely shift, forcing issuers to offer greater concessions or more generous new issue yields and coupons. And since most companies are beyond stingy when it comes to their balance sheet, this option will likely not be seen as realistic, forcing companies to discover new and improved ways to entirely bypass the MCOs of the world. And that, much more than any latent Wells Notice, will likely be the end of the rating agency paradigm.

The third - an article from New Deal 2.0 - Marriner S. Eccles: Keynesian Evangelist Before Keynes

Learning lessons from Eccles’ economic conversion.

Central bankers around the world nowadays may not know about Marriner S Eccles. The second phase of the Great Depression can be blamed on the early policies of the Federal Reserve under Eccles (November 15, 1934-January 31, 1948). Eccles, the president of tiny First National Bank of Ogden, Utah, became nationally famous through his successful effort to save his bank from collapse in the late summer of 1931.


Eccles defused depositors’ panic outside of his bank by announcing that his bank would stay open until all depositors were paid. He also instructed his tellers to count every small bill and check every signature to slow the prospect of his bank running out of cash. A mostly empty armored car carrying all First National’s puny reserves from the Federal Reserve Bank in Salt Lake City arrived conspicuously while Eccles announced that there was plenty of money left (which was true except for the fact that none of it belonged to First National). The crowd’s confidence in First National was re-established and Eccles’ bank survived on a misleading statement that would have been considered criminally fraudulent in a vigorous investigation.


Eccles was a quintessential frontier entrepreneur of the US West and politically a Western Republican. Beginning with timber and sawmill operations, his family’s initial capital came in the form of labor and raw material. He learned from his father, an illiterate who immigrated from Scotland in 1860, that the way to remain free was to avoid becoming indebted to the Northeastern banks, which were in turn much indebted to British capital. Among Eccles’ assets of railroads, mines, construction companies and farm businesses was a chain of local banks in the West.


Immersed in an atmosphere of US populism that was critical of unregulated capitalism and Northeastern “money trusts”, Eccles viewed himself as an ethical capitalist who succeeded through his hard works and wits, free of oppression from big business trusts and government interference.


A Mormon polygamist, the elder Eccles had two wives and 21 children, which provided him with considerable human capital in the labor-short West. The young Eccles, at age 22 and with only a high-school education, had to assume the responsibilities of his father when the latter died suddenly. The Eccles construction company built the gigantic Boulder Dam, begun in 1931 and completed in 1936, renamed from Hoover Dam in the midst of the Depression and re-renamed Hoover Dam in 1941.


The market collapse of 1929 caught the inner-directed Eccles in a state of bewilderment and despair. Through eclectic reading based on common sense, he came to a startling awareness: that despite his father’s conservative Scottish teachings on the importance of saving, individuals and companies and even banks, ever optimistic in their own future, tended to contribute to aggregate supply expansion to end up with overcapacity through excessive savings for investment. Eccles’s conclusion that we needed an income policy was the diametric opposite of Hayek’s market fundamentalism, which claimed that each market participant acting independently to maximize his individual interest represents the most efficient allocation of resources.


It was obvious to Eccles that the problem of the 1930s was that too much money had been channeled into savings and too little into spending. This new awareness, albeit not early enough to save him from policy error made in the first two years as Fed Chairman, led Eccles like Saint Paul’s vision on the way to Damascus to a radical conclusion that contradicted all that his conservative father had taught him.


From direct experience, Eccles realized that bankers like himself, by doing what seemed sound on an individual basis, by calling in loans and refusing new lending in hard times, only contributed to the financial crisis. He saw from direct experience the evidence of market failure. He concluded that to get out of the depression, government intervention, something he had been taught was evil, was necessary to place purchasing power in the hands of the public. In the industrial age, the mal-distribution of income (which was hugely unequal) and the excessive savings for capital investment always lead to the masses exhausting their purchasing power, unable to sustain the benefits of mass production that such savings brought.


Mass consumption is required by mass production. But mass consumption requires a fair distribution of new wealth as it is currently produced (not accumulated wealth) to provide mass purchasing power. By denying the masses necessary purchasing power, capital denies itself of the very demand that would justify its investment in new production. Credit can extend purchasing power but only until the credit runs out, which would soon occur without the support of adequate income.


Eccles’ epiphany was his realization that Calvinist thrifty individualism does not work in a modern industrial economy. Eccles rejected the view of his fellow bankers that depressions are natural phenomena, in the long run the destruction they wreak is healthy and government intervention only postpones the needed elimination of the weak and unfit, thereby weakening the whole system through the support of the unfit.


Now, the interesting thing is that Eccles, who never attended university or studied economics formally, articulated his pragmatic conclusions in speeches a good three years before Keynes wrote his epoch-making The General Theory of Employment, Interest, and Money (1936). John Galbraith, in his book Money: Whence It Came, Where It Went (1975), explained: “The effect of The General Theory was to legitimize ideas that were in circulation.” With scientific logic and mathematic precision, Keynes made crackpot ideas like those promoted by Eccles respectable in learned circles, (even though Keynes himself was considered a crackpot by New York Fed president Benjamin Strong as late as 1927).


In one single testimony in 1933, in his salt-of-the-earth manner Eccles convinced an eager US Congress of his new economic principle. He outlined a specific agenda for how the federal government could save the economy by spending more money on unemployment relief, public works, agricultural allotment, farm-mortgage refinancing, settlement of foreign war debts, etc.


Eccles also proposed structural systemic reform for achieving long-term stability: federal insurance for bank deposits, minimum wage standards, compulsory retirement pension schemes — in fact, the core program that came to be known as the New Deal.


Eccles also helped launch the era of liberal credits through government guarantee mortgages and interest subsidies, making middle-class and low-income home ownership a reality. It was not a plan to do away with capitalism as much as it was to save capitalism from itself. Eccles’ plan was to give the masses high income on which liberal credits can finance a nation of homeowners. It was fundamentally different from the neoliberal program of depressing worker income through cross-border wage arbitrage while financing homeownership with subprime mortgages.


Eccles also rescued the Federal Reserve System from institutional disgrace. For this, the Fed building in Washington has since been named after him. The evolution of political economy models in the early 1930s, a crucial period of change in the supervision and regulation of the financial sector, can be clearly seen in the opposing policies of the Hoover and Roosevelt administrations. It resulted in a change of focus in the Federal Reserve Board from orthodox sound money initiatives to a heterodox Keynesian outlook, which was reversed by the monetarism of Milton Friedman. Under Eccles, the push toward centralizing the monetary powers of the Federal Reserve System at the Board, away from the regional Federal Reserve Banks, was implemented.


With support from Roosevelt, despite bitter opposition from big money center banks, Eccles personally designed the legislation that reformed the Federal Reserve System, the central bank of the United States founded by Congress in 1913 (Glass-Owen Federal Reserve Act), to provide the nation with a safer, more flexible, and more stable monetary and financial/banking system. An important founding objective of the original Federal Reserve System had been to fight inflation by controlling the money supply through setting the short-term interest rate, known as the Fed Funds Rate (FFR), and bank reserve ratios. By 1915, the Fed had regulatory control over half of the nation’s banking capital and by 1928 about 80 percent.


The Banking Act of 1935, designed by Eccles, modified the Federal Reserve Act by stripping the 12 district Federal Reserve Banks of their autonomous privileges and veto powers and concentrated monetary policy power in the seven-member Board of Governors in Washington. Eccles served as chairman for 14 years while he continued to function as an inner-circle policy maker in the White House. The Fed under Eccles had no pretension of political independence. Galbraith described the Fed under Eccles as “the center of Keynesian evangelism in Washington.”


Eccles’ transformation from a businessman, brought up to believe in survival of the fittest, to his belief in government spending on the neediest can teach us many lessons today. He pragmatically saw that money is not neutral, and it has an economic function independent of ownership. Money serves a social purpose if it circulates widely through transactions and investments, and is socially harmful if it is hoarded in idle savings, no matter who owns it. Liquidity is the only measure of the usefulness of money. The penchant for capital preservation on the part of those who have surplus money has a natural tendency to reduce liquidity in times of deflation and economic slowdown.


The solution is to start the money flowing again by directing it not toward those who already have a surplus, but to those who have not enough. Giving more money to those who already have too much would take more money out of circulation into idle savings and prolong the depression.


The solution is to give money to the most needy, since they will spend it immediately. The only institution that can do this transfer of money for the good of the system is the federal government, which can issue or borrow money backed by the full faith and credit of the nation and put it in the hands of the masses, who would spend it immediately, thus creating needed demand. Transfer of money through employment is not the same of transfer of wealth. Deficit financing of fiscal expenditure is the only way to inject money and improve liquidity in a stalled economy. Thus Eccles promoted a limited war on poverty and unemployment, not on moral but on utilitarian grounds.


Read the full post here.

[ThePythonicCow]

Re: The GOLDEN question, who sold to BIS?

Gordon T. Long's take on this - SULTANS OF SWAP: Gold Swaps Signal the Roadmap Ahead

chedir007 asked what this article of Gordon Long meant yesterday on the thread Another strategy to fight deflation?. Right now I am reading several other Gordon Long posts; interesting stuff.

My initial (i.e. half-baked) take on the above Long article: Perhaps Long is suggesting that these SDR things might be crafted into "The Next Bubble."

For the last two years, we've been limping along using such mechanisms as quantitative easing and the accounting fraud (mark-to-magic) of extend and pretend. But we've got some really big problems coming at us now, such as Option ARMS in residential real estate, a huge pile of Commercial Real Estate debt to roll over the next couple of years, and some more vulnerable sovereign nations choking on their debt.

We "need" to pump another $5T (Long's number, above) of debt-money [Note 1] into the system to keep it afloat. That really is more than the U.S. Federal Reserve can get away with generating. The Fed really does not print fiat money without practical limit; rather it creates debt-money and the Fed has political limits on how much such debt [Note 2] it can create.

Notes:

1. The Fed in cahoots with the U.S. Treasury and other U.S. government agencies lends new money into existence with a matching pair of bookkeeping entries.
2. This new debt is ultimately backed by the tax revenues of the U.S. Federal Government.

[Rajiv]

Re: The GOLDEN question, who sold to BIS?

chedir007 asked what this article of Gordon Long meant yesterday on the thread Another strategy to fight deflation?.

Again, not accessible by me, as it is in the select area.

[ThePythonicCow]

Re: The GOLDEN question, who sold to BIS?

Again, not accessible by me, as it is in the select area.

That's ok. You're not missing anything. That is just a short thread, with two posts. chedir007 posted a link to this Gordon Long article about SDR's, and I posted a link back to this present thread you and Mega started. All the interesting stuff (mostly your posts) is on this present thread.

[lsa420]

Re: The GOLDEN question, who sold to BIS?

Again, not accessible by me, as it is in the select area.

Time to subscribe!!!

[Rajiv]

Re: The GOLDEN question, who sold to BIS?

Time to subscribe!!!

As I have already stated to the management here -- "Not until I get the requisite funding!" Currently all resources are spoken for!