Who is the enemy? [updated2]

Have you ever tried to sit on a bench in the street or in a train station and watch the people walking/running around? Why are we running? What are we after?

Ask yourself some questions:

• Who is lying about the inflation, growth, unemployment, money growth rate?
• Who is stealing from your savings night and day, slowly but surely, and making sure that your savings won't have any value in 10 years or so, and hence is forcing you to run for the rest of your life, chasing the unreachable peace of mind and rest that you deserve?
• Why do have to get into dept for 20-30 years in order to be able to afford a home and to become the slave of your bank? And who is making sure that for anything you want to do in life you have to get into more dept and work harder and harder to expect a decent way of life?
• Who is taking your side, defending the citizens of this country, defending your currency? Is this the President of the USA? Is this the Chairman of the Fed? Is this the Secretary of Treasury? Is this the Chairman of the FDIC? (if you are not in the US, replace by your country's bodies).
  
• Why do you have to put your savings at risk in order to try to just protect your purchasing power? Why do you have to invest in Treasuries with a negative rate of return? Would you invest in stocks and put your savings at risk if the inflation rate was 0.0% and you were sure to keep your purchasing power on the long run?
• Who is stealing from the People to give to the Establishment?
• Who is bailing you out when you have trouble? Paulson? Bernanke? Bush?
• Who is changing the rules overnight, making sure that you can't win? Who is cooking the books? Who is letting the rumors go without punishing the originator? Are the SEC and the FDIC protecting the people's interests or the government's?
  
• Who stole all the gold of your country and transformed your paper receipts for gold into a fiat currency with no value?
• Who made a you a slave of the system?
• Who are you trying to fight? Who are you trying to hide from? Who are you trying to protect yourself from?
• Why do you fear your government? What happened to "the government of the people, by the people, and for the people"?

Basically, by distorting the value of money, the government and its bodies (I include the Fed and Central Banks in the Government Bodies, even though it's wrong) are distorting your vision of the world and by continuously debasing the currency and forcing you into dept, they have made you a slave of the system. That same system has failed and is now bankrupt, but they are now trying to rebuild it by stealing from your savings and those of your children in the future. Will you allow that? Why?

Listen to their own words.

Remember, the only think that can free you from their debt based currency and the slavery that it creates is a sound money backed by Gold. Also remember: the government has always been your enemy, but with the gold standard it had its hands tied, but the Fed and the fiat currency system set your worst enemy free. No government has been able to escape from corruption and lies. The only way to break free is to restrains the functions of the government to those implied by the Constitution.

Please, spread the message as much as you can and make sure that this is the last few months of the Fed and of fiat currencies.

Jay Lenno:"Let's see: a failed president and a failed congress will put $700 billion into failed companies. What could possibly go wrong there?"

Books:

• Peter Schiff - Crash Proof
• Nathan Lewis - Gold, the once and future money
• Ferdinand Lips - Gold Wars: The Battle against sound money
• Albert Jay Nock - Our Enemy, The State [added on the 23rd Oct 2008]
  

Movies:

• America: From Freedom To Fascism
• The Money Masters
• Money As Dept

Vote:

• Ron Paul - Campaign for Liberty

Jim Willie, CB. Editor, Hat Trick Letter on the September 24, 2008:

The United States has transformed itself, the most radical degraded aspects having occurred in the last eight years. Many might object or cringe at repeated mention of the Fascist Business Model implemented by the Clinton Administration, and carried to extreme by the Bush II Administration. It is a harsh departure from Beacon of Freedom. Too bad, fact of life! This merger of state and big business in the midst of a climax, the biggest display of exported financial toxin in modern history, and the disintegration of the financial structure for the nation owning the world reserve currency. The Fascist Business Model has criminal fraud & corruption as its chief characteristic, alienation & resentment as its chief foreign effect, and systemic failure & collapse as its chief outcome. Broad war often follows. How anybody could think the sharing of bank and oil executives with federal government leadership as a move toward progress on the evolution chart, that is moronic. Surely, it is about political power and corruption. The military budget is sacred, and private contractor deals are made without bids. Now five to six energy giants will hog all Iraqi oil service contracts. The terrorism topic is untouchable for dispute. A Coup d’Etat is in progress as the Wall Street conmen and fraud kings have taken implicit control of the USGovt. This will be recognized in time, even while resistance is evident. To me the ongoing drama smacks of a comedy of corruption. US citizens are in shock & awe, while foreigners are aghast in disgust.

One month later, still no physical on the resellers

I already mentioned it a few weeks ago, but it's been about a month that Kitco and several other retail-friendly gold/silver bullion merchant are not taking orders for the following products (No advert for Kitco intended, I just tend to consider that they make the best prices and are the biggest online merchant):

• 1 oz Gold bars
• 1 oz Kitco Gold bars
• 10 oz Gold bars
• 1 oz Silver Eagles
• 1 oz Silver Maples
• 1 oz Silver Philharmonic coins
• 1 oz Olympic Silver Maples
• 100 oz Silver bars
• 1 oz Palladium Maples.
  

Draw your own conclusion, and (likely) start your own hoarding :-)

The commercial banking system in the United States remains well capitalized

The FDIC made a press release today to announce the acquisition of Wachovia by Citigroup. In this press release, you could read:

"On the whole, the commercial banking system in the United States remains well capitalized. This morning's decision was made under extraordinary circumstances with significant consultation among the regulators and Treasury," Bair said.

For information, Bair is the Chairman of the FDIC.

Let's sum up what happened in the past week, and in the past week only:

• Washington Mutual went bust
• Goldman Sachs raised $5 billion
• Wachovia went bust
• Morgan Stanley raised $9 billion
• JPMorgan announced it's raising $10 billion
• The Federal Reserve injected more than $220 + $630 billion in the banking system (about $1 trillion USD)
  
• The total reserve of the banks as a whole in the USA is negative $158 billion as of the 24th of September 2008

These are all major US institutions, not small meaningless companies. One can question the integrity and honesty of Mrs Bair. Also, if the system is well capitalized, why do Paulson and Bernanke want to inject at minimum $700,000,000,000 in that same system?

Markets almost crashed today and I had been writing about the overvaluation of the stock market for quite some time. After several months of rallying on every bad news, it looks like the market has finally put on its reality lenses.

So what happened today on the markets? The Bernanke+Paulson PUT that I have been talking about for a couple of weeks has expired. It looks like this PUT had a strike price of 10,800 on the Dow and about 1175 on the S&P 500. It was a sad day for most traders, but a great one for Democracy in the US (and incidently, my portfolio). Let's hope that they keep on going this way and don't ever turn back.

Finally, please remember that this bailout plan will not help in any way the economy and will not lead to any kind of recovery except the recovery of the personal stock options of the finance industry CEOs. The reason is simple: Paulson and Bernanke want to overpay for valueless paper in order to shore the balance sheets of the banks and allow them, supposedly, to resume their lending and the credit expansion (also known as inflation). But the only reason of this crisis was that borrowers were so much into dept that they couldn't even pay back their current mortgages and other sorts of credit. So how on earth would allowing people to borrow more would solve any problem while they are unable to take any more dept?

Gold coin sales halted by the US Mint (again!)

The Financial Times reports:

The rush by retail investors into gold on Thursday forced the US government to “temporarily” suspend the sales of the popular American Buffalo one-ounce bullion coin after depleting its inventories.

The shortage of gold coins is the latest sign of investors seeking a safe haven into bullion amid Wall Street woes. Gold prices this week surged above $900 an ounce, up about 20 per cent from its level before the collapse of Lehman Brothers.

Safe-haven buying spurred by a weakening dollar and rising inflation on the back of high commodity prices have also benefited gold sales, analyst said.

The US Mint said in a memorandum that “demand has exceeded supply” and, therefore, it was “temporarily suspending sales of these coins”. “We are working ­diligently to build up our inventory and hope to resume sales shortly,” it added.

It is not the first time I blog about this, here are the two previous posts, recommended reading:

• Gold vs Gold
• US Mint stops selling gold coins
  

Hundreds of Economists Urge Congress Not to Rush on Rescue Plan

"Hundreds of Economists Urge Congress Not to Rush on Rescue Plan" is the title of a Bloomberg article.

I just made a quick calculation, basically, if you consider a bailout plan of $700,000,000,000 and a US population of 300 million, you see how big this plan is. It means that every single person in the US, from the grand-father, the disabled, the 1 month baby and of course you, dear reader, will pay about $2,300 to Wall-Street. Now, how does that sound?

And even worse, if you take into account only the beloved US Tax Payers (according to Wikipedia, they are only 138 million tax payers as of 2007 and which is going to bee soon an endangered specie anyway), the cost per Tax Payer is about $5,000. It means that every single tax payer will have to pay $5,000 to Wall-Street.

So now that the Bernanke+Paulson Put is actually about to be exercised at the expense of the US Tax Payer and more globally, at the expense of every person on planet earth except a few hundred highly paid bankers in the US, we can see the market rallying today. I hope it will go a little bit higher so that I can short it. But let's not loose our focus here.

As I have stated many times on this blog, bad news keep on hitting the wires and every time, they are followed by sucker-rallies. So what happened today?

• Before the market opened, GE made a profit warning, and puting an end to its stock repurchase plan. Result? +4.5%
• Initial claims hit 493,000 where the market was expecting 450,000 (the market was off by 10%)
• Durable orders fell 4.5% where the market was expecting 1.5% (the market was off 300%)
• New home sales fell to 460,000 where the market was expecting 515,000 (the market was off again 10%)

Conclusion? The Dow Jones IA and the S&P 500 rose more than 2%.

After Market, Research in Motion is getting hammered by approximately 20%, because of their forecasts and sales figures.

We are far from the end, and yet, the markets are still not getting it.

Two very interesting comment that have been made today. These are very important, and not the kind of things you will hear on mass media:
London Banker:

I think the gun to the Congressmens' heads is the Fed is illiquid. Over $600 billion of their $800 billion in balance sheet Treasuries has been lent against this crap MBS collateral. The Paulson Plan will allow banks to take back the crap MBS and get cash for it from Treasury, returning the good Treasuries to recapitalise the Fed. If the Fed doesn't get recapitalised pronto, then the next big shock takes down the central bank. That's the threat that is forcing through this bill.

[...]

Warren Buffett, new stakeholder in the megalithic survivor-biased Goldman Sachs, has referred to recent upheavals in the financial markets as "an economic Pearl Harbour". He is a very smart man who knows his history, having lived it and seen it up close. He will know better than most that Pearl Harbour is now understood in well informed circles to not only have been foreseen by FDR, but provoked by FDR in an orchestrated campaign to engineer a war with Japan dating from a plan adopted in 1940.

Warren Buffet knows better than most just how dirty and mean this Bush administration plays. The politically motivated prosecutions of AIG after he endorsed Kerry in 2004 will have left scars, and his advising Obama puts him at huge risk if Rove succeeds with another GOP victory.

He is in the insurance business, isn't he? So think of his acquisition of a huge stake in Goldman Sachs and his endorsement of the Paulson Plan as insurance. Meanwhile, he may just be patriot enough to have provided a coded clue as to what he really believes you can expect.

Karl Denninger thinks that the Fed has been reducing the liquidity even when they claim the opposite in order to get their bill approved by Congress:

Note that this is an intentional drain of slosh, or liquidity, from the banking system. $125 billion in the last four days drained?

You wouldn't be trying to intentionally cause a bank failure or two to bolster your call for the $700 billion bailout plan, or perhaps intentionally lock the short-term credit markets, would you Ben?

If the market has a liquidity crisis, why would you be intentionally draining reserves from the banking system? Don't you think you ought to explain that to Congress?

The Black Swan & The Fed

(click for bigger image)

Would you have ever predicted this black swan? Do you recognize this one? What was the probability of such an event in the Gaussian world?

The next question is: How can we trust the Feds figures for this graph, when several banks have been collapsing in the past few weeks and that the Fed has been injecting hundreds of billions of US dollars in the system, and yet fails to show any changes in the borrowing figures for the past two months?


Official figures:

Latest Observations:

Date	2008-04-01	2008-05-01	2008-06-01	2008-07-01	2008-08-01
Value	135.410	155.780	171.278	165.664	168.078

Just more lies?

Short squeeze on the octobre futures contract for Crude

I was shocked when I got back home and saw this chart on my computer, I thought something was wrong.
It appears that the CLV8 contract for crude oil has been subject to a short squeeze on the last trading day.
It also shows that if oil has decline so much, it is likely the result of huge short contracts.
And the CFTC wants us to believe that the 'speculator' is keeping oil price high.
And the SEC tries to make us believe that the same 'speculator' is pushing stock prices down, which has been proven false, given the market drop even after the shorting bad. BAD SPECULATOR! (what a joke from the regulators...).

The conmen take over the US

Bloomberg Magazine's cover is Hank Paulson with the big title of "The Persuader" and subtitled "Treasury Secretary Hank Paulson brings crisis management to Washington".

What happened to free markets since the beginning of the crisis?

• The CFTC is closely monitoring the commodities market to make sure that 'speculators' do not make the prices go up. They are warning again today.
  
• The SEC (and almost all the other regulators worldwide) banned the short selling on several hundreds of financial stocks in order to avoid 'speculators' driving the prices too low.
• The Fed has created its 'alphabet soup' in order to pump liquidity into the markets but that's just a fancy way of saying: lending hundreds of billions of dollars to the banks. Borrowing facilities from the Fed now include: TSLF, PDCF, TAF, Single Tranche OMO, Term Discount Window Program (see here).
• The Fed and the Treasury (each being a single person decision making process: Bernanke and Paulson, none of which are elected) took over Fannie Mae and Freddie Mac and AIG, adding more than 5 trillion dollars of liabilities to the balance sheet of the US and facilitated the take over of Bear Stearns and Merrill Lynch.
• Paulson is now asking to have a check of at least 700 billion USD with which he will spend with now approval process and more importantly without being accountable for it (Sec. 8. Review: Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.)
• The Fed is changing the rules overnight without any justification or legal foundations in order to bail out Goldman Sachs and Morgan Stanley.

This whole scheme is probably the biggest con in the history of mankind and is currently being estimated to have cost the US citizens about $1.8 trillion USD and not only Paulson is acting as a Reverse Robin Hood, stealing from the people to give to the establishment, but he somehow managed to convince people that this is a great plan and people are actually thanking him now. He is now working on convincing other nations to follow his path!

There is just so much to say, but I would like to keep it short.

• Investors have lost confidence in the USD, the markets and Paulson/Bernanke. Bank stocks are collapsing because the banks refuse to come clean with their balance sheets and keep on lying on their reports. The financials index plunged 10% yesterday, while short selling is prohibited. So short sellers driving the markets down was just proven to be just another lie. If you refuse to show your balance sheet, it means that you have something to hide.
  
• Paulson seeks immunity. When you do that, it's very likely because you know that you are doing something you will be prosecuted for.

You are either with us or against us

So who is being punished here?

• The Citizens of the United States because their currency and their democracy is being destroyed and their constitution is being shredded
  
• Those who have been saving money are being punished through inflation produced by the Fed with the blessing of the Treasury.
• Those who have refused to get a mortgage because house prices where in bubble are being punished because the government is doing its best to keep the prices high instead of letting the free market decide.
• Those who saw all this coming and shorted the markets.
• Those who are trying to save their money buy buying commodities, because you cannot find any more gold on the markets (the US Mint has stopped minting gold and silver coins, all the retailers are basically out of stock of individual investor friendly products).
• Are the US Citizens going to receive a single dollar of this multi-trillion plan? No.

Who are they trying to save?

• The companies, establishment and happy few that made billions by cashing in on the credit binge.
• People who have been spending more than they earn and hence are in dept (this is just a side effect of the inflation they are creating, they don't care about the people!).

How do you escape?
Get out of most of your paper currency, buy Gold and Silver and store them in your home, don't buy paper gold like GLD, GBS or future contracts. Make sure that you have the physical with you in order to avoid confiscation or scams. Precious metals will free you from the fiat currencies which are backed only by the government dept. They have no value and their current price is going to pluge exponentially to zero.

Recommended links (MUST READ):
Senator Dunning Declares the Free Market Dead
Mish: Contact your Senator
Ron Paul:
London Banker: "The problem with financial institution balance sheets is that on the left hand side nothing is right and on the right hand side nothing is left."
(more to come)
The Zero Currency, Tom Cash draws the same conclusion as I did and it's definitely worth the read.

"You're so far past the line that you can't even see the line! The line is a dot to you!"

The New York Times has published a draft of the Paulson plan. Interestingly, he plans to steal $700,000,000,000 from the people to give it to the happy few in the banking establishment.

Please note that democracy and the Constitution don't mean anything to these people. They are not trying to hide the fact that they are fascists anymore:

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Chandler: You're right. I have no excuses. I was totally over the line.
Joey: Over the line? You... you.. you're so far past the line that you can't even see the line! The line is a dot to you!
(Friends, Episode 7, Season 4)

Remember what Jefferson said in 1802?

I don't think anything more needs to be said.

Reactions on the blogosphere (updated):

• London Banker: Distatorship
• Mish: Bush Administration Seeks "Dictatorial Power"
• Denninger: The Mother of all Frauds
• Paul Krugman
• Bad
• Mish: Lies from Paulson Contact your Senator before it's too late!
  

Markets Alchemy and Greed Stupidity

So Paulson announced his big plan to nationalize all the toxic waste from the financial industry at the expense of the US citizens and the markets rally like heroin addicts getting a relief shot after a few days of missing their dope. He announced that he will put about $1.2 trillion USD ($400 billion to save money market funds and $800 billion to buy the toxic waste).

Now, look at the chemical reaction that happens:
The world total market cap by the end of 2007 was about $60 trillion USD
supposing that the overall market fell by 25% until by the 18-09-2009, we are at about $45 trillion USD
No, Paulson, probably the biggest fool in the history of humanity, exceeding easily Bush, Greenspan and Bernanke, comes in, a thow in about $1.2 trillion USD. So basically, he's throwing in an amount approximately equal to 2.5% of the world total market cap. This figure really seems amazingly high. And hearing the news, the world markets rally by approx. 8% (!!!) in 24 hours, or about $3.6 trillion USD. Any rationality here? I call this alchemy: 1.2 trillion in = 3.6 trillion out. So this just cannot work...

But wait there's worse. Many important questions are raised by this Forbes article:

Wachovia is said to be considering a "bad bank" for toxic assets, including some portion of a potentially lethal $122 billion portfolio of alt-A mortgages on its books. Citigroup is trying to work off $500 billion of its "legacy" assets. Paulson hasn't said what limits would be set for contributions from individual banks, if any. Does that mean a bank could unload absolutely everything, or would they be required to retain a portion for their own books?

So, if Wachovia and Citigroup, just by themselves have more than 600 billion USD of toxic waste to dump in, the 800 billion USD provisioned by Paulson looks a ridiculously small amount.

Please also keep in mind the following (Source: U.S. Global Investors):

• Total US Money supply is $15 trillion (Paulson is going to increase it by 10%!!)
• World GDP: $54 trillion USD in 2007 (source: CIA)
  
• Total amount of derivatives: $516 trillion
• According to the Bank for International Settlements reported the notional amount on outstanding OTC credit default swaps to be $42.6 trillion in June 2007 (Wikipedia).
• In the US, the Office of the Comptroller of the Currency reported the notional amount on outstanding credit derivatives from 882 reporting banks to be $5.472 trillion at the end of March, 2006 (Wikipedia).

The conclusion is that even if the 1.2 trillion USD of the plan are a gigantic amount of money that will sink the US Treasuries balance sheet for decades, it remains a meaningless drop in the ocean of potential losses.

So, who will be able to dump toxic junk in this pool? Up to wich amount? How will these junk be priced? You can be sure that Paulson will keep everything as secret as possible to not hurt the banks because if you disclose these informations, the banks will slump and we are back to square one within 24 hours.

So, it is almost certain that this last final bullet will be dodged and that things will get worse: how much will the USD fall? How much will the treasuries fall and how high will the rates get? These are all very bearish for the US.




Jim Sainclair's blog:

The notional value of all outstanding derivatives now totals approximately $1.144 QUADRILLION.

This appears to be Bank of International Settlement Spin to announce the largest gain in derivatives outstanding since they started to report. As of the last report it appeared that both listed and OTC derivatives was under $600 trillion. Now listed credit derivatives alone stood at $548 Trillion. The OTC derivatives are shown as $596 trillion notional value, as of December 2007. One can only imagine what number they are at now.

Well we hit a QUADRILLION. We have more than $1000 trillion dollars in all derivatives outstanding. That is simply NUTS because notional value becomes real value when either counterparty to the OTC derivative goes bankrupt. $548 trillion plus $596 trillion means $1.144 quadrillion.

It would be an interesting piece of research to see what the breakdown is of listed derivatives according to exchange to see if it adds up to the reported number. Spin is now everywhere.

This means that no OTC derivative house can be allowed to go broke. This means that whatever funds are required to rescue failing international investment banks, banks and financial entities will be provided.

Keep this economic law in mind. Monetary inflation proceeds price inflation and is its primary cause in economic history from Rome to present.

Nothing can stop the juggernaut of price inflation heading towards every nation like a runaway freight train down a mountain.

Gold is going to at least $1650. I am probably way too low with that estimate.

The BigPicture quote:

Here is tonite's theater of the absurd SEC headline:

SEC intends to temporarily ban short selling, but it's not clear if the commission has approved the move. Cox is briefing congressional leaders. Separately, the government is seeking congressional authority to buy distressed assets.

This is nothing short of a total panic by people who have no clue what they are doing. And to think, I mocked Russia for being a nation run by market commies.

This is the ultimate bailout attempt, which will have repercussions far far beyond our imaginations:

1) We suffer a loss of Market Integrity; The US is now a Banana Republic

2) Blatant market manipulation: this is nothing more than an attempt to force markets higher;

3) 60 days prior to a presidential election? This is a none-too-subtle attempt to influence the elections -- especially coming on top of the Fannie/Freddie bailout;

4) The coming pop will create a huge air pocket, ultimately leading to us crashing much lower;

5) Expect a huge increase in volatility -- upwards first, then down;

We Are A Nation of Morons, led by complete Idiots, making us complicit in our own self destruction.

Bloomberg:

``It sounds like there's going to be a giant dumpster for illiquid assets,'' said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, which oversees $22 billion in assets. ``It brings up the more troubling question of whether the U.S. government is big enough to take on this whole problem, relative'' to the size of the American economy, he said.

And you thought G. W. Bush had badly hurt the United States?

Paulson's latests action on the US balance sheet (just for September 2008):

• Fannie and Freddie: $200 billion + $5 trillion of bad dept on the balance sheet
• AIG: $85 billion

And today, he is working on nationalizing all the losses of all the US banks and investment firms!

Treasury Secretary Henry Paulson is working on a plan that would set up a government facility to take on bad debts from financial institutions, preventing a worsening of the global credit crisis, Wall Street sources have told CNBC.

Such a move, according to its advocates, would allow banks to shovel bad debt off their balance sheets and allow the firms to go back to business as usual. It would also eliminate the need for individual company bailouts.

In turn, that could allow the housing market to recover because it would restore banks willingness to lend.

"This will bring real trust back into the market." Donald Marron, chairman of Lightyear Capital, said on CNBC. "It would free up real, spendable capital in these organizations. They can use that to make loans, to make transactions and to build confidence in the system. This is a confidence crisis."

The good news for libertarians is that this will fail to make the markets recover on anything but a short term speculative rally. Why is that? Because the problem is not that the banks hold bad dept on their balance sheet and hence cannot lend anymore. This is the consequence. The problem is that the debtors are unable to take on more dept and are unable to pay back their current ones! Paulson and Bernanke, probably the biggest fools in the world (even bigger than George W. Bush) still don't get it!

Not even China or Russia came up with this idea.

• The United Kingdom, the supposed kingdom of capitalism and freedom, is also turning its back to all these principles, and prohibited short selling on their exchanges. Last time I heard such an irrational news was when Pakistan decided to forbid short selling and also forbid shares from declining more than 5%.
• Russia announced today that it will keep its exchanges closed until Monday (to help it heal?).
• China said it will start buying stocks in order to try to prevent markets from further declining.

This afternoon, I worried because free-markets were collapsing. This evening, I am worried because there are no free-markets anymore. Guess which one I preferred?

"They misunderestimated me." --George W. Bush

Bentonville, AR
11/06/2000

[Update: other comments from the blogosphere. They provide additional important information]
Stock Market Cheers Fiscal Insanity
SEC bans short selling on799 financial stocks
Peak Insanity (please read the email from "CS")

Markets hit the wall of reality

Too many things are happening and it is hard to keep the pace, as the financial landscape of the US is radically different today compared to only 2 weeks ago: The biggest american insurance company has gone bust, the two giants of the mortgage market have been nationalized, after the collapse of the 4th biggest broker dealer, the 3rd one has also disappeared, while the 2nd one, Morgan Stanley dropped as much as 40% today, and is rumored to be talking merger with Wachovia, another distressed bank which will probably go bust as well. Washington Mutual, one of the biggest retail bank in the US is desperately looking for a buyer and might end up in the hole as well. And these massive sell offs won't stop until the bank come clean on their balance sheet and stop hiding losses in GAAP loop holes like Level-3 assets or off-balances SIVs. It's quite simple, the market has lost confidence in these companies and their accounting principles, and wants them to show their hands and stop bluffing. If they have nothing to hide, then they should just show their cards. Otherwise, it gets even more suspicious, and generates further sell offs.

Bernanke surprised the markets by not lowering rates, which I interpreted as a willingness to not get naked immediately since things are getting worse and worse and also as a trade-off with the congress to bail out AIG. I turns out that I was right, and the market took off from -2% to finish at +1.75% within 10 minutes, the Russell 2000 doing better and going through the roof up to +3.75%. It was a very nice shorting opportunity, that I took :-)

Please read this post from Karl Denninger who is starting to get seriously worried by the actions of the Paulson/Bernanke duo, who have started the money printing presses. Read this post from Mish regarding the AIG bail-out as well.

Following the meltdown of the US financial system, and Paulson confirming that the US banking system is safe and sound, the vote of non-confidence in the US Treasury/the Fed/the US Dollar made the precious metals soar, as Gold is up $93 or 12% and Silver is up 16%. It's a good thing that I had loaded my portfolio with both for the past few weeks. Oil is also up almost 7% to $97.xx. Countries in the Middle-East are also working on their own monetary union, probably due to the lack of trust in the US Dollar and Government and that they don't want to import the US inflation in their countries anymore and seeking to break their peg to the USD:
Khaleej Times Online: Five of the six Gulf Co-operation Council members have taken a “significant progress” by approving a draft agreement for monetary union, according to a Dubai-based official Standard Chartered Bank

Other news of high interest:

Russian Markets Halted as Emergency Funding Fails to Halt Rout

Sept. 17 (Bloomberg) -- Russian markets stopped trading for a second day after emergency funding measures by the government failed to halt the biggest stock rout since the country's debt default and currency devaluation a decade ago.

The ruble-denominated Micex Stock Exchange suspended trading indefinitely at 12:10 p.m. after its index erased a 7.6 percent gain and plunged as much as 10 percent within an hour. The benchmark fell 17 percent yesterday, the biggest drop since Bloomberg started tracking the gauge in May 2001.

Nationalization of AIG

The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.

The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.

Contrary to what the market believed at first, it sounds like they are going to liquidate the company! This is not really a bail out, but of course, they will do their best to bail everybody (read the post from Denninger as mentioned above).

J.P. Morgan advanced $138 billion to Lehman

J.P. Morgan gave Lehman Brothers Holdings Inc a $87 billion advance Monday and a $51 billion advance Tuesday, according to a filing with the U.S. Bankruptcy Court of the Southern District of New York.

"At the request of [Lehman] and the Federal Reserve Bank of New York, and in order to avoid a disruption of the financial markets ... [J.P. Morgan] advanced [the money] to or for the benefit of Lehman in order to clear, and facilitate the settlement of, certain securities transactions with customers or clients of Lehman," the filing said.

The first advance was repaid Monday night, and Tuesday's advance was made at the request of both Lehman and the New York Fed, the filing also said.

J.P. Morgan "may elect to make additional advances," the investment bank stated in the filing.

The advances were secured by collateral, according to J.P. Morgan. It didn't say where the $138 billion came from, or whether it had access to a Federal Reserve window. A J.P. Morgan spokeswoman did not immediately return calls. A Lehman official declined comment.

Yahoo Finance:

Despite Morgan Stanley's (MS) better-than-expected third quarter earnings and revenue, the stock is down 17% in premarket trading. Yesterday, Morgan Stanley's credit default swap -- which is the cost to protect debt -- traded at 728. By comparison, Lehman Brothers' (LEH) swap traded at 707 before it filed bankruptcy. There is also concern with the TED spread -- the difference betwee three month Treasury bill and three month Libor -- spiking 30% to 2.83%, which is a higher spread than when Bear Stearns collapsed.

Morgan Stanley is on the hook and must come clean or else collapse...

The SEC issued a new short-selling rule, which will apply to all public companies. Rules are tightened, requiring a firm to deliver securities by the settlement date, according to reports.

The SEC is still trying to break the market efficiency and make us believe that the short sellers are bringing the companies down??? They should rather focus on doing their job and trying to catch the people who are making millions by propagating false rumors every day!

The Treasury is setting up a temporary financing program at the Fed's request. The program will auction Treasury bills to raise cash for the Fed's use. The initiative aims to help the Fed manage its balance sheet following its efforts to enhance its liquidity facilities over the previous few quarters. The news gives a boost to gold prices.

Ooops, the printing presses are starting.

Bank of America is also probably going to collapse, as the main story about the Merrill buyout, sponsored by Peter Schiff, is that Merrill and BofA are trying to get big enough to get to big to fail, otherwise who would be stupid enough to buy Countrywide and Merrill Lynch as I wrote? Here's how lucid and rational is the CEO of BofA:
When asked why he didn’t wait until Monday to get Merrill at a lower price, Bank of America CEO Ken Lewis stated “the strategic opportunity was so compelling it couldn’t wait.”

Mervyn King's Open Letter to Alistair Darling

Mervyn King, the Governor of the Bank of England has sent yet another letter to Alistair Darling to explain why inflation is about twice as high as the target of the BoE. Darling's ridiculous reply is available here.

He basically states that the rise of the prices is due to the plummeting value of the British Pound, which has lost 15% of its value in the past few months and rising costs of commodities. And that he expects inflation to be out of the target for at least a year.

He fails to point that the falling value of the GBP is due to the cut of the repo rate he made a few months ago and to the fact that investors are expecting further cuts and they know that neither Darling, nor Gordon Brown nor Merving King will have the political courage and the guts to defend their currency and will try to devalue their currency in the hope of getting more votes at the next election and save their own personal political career at the expense of the currency of their country and trading the future of the British citizens against a short sighted target (the ballot).

Merving King writes as if inflation was out of his control and that he couldn't do anything to prevent it, even though the only tool that can be used to fight inflation is the very tool that only the BoE controls: the BoE rate! Just raise the rates!

Darling/Brown and King are just playing a political game and gambling the future of their country. Shame on them!

Here's why cutting rates won't do any help but rather make things a lot worse:

• The very reason why we are in such a mess is that the rates have been kept too low for too long, creating the real estate bubble and the credit binge
• The UK citizens have the sad world records of both the biggest debt per capita across the whole world and the biggest dept per capita in the history. This is a two dimensional record that will hit the economy very hard and which also end in personal disasters.
• The UK imports most of the products and commodities it needs. Reducing rates will make the GBP fall further and hence increase the imported inflation while not having any upside.
• The UK doesn't have any productive force or industry. A falling GBP will not help export anything.
• The UK relies on foreigners across the whole world to do the low end jobs and the top end jobs. Most workers from Eastern Europe for example in the UK don't mind having low end jobs because it pays well compared to the income they have in their home country. Most people in the City are the same, but on the other side of the scale. They are the productive workforce of this country. They are now starting the leave, as I have seen reported many times and experienced among my colleagues/friends. Once it reaches the point very it's too late, the UK will understand how dependent it is the foreigners, but also how important it was to have a strong currency.
• The UK citizens need to save money, not spend more. Raising rates would help that.
• It won't work anyway, as shown in this Bloomberg report (this is a MASSIVE move):
  

  Sept. 16 (Bloomberg) -- The cost of borrowing in dollars overnight more than doubled to 6.44 percent, its biggest jump, according to the British Bankers' Association.

  The London interbank offered rate or Libor, increased 333 basis points from yesterday, the BBA said today.

So why will they lower rates? Because they are trying to reflate a real estate bubble that will only take longer to pop and cause more havoc. They somehow managed to convince people that borrowing for the rest of their lives to live in a one-bedroom flat 50 miles from their workplace is great and that houses should be unaffordable. This is the Great Con of the past several years. And now, people expect help from the government to prevent the house prices to collapse, at their own expense!

Actual people are getting bankrupt. Actual families are losing their homes. King/Brown/Darling are playing with the personal lives of their citizens for the benefit their own personal careers. This is just disgusting and sick.

Reckless spending by the US gov to continue

Reuters reports that the US gov is preparing a second stimulus package:

the $50 billion would add to a $168-billion economic stimulus enacted earlier this year, mostly in the form of tax rebate checks already issued.

The second stimulus program would also supplement other steps expected from the federal government in days ahead to boost the flagging economy and calm financial markets.

To the deflationists: Isn't stimulus checks sent back to the tax-payers and these kind of stimulus plans anything but money falling from the sky as Helicopter Ben Bernanke promised he would do to prevent deflation?

The Fed is also likely to lower interest rates very soon (this week or the following).

My guess is that the next bubble to pop is the US governments bonds. With a negative yield of -2 to -4%, who is dumb enough to "invest" in these securities? So I think we will going to see a major sell off sometime in the future (bubbles popping are almost impossible to predict and require an external and unexpected event to occur). But when it does, the US government yields will raise by many percent, which will also make it almost impossible for them to raise any money by selling bonds to the savers.

Once this happen, the most likely thing is that the government will still keep spending and spending, but they will have no other choice but to turn to the Fed. What does it mean? That the Fed will then print the money required to pay for this bonds and the inflationary feedback loop will be created.

Free market is a joke in the corrupt United Socialist States of America [Updated2]

So, here we are, the comrades Paulson, Bernanke and Bush have made it again. Free market doesn't exist anymore in the US... And here's why.

What do we need for markets to work efficiently? Confidence in every part of the whole. What do we have in the US?

• No confidence in the companies since companies that where fine a week ago are now bankrupt
• Corollary: No confidence in the auditors and accountants such as KPMG, PWC, Ernst&Young etc which helped the previous companies to commit fraud thanks to the lack of transparency of GAAP
• Corollary: When the GAAP changes the accounting principles or the date some new rules must get effective to save CitiGroup, you cannot have any confidence in the GAAP body neither.
• No confidence can be held in the rating agencies, which first rated triple AAA all the toxic waste and now fail to downgrade insolvent companies in order to try to save them.
• No confidence in the SEC, which fails to apply any regulatory law. The US markets are the new wild wild west and there's no Sheriff in town!
• No confidence in the figures from the US Government (unemployment, inflation, growth...)
• No confidence in the Government in general (Paulson and Bush are proven blatant liars)
• No confidence in the Fed (that's not new, but it's truer than ever, Bernanke being an incompetent, dangerous, liar).
• [UPDATE 2008-09-16] No confidence in the FDIC: FDIC Chairwoman Blair said banks are safe and sound, according to Reuters. Blair added that insurance funds for deposits will be adequate to absorb any losses. (From Yahoo Finance).
  

The $50 billion question is: Why would Bank of America buy Merrill Lynch for $50 billion and with a 70% permium over the last closing price, while is sure that today, the stock would have get crushed by 70%? BofA could have paid about $5 billion instead of 50. This is a total rip off of the share holders. BofA did the same with Countrywide Financial a few months ago. Does Bernanke keep in a vault at the Fed some very dirty material on Lewis? And hence for him to do stupid and dangerous buy-outs?? [UPDATE: The market doesn't seem to believe that this merger is going to happen as is, as shows the stock price of Merrill remained on the unchanged mark at $17. The Merger Arb funds are either out of the game because they are running out of fund or they simply don't believe in this announce.] [UPDATE2: Mish has a long article abou this deal]

One thing is for sure though, the Bernanke+Paulson PUT helped save the market from a collapse last week and this week. Why? Well, last week, Lehman, Wachovia, Washington Mutual, AIG, Merrill Lynch were all insolvent companies and well alive. The market still believed in a bail out in some form, and it looks like some are getting bailed out.

So last week, AIG which is the biggest insurance company in the world, dropped 46%. It is an insolvent company, as is probably Citigroup and General Motors. So the Dow Jones, which comprises only 30 companies, 3 of which are insolvent, one of which drops 46% in a week, the same week where Fannie & Freddie are bailed out with $200 billion of government injection and 4 to 5 trillion USD on the treasuries balance sheet, as well as Lehman's collapse, the Dow manages to rise 0.3%. And people talk about panic? This market is a joke, and everybody on the Street is simply waiting for Bernanke to lower the rates to 1% and Paulson to bail them out everybody.

During this week-end, the Fed decided that it had to inject far more money in the system and also took the liberty to allow the brokerage firm to get access to the funding (in violation of Federal Reserve Act Section 23A). They also decided that they would take anything on their balance sheet in order to provide liquidity to the banks. They normally have allowed to only take AAA rated bonds, but they are now taking any kind of insecure to toxic waste on their balance sheet in order to save their friends on Wall Street. This is the further the Fed has been since its creation, and they are now violating law.

Today, AIG is insolvent, but do you think that any rating agency will downgrade their rating (which would be fatal to AIG, but would be the right thing to do by the rating agencies)? No, they won't do it. [UPDATE: they finally did downgrade AIG. Let's see if they waited for the government to come up with a solution before doing so or not. Today is either the collapse or the bail out of AIG.] [UPDATE2: Mish on Fitch: AIG is flirting with bankruptcy and all Fitch was willing to do was downgrade it to "A". Fitch did not downgrade Lehman (LEH) from "A" until Lehman went bankrupt. The downgrade of AIG to "A" is further proof of just how useless Fitch's ratings are.]


Worse, Government is now intervening and begging the banks and the Fed to save AIG. On which grounds?
Here's a quote from the WSJ:
AIG has received permission from New York Gov. David Paterson to access as much as $20 billion in capital from its subsidiary companies to cover its day-to-day operating needs. (my note: this is illegal!)
"They can make a bridge loan to themselves," (my note: how does that sound?) Mr. Paterson said during a press conference Monday. He said the relaxation of insurance regulations came in response to a request from AIG. (my note: what AIG wants, AIG gets?)
[...]
Mr. Paterson said. "Hopefully we have cleared the way for the federal government" to provide assistance as well.

Now he wants the Federal Reserve, which doesn't have anything to do with the insurance companies and which is not allowed to lend them any money to lend them $40 billion, while AIG's market cap is $13 billion. They want to borrow 3 times their market cap! So the government is pushing the Fed to do an illegal and very dangerous act by lending so much money to an insolvent company.

But wait a second, the best is to come. AIG wants government/Fed funding while:

• AIG has rejected funding from 3 (not one, not two, three) private equity firms, because they would have got a controlling stake at the company (because the current board and CEO are doing such a good job that they want to stay where they are??)
• AIG has failed to get any funding from Berkshire Hathaway after meeting with Warren Buffet (why? because the company is so deep trouble that it's not worth pumping money it to it? Or because of the same reason as the private equity firms?)
• AIG paid a dividend in September (ex-date 3rd of September), of approximately $2.5 billion to his shareholders.

If you look at the action today on the market, you will find a lot of bullish attitude, the Dow and S&P rallying after market opened to approximately -1% while nothing but disastrous news hit the wires:

• Lehman fills for bankruptcy (This is the 4th biggest investment bank in the US)
• Merrill Lynch fails but managed to get bailed out by BofA (This is the 3rd largest investment bank in the US)
• AIG is insolvent and collapses (This is the largest insurance company in the world)
• WaMu and Wachovia collapse as well (These are major retail banks in the US)
• Capacity Utilization and NY Empire State Index collapse (and reach level far below market expectations)

With all this, the market manages to get a little -1.5% down 1 hour after opening?
When I read on the news that there's a panic, it makes me laugh!! Panic? Where?? The Bernanke+Paulson PUT is there.

Next step: interest rate cut to 1%. Probably this week or the following.

Market wrap up in a few tables

Draw your own conclusions about rationality and buy/sell opportunities

Fannie Mae -89%:


Freddie Mac -87%:


Lehman Brothers -77%:


AIG -46%:


Washington Mutual -36%:


Merrill Lynch -36%:


S&P 500 +0.75%:


Ford +11%:


General Motors +21%:

Gold vs Gold (Paper vs Physical)

Confusing paper trading with real physical delivery can be very misleading. And here's why.

There has been a huge drop in the price of gold (and many other commodities) for the past few weeks and gold has declined from $1,000 per troy ounce to about $750 (so a decline of about 25%).

The reasons of this drop remain to be found, here are some possible explanations (not mine):

• Government and Central Bank manipulation
• Bank manipulation
• Raise (huge rally) of the US Dollar
• Lack of momentum and interest from investors
• Decline in demand due to high prices ('Demand destruction')
• Sell off by commodities Hedge Funds to meet their margin requirements

My opinion is that the latter explanation might be the right one, and if you add some downward momentum to be exploited by speculators, you probably would reach the current levels.

The reason I reached that conclusion are twofold:
1) Gold futures market (paper gold)
One futures contract for gold has a notional of 100 troy ounces and on a typical day, more than 100,000 contracts are exchanged. What does it mean? That every single trading day, about 10 million ounces or 300 metric tonnes of gold for future delivery are exchanged. This is an unbelievably huge amount if you compare it to the to gold production of 2007: about 2400 tonnes or 80 million ounces. So basically, every single trading day, 15% of the yearly gold production changes hand, and obviously, in the end, a very small fraction of this is actually settled with physical delivery.

2) In the meantime, in the real world (physical market), there is a major shortage of gold available for investors:
Kitco Precious Metal Store (probably the biggest store worldwide):

The following products have been temporarily removed from our Precious Metal Store until further notice due to production and delivery delays that retailers are currently facing:

• 1 oz Gold bars,
• 1 oz Kitco Gold bars,
• 10 oz Gold bars,
• 1 oz Silver Eagles,
• 1 oz Silver Maples,
• 100 oz Silver bars,
• 1 oz Palladium Maples.

Basically, they've sold out of everything!!! Except the 1000 oz silver bars and the 1kg and 400 oz of gold. Not many private investor that I know can afford to pay between 14 k$ to 350k$ one shot.

Getting delivery of the physical in private-investor friendly way is becoming almost impossible. So you can tell me that I can always buy a futures contract and take delivery for it, but you would be being just a sophist. A single contract being for delivery of 100 troy ounces, it would mean $75,000 at current prices.

First impacts of wiping out the preferred stocks of Fannie & Freddie

E*Trade Financial:
E*Trade Financial declared today during a presentation at Lehman Bros (!!!) that their bottom line will be impacted by a $150 million loss due to Fannie and Freddie preferred shares.

AIG:
American International Group announced it has exposure to Fannie Mae and Freddie Mac preferred shares between $550 million and $600 million, according to Reuters.

Citigroup:
Citigroup Inc. said in a filing with the Securities and Exchange Commission Wednesday that its net exposure to Fannie Mae and Freddie Mac preferred shares had fallen 95%, to about $50 million, from the end of June to Monday as a result of sales, hedges and writedowns.

It said the holdings had resulted in a $450 million quarter-to-date hit but that the final impact for the period could be different.

Wachovia:
Wachovia Corp. said Tuesday it had liquidated its $509 million of government-sponsored enterprise preferred stock at a pretax loss of $171 million.

The sales were completed on July 21 - more than a month before the government takeover of Fannie Mae and Freddie Mac - and were part of the Charlotte company's effort to reduce leverage on its balance sheet, Wachovia said.

Gateway Bank:
Gateway, parent company of Gateway Bank & Trust Co., had invested $40 million in Fannie and Freddie stock as of June 30, according to its second-quarter report, released last month. Those investments are now worth $4.2 million based on the closing prices for those preferred shares on Wednesday.

Sovereign:
At June 30, 2008, Sovereign had eight securities totaling $622.6 million of perpetual preferred stock of Fannie Mae and Freddie Mac which had an unrealized loss of $34.4 million. The impact of the above actions and concerns in the market place about the future value of the perpetual preferred stock of Fannie Mae and Freddie Mac have caused values for these investments to decrease materially. It is unclear when and if the value of the investments will improve in the future. Given the above developments, Sovereign expects to record a non-cash other-than-temporary impairment on these investments for the quarter ending September 30, 2008.

City National:
City National Corp. has become one of the first Los Angeles bank holding companies to disclose its exposure to Fannie Mae and Freddie Mac in the wake of the mortgage giants’ takeover by federal regulators earlier this week.

The company said in a Thursday regulatory filing that it expects to take a non-cash charge of $12 million to $13 million in the third quarter.

The Beverly Hills parent of City National Bank said its perpetual preferred investments in Fannie Mae and Freddie Mac are included in securities available for sale at a cost of $23.6 million. They account for about 1 percent of its investment portfolio.

City National said it does not hold any common stock or other equity securities issued by Fannie Mae or Freddie Mac.

Old Mutual:
The chief executive of Old Mutual has resigned after the insurance company issued its third profits warning in three months and was forced to write down $135m (£77m) of assets in its US life business.

Jim Sutcliffe resigned after taking "personal responsibility" for troubles in the US business linked to the bail-out of US mortgage giants Fannie Mae and Freddie Mac, a source close to Old Mutual said.

Despite resigning, Mr Sutcliffe will receive a pay-off of £800,000 after offering to serve his one-year notice period. The board offered to pay him in lieu of his notice.

Bank of America:
Moynihan said Bank of America would need to take some marks in its holdings in Fannie Mae and Freddie Mac, which last weekend were taken into government control. He said: "Given the recent action surrounding the GSE's over the weekend, we're also going to have to take a mark this quarter against our preferred holdings in these entities." Bank of America has a notional exposure of less than $500m to the GSE's. Moynihan took over the corporate and investment banking division last October. He was previously president of Bank of America's global wealth and investment management business.

http://seekingalpha.com/article/94961-bank-exposure-to-freddie-fannie-securities-do-your-homework
The following examples of financial institutions and their exposure, as disclosed on or about July 20, 2008, should be noted and applied towards any financial security considered for investment.

Company $Exposure Pref. Debt. % of tangible equity
Wells Fargo (WFC) 480m 480m 0 n/a
Fifth Third (FITB) 68m 68m n/a 1.2
U.S. Bancorp (USB) 97m 97m 0 0.9
BB&T (BBT) 310m 0 310m 4.4
Sovereign Bancorp (SOV) 823m n/a 623m 14.5
M&T Bank (MTB) 352m 162m 190m 11.3
Synovus Financial (SNV) 100m 100m 0 3.4
Huntington (HBAN) 350m 0 350m 14.8
WestAmerica (WABC) 45m 0 45m 16.4%
Valley National (VLY) 70m 70m 0 9.2%
EastWest Bancorp (EWBC) 45m 0 45m 6.3%
Wilmington Trust (WL) 42m 0 42m 6.2%


Published on FT Alphaville (click for bigger image, not great quality though)


More is coming, don't forget: $40 billion has been wiped out, with a high yield, it was probably marked at $50 or $60 billion on the balance sheets. The Fed is probably pumping money like crazy into the banks and without our knowledge.

Finally, for the people who like to follow advices given by the idiots on Wall Street, or those who like to simply have a good lough: (ContrarianProfits.com)

Andrew Gordon says preferred shares in Fannie and Freddie still represent some of the best value to be had in the market right now.
This from Andrew in today’s Investor’s Daily Edge:
[...]
“Investors have been selling on all this speculation about what the government may do. But the Treasury Department isn’t giving out any details. So that’s all it is. Speculation. But the selling is driving the price down. And that just feeds on itself. Investors see the price dropping and that encourages more selling.”

Richard says, “I’m buying.”
[...]
The government won’t let Freddie and Fannie fail. That much is clear. That should have strengthened F&F in the eyes of investors. But it did the opposite. At least at first.

But investors are once again warming up to Freddie and Fannie. They went into the market in the past two weeks and raised a combined three billion dollars from the bonds they issued.

While preferred shareholders are still vulnerable, the basic fact about them is this: they represent a highly protected class of shareholders in a company that has the implicit backing of the U.S. government.
[...]
I believe that Wall Street has got this issue wrong.

For gosh sake, Paulson comes from Wall Street. He knows what’s at stake. He’s going to give F&F every chance to get back on their feet. And if he has to act, he will act to save the value of these GSEs – not kill it. If Wall Street wasn’t so quick to scare – God bless them – they’d have figured this out.

With preferred shares you get double-digit interest yield on an investment which also has the backing of the U.S. government – and that backing is much more explicit than it used to be.

Sounds pretty good, doesn’t it? On top of that, you get to buy these shares at over a 50 percent discount.
[...]
The risk-reward for preferred shares of F&F beat most anything else available on the market right now. They’re worth looking into.

A few facts: preferred shares are bought and sold on the major exchanges. They’re usually issued at $25 per share but F&F’s go for $50. As I said, they’re now being traded at huge discounts.

The Fed is long financials/short commodities

From FT Alphaville:

Conspiracy theory of the day comes from Donald Coxe, global portfolio strategist at Canadian bank BMO Financial Group.

He’s blaming the sell-off in commodities, the one that’s caused so much trouble for so many hedge funds, on a secret plan cooked up by the Fed. The Globe and Mail reports:

To understand why commodities are plunging now - the S&P/TSX plummeted another 488 points yesterday - you have to go back to mid-July, when the U.S. Federal Reserve and Treasury first announced steps to support mortgage giants Fannie Mae and Freddie Mac.

The move, which ultimately led to the Treasury taking control of Fannie and Freddie this week, touched off a chain-reaction of market events that culminated with the wrenching decline in commodities.

According to Mr. Coxe, the Fed’s ultimate goal was to trigger a rally in financial stocks, which would, in theory, help banks hammered by the credit crisis raise fresh capital and repair their balance sheets. To accomplish this, the decision to support Fannie and Freddie was deliberately announced on a Sunday, which had the effect of maximizing the reaction from thinly traded financial stocks on overseas markets.

Because many hedge funds were using massive leverage to short financials and go long on commodities, when North American markets opened and banks initially rallied, the funds were forced to cover their short positions.

At the same time, the U.S. dollar was rallying because the risk of holding Fannie and Freddie paper had diminished. The rising dollar, in turn, made commodities less attractive, giving funds that were already scrambling to cover their financial shorts another reason to dump oil, grains and other commodities.

The losses were swift and dramatic. On the Friday before the July 11 announcement, crude oil closed at $145.18 a barrel. Over the following five days, it plunged 11 per cent. “Leverage was being unwound dramatically,” Mr. Coxe said on a conference call last week. “We had a true panic.”

As oil and other commodities were tumbling, fears about the slowing global economy were mounting, giving resources another push downhill. This was also in keeping with the Fed’s wishes, because lower commodity prices would help quell fears about inflation.

Mr. Coxe has no proof that the Fed and Treasury acted in concert to boost financials and sink commodities. He is basing his assertions on conversations with hedge fund managers and on years of watching financial markets. “There’s no doubt whatever in my mind” about what happened, he says.

The future is less certain, however. Now that Freddie and Fannie have been nationalized, the credit crisis is still very much alive and financial stocks are looking as shaky as ever. As for commodities, once the current storm passes, Mr. Coxe is confident they will recover.

What would have happened if Fannie and Freddie defaulted?

In The Hidden Bailout of $1.4 Trillion CDS, Daniel Amerman explains what would have happened if the government didn't nationalize Fannie and Freddie:

The financial news of the day was that Fannie Mae and Freddie Mac were both unable to make debt payments and had defaulted on $5 trillion in bonds and mortgage-backed securities. With the US real estate market having fallen $4 trillion in the previous two years (non inflation-adjusted), it should have been no surprise that these two highly leveraged companies were not able to absorb the staggering losses. As this became clear to the markets, Fannie and Freddie lost the ability to borrow - which their survival was based upon - and actual default followed soon after. This default immediately triggered settlements on $1.4 trillion in credit-default swaps (credit derivatives), which had been entered into by major financial firms who had promised - in exchange for lucrative fee income - that if Fannie Mae or Freddie Mac were to default, these guarantor firms would make good on the defaulted bonds.

As the value of Fannie Mae and Freddie Mac debt plunged to 30 cents on the dollar, this meant that there was a 70% loss on the bonds (if one could find a buyer at all). This then triggered a call for settlement on the $1.4 trillion in credit-default swaps outstanding. Because the debt of the two former titans of the financial world was trading at a 70% discount compared to par value, this meant that total credit losses were $1 trillion ($1.4 trillion X 70% = $1 trillion). This meant $1 trillion worth of payments was due from the companies that had guaranteed the value of this debt, through their entering into credit-default swaps.

Settlement was triggered, but as the credit-default swap beneficiaries soon found out, collecting their settlements was an entirely different matter. The financial institutions around the world who had guaranteed Fannie and Freddie in exchange for lucrative corporate fee income (and multi-million dollar individual bonuses) were all highly leveraged themselves (indeed, weaker than the companies they were guaranteeing), and absolutely reliant on the day to day availability of large lines of credit and general borrowing capacity. As the creditors of these financial giants realized that a trillion dollar hit was barreling straight at them, they pulled their financing. Having to repay or replace these loans, without being able to sell massive portfolios of illiquid assets in a market suddenly devoid of buyers, left nearly every major investment bank and commercial bank in the United States and Europe unable to meet their obligations – even before settlement of their trillion dollar credit-default swap losses.

The failure of the major financial firms triggered another massive round of credit-default swap events, with amounts well over $10 trillion by Thursday, and over $20 trillion by Friday. By that time, however, no one was naïve enough to expect actual payment on those swaps, as Wall Street and the rest of the world’s financial hubs had all been insolvent since Wednesday. When the markets eventually opened for business again more than two months later, the official drop in the Dow Jones Industrial Average was over 10,000 points, meaning the index was trading at a level in the 1,000 – 1,500 range.

His conclusion?

In other words, the biggest beneficiaries of the $1.4 trillion Fannie and Freddie bailout were not Fannie or Freddie at all, but the Wall Street firms whose senior officers just happen to be major political contributors to both political parties – with some of those senior officers also running the Treasury Department on a revolving door basis.

It's definitely worth reading the full article.