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But... but... didn't they say that it was contained?

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Looks like they only made the problem orders of magnitude larger...

 

http://www.bbc.com/news/business-28260172

 

 

Portugal's central bank has sought to steady investors' nerves by stating that Banco Espirito Santo does not need extra funds.

Banco Espirito Santo itself has said it has sufficient finances to deal with its parent company's debt problems.

Worries about the financial strength of the bank's parent company hit global stock markets on Thursday.

The central bank said investors had "no reason to doubt" the security of funds, and savers had "no need to be worried".

 

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good to see you

 

but they will print and bailin for as long as they can get away with it

 

and judging by the amount of zombies in the world they will probably get away with it for a while yet

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Thanks Cg - hope you are well.

 

I remember back in 2007 or so thinking that we had one more economic cycle to go - looks like we're reaching the end of it. And I'm having conversations about the vast quantity of money that is around looking for a home - just like in 2007. Not sure how much longer there is, but things are beginning to look terminal now.

 

Any thoughts on the sequence of events to come? - lots of talk of France next, but could be anywhere...

 

And timescales? difficult to tell - even unstable systems can remain unstable for some time...

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http://investmentwatchblog.com/clubmed-bank-failures-more-on-the-way-were-going-to-pay/

 

CLUBMED BANK FAILURES: MORE ON THE WAY, & WE’RE GOING TO PAY

Following the difficulties of Banco Espiritu Santos in Portugal ..... the Spanish government issued a retroactive tax on bank deposits there ...... I wonder if the Government in Madrid gave much thought to the illegality under the Lisbon Treaty of retroactive legislation?

.....with Portugal so joined at the hip fiscally and economically to Spain, this may yet turn out to be the start of Something Big.

 

Over the seas to Italy, ... the .... finance minister.... pointed out that the time has come for Italy’s pension providers to invest “spontaneously” in the future of the Italian economy.....

 

......there was ‘concern that dictating to pension funds what they should invest in was equivalent to privatising them’.......

 

The UK’s trade deficit increased from £2.1bn to £2.4bn from April to May..... Britain is, in reality, the ultimate sick man of Europe….

 

 

 

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Any thoughts on the sequence of events to come?

 

Draghi's bluff is in the process of being called.

 

1. Bank trouble at the periphery (Bulgaria, Portugal, etc...)

2. Market jitters (just starting)

3. Run to safety, spreads widen, global markets crash

4. Major institution insolvency

5. First bail-in attempt leads to full fledged panic and bank runs

6. Forced bank holiday

 

Exact timing is unpredictable but the fuse is already burning. 2007-2009 will look like a walk in the park. Expect mass protests and draconian restrictions as a response.

 

 

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All true and Timely, CG.

(welcome back!)

 

And yet...

Here's one keen observer who claims: "Europe is in Better shape ... than the US."

=

LISTENING to this now...

( It just gets better and better as it goes on - he sees thru the Bullfeathers)

 

Caravan To Midnight - Episode 86

Charles Coppes with IDP Consulting Group

About "THE REAL MESS that the US is in... and Elite strategies"

 

http://www.youtube.com/watch?v=FlXhdsJIV_c

 

Coppes wrote / revised a new book on finance markets

 

"When you point a finger (as the US does), there are three pointing back"

"That is: Standard&Poors, Fitch, and Moodys"

"The US is in worse shape than Europe - They are the biggest economy."

 

"If the SDR is to follow the US Dollar, they will need a big bond market (to invest in)"

"Europe has that."

 

"Cloward-Piven strategy is being implement... TO OVERLOAD the US welfare system*"

"Obama is just and empty suit. The shadow secret govt, is running things."

"TPTB want to merge the US, Canada, and Mexico... hence the immigration."

 

*With claimants, in an effort to destroy traditional US Values, and create socialism:

http://www.greenenergyinvestors.com/index.php?showtopic=19240

=

 

So what do we do?

Say: forget the US Dollar, forget the Euro... and Buy Gold (and Silver) ?

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Thanks for replying CG.

 

The sequence sounds reasonable. I'm expecting complications in the way countries respond to the crisis - in that they will try a given solution that worked before (even though it only resulted in delay), and then the system will be surprised when that solution blows up in their face...

 

 

All dreadful, of course. I hope you're in a stable place. Part 5 will probably get messy (people will be complacent because everyone was bailed out 'last time', then there will be a madness when it is realised that it really is different this time - dangerous).

 

[CMJ - interesting last line - I have been hearing strange noises regarding the 'strength' of the pound. Doesn't look particularly good]

[also, in an aside to your last post - it seems that people are wanting to get out of Germany. Hmm]

 

[DB - dunno about gold and silver. re. 'the crisis' I almost expect the reverse of 'last time' - prices remain stable (or even drop a bit in expectation) up to the last minute, then when the crisis is clear the prices spike higher. I'm buying at the moment, though. We'll see...]

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Yeah, okay DGul, it is likely to be different... Bank bail-ins, a possible new factor

(if so, you do not want to keep bank deposits... except maybe in local HK banks?)

 

1. Bank trouble at the periphery (Bulgaria, Portugal, etc...)

2. Market jitters (just starting)

3. Run to safety, spreads widen, global markets crash

4. Major institution insolvency

5. First bail-in attempt leads to full fledged panic and bank runs

6. Forced bank holiday

 

I am also monitoring PUTS on Stocks:

xx

 

... and Bonds / Calls on TBT (2x Bond Bear):

http://www.greenenergyinvestors.com/index.php?showtopic=19200

 

Chinese, and other rich foreigners, seem to be "banking" money in US property.

Personally, I do not think that post-Coup-D'Etat USA is safe anymore

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An interesting story...

 

Of Insider theft ?

To cost Billions ??

That has to come from someone ...

 

SOFIA, July 11 (Reuters)

- Bulgaria is to allow its fourth-biggest lender to collapse but could spend up to 2 billion levs ($1.39 billion) making sure customers do not lose out, as the Balkan country battles to clean up its worst financial scandal since the 1990s.

The central bank said it was removing Corporate Commercial Bank's (Corpbank) banking licence and would hive off its healthy activities into a separate bank, marking the first banking collapse since a 1996-1997 domestic financial crisis.

The Bulgarian National Bank (BNB) is also alerting prosecutors to the possibility that Corpbank's main shareholder stole almost 206 million levs just before the central bank took over its operations on June 20 after depositors withdrew about 1 billion levs.

The bank run was prompted by media reports accusing top shareholder Tsvetan Vassilev of shady business deals. It spread quickly to another lender, forcing Sofia to set up a protective $2.3 billion credit line for its banks - a reminder that parts of Europe's financial system are still far from secure despite progress from the worst days of the global financial crisis.

. . .

The cost is so high because the authorities have vowed to repay all of the bank's depositors except those linked to Vassilev. Corpbank's financial statements show that depositors were owed almost 6 billion levs on March 31 - and since the bank may not get repayment on much of its loan books it has a substantial gap to fill.

The BNB has not provided any figures more recent than that financial statement, nor said what proportion of the deposits were linked to Vassilev. It has said that prosecutors will have to determine whether his withdrawal of 206 million levs via a third party amounted to theft.

Orlin Rusev, chairperson of the bank's management board, was detained in Bulgaria's Black Sea resort of Sozopol on Friday in relation to Vassilev's withdrawal of funds, prosecutors said. A second executive at the bank's treasury department, Margarita Petrova, was charged with embezzlement in relation to the same withdrawals on Thursday

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Derivative Risks are still being mis-understood and exaggerated.

An example follows - there are some interesting points, such as the comments about Christine Laguard's numerlogy

- but they do not seem to "get" how derivatives work

 

TRUNEWS 7/2/14: Marshall Swing : "Derivative Collapse of Biblical Proportions Coming"

 

= https://www.youtube.com/watch?v=JjxNb5Pr5vo =

 

"Watch the Derivatives. When you see them collapsing, ... they may bring down the World Financial System."

(they talk speaking detail about 29-30 minutes in)

"1 quadrillion to 1.5 quadrillion of derivative risk... 100 times as much paper risk... Tentacles that reach into every sector... They took on bets that looked good. Tentacles go through entire financial sector... A domino effect, that will collapse the entire system..."

 

It is the language of fear, without deep knowledge backing it up.

 

 

Here was a good comment from under the Video about Derivative Risks

 

G---- F-- :

=======

Rick, you and your guest could use a decent primer on how Derivatives actually work. They are not "strange" risks at all. Nor are most of them as complicated as you might imagine. They are not "strange" risks at all. Nor are most of them as complicated as you might imagine.

 

Here's a quick explanation in a nutshell: A Derivative is a "Bet", where the final value to be paid is DERIVED from a financial price. Typically, no money changes hands on day one, only at the maturity dates. The two sides might "bet" on the price of a financial instrument on a series of dates, including for example, the S&P-500 close on Dec. 31, 2014. If the agreed price is 2,000. Then, one side pays the other if the price is above 2,000 - and the other side will pay if it is below 2,000. The size of the payment, depends on the size of the bet. So if the bet made is: $1,000 a point. and it closes at 1,900 : then the Winner gets: 100 x $1,000 : that's $100,000 from the Loser. Here are some things you need to understand:

 

1/ The bets are self-liquidating. They end at the maturity date, or at the series of maturity dates, since many derivatives have a series of bet settlements over a period of time, such as the end of each quarter.

 

2/ If the price settles at the pre-agreed price (2,000 in my example), then NO MONEY is paid on that settlement. Since there is no winner or loser. The main point is the risk goes down over time, settlement-by-settlement.

 

3/ The numbers reported in the press are typically the FACE AMOUNTS of the bets : 2,000 x $1,000 = $2 Million in my example for that settlement. The Face Amount is usually a huge, huge, exaggeration of the money that will ever need to be paid after expiry.

 

4/ Bets in both directions may offset each other, so if Bank X is the loser on bet A, with Bank Y, then they may be the winner on bet B with bank Y settling the same day - and only the Net amount: A-B needs to be paid. Can you see now how the numbers in the press are often outrageous exaggerations - and are almost meaningless. That is not to say these instruments are without risk - there are many real risks - but the usual press article or internet story is usually horribly misinformed. I understand derivatives, and cringe when I read the articles.

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But Dr B, those derivatives are only self cancelling if the chain is intact.

If a major participant goes belly up, you can end up with uncovered positions.

Eg if you have a 100 contracts to sell at $1.20 by Nov

and you also have 100 contracts to buy at $1.10 by Nov

what will happen if the other party to say, 90 contracts to buy your $1.20 by Nov, goes bankrupt?

 

You'll still have your 100 contracts to buy at $1.10 by Nov

but only have 10 contracts to sell at $1.20

 

Your exposure is quite different in that scenario, no?

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CMJ vs DrB - presumably the truth lies somewhere in between - the question then being whereabouts in the space between total face and net. I find it amazing that in only a few years we've forgotten AIG - that was bailed out, but will it (or the equivalent) be bailed out 'next time'. Indeed, this is my current zeroth assumption - that whatever worked last time will be tried again, but will fail (and make things worse), for reasons that are obvious in hindsight but are cloudy now. The questions then become - what will be the failing institutions next time, what will 'they' do to stop the problem, where will the ultimately successful solutions come from.

 

[and there will be successful solutions - the problem is they might not be regarded as successful from the point of view of, say, the UK]

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But Dr B, those derivatives are only self cancelling if the chain is intact.

If a major participant goes belly up, you can end up with uncovered positions.

Eg if you have a 100 contracts to sell at $1.20 by Nov

and you also have 100 contracts to buy at $1.10 by Nov

what will happen if the other party to say, 90 contracts to buy your $1.20 by Nov, goes bankrupt?

 

You'll still have your 100 contracts to buy at $1.10 by Nov

but only have 10 contracts to sell at $1.20

 

Your exposure is quite different in that scenario, no?

 

 

I think the phrase used was that derivative exposures "are Self-liquidating", by which is meant: the size of the exposure gets smaller over time, as expiry dates on individual tranches are reached, at the end of each quarter, or whatever.

This means, only a small portion of the exposure from 2007-8, would still be left on bank books. There is no huge loss exposure out there waiting to be discovered. The losses and profits have already been paid. New exposure, at new prices, has been added, and it is reducing over time too.

 

Most banks will have derivative exposures both Long and Short on any particular underlying risk. So if they default, they will have gains and losses.

AIG was a rarity, since they had a unique model, and so were valuing their risk wrong, and hedging poorly, and wound up on the Losing side of many trades.

 

I don't get your example...

They are not like debt instruments, no money is collected or owed unless there is a big price move - i.e. they are typically contracts for differences. No money changes hands on day one (for non-options). The amount due at maturity, if any, will depend on how far the settlement price is away from the original trade price. If you give me a clearer example, I will be able to comment better. Think of a specific type of asset - ie the underlying price - it may then be more clear...

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CMJ vs DrB - presumably the truth lies somewhere in between - the question then being whereabouts in the space between total face and net. I find it amazing that in only a few years we've forgotten AIG - that was bailed out, but will it (or the equivalent) be bailed out 'next time'. Indeed, this is my current zeroth assumption - that whatever worked last time will be tried again, but will fail (and make things worse), for reasons that are obvious in hindsight but are cloudy now. The questions then become - what will be the failing institutions next time, what will 'they' do to stop the problem, where will the ultimately successful solutions come from.

 

[and there will be successful solutions - the problem is they might not be regarded as successful from the point of view of, say, the UK]

 

AIG got into trouble, because they thought they were the brightest guys in the room - but in reality were foolish clowns, not managing or measuring their risk sensibly - bonuses were collected by bozo the clown. Had they been a bank, the (experienced) bank auditors would have caught the flaw in their models. As it was, they built towers of risk, which all collapsed at the same time.

 

The US Treasury and Fed negotiated poorly. They should have forced a haircut on AIG's counterparties in return for the guarantees. But Paulson's game was saving GS, not doing what made sense for America and the markets. He is a villain, and probably belongs in jail, and certainly in low esteem everywhere. (I disrespect you, Hank!)

 

BTW, the US eventually got all its money back on AIG, but the amounts were way bigger than they should have been.

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Let's consider what happens with 2 silver contracts that close out this month

[Please note that I know nothing about silver derivatives and little about derivatives]

I have a contract to buy 100 oz of silver at $20.50 an oz

And another to sell 100 oz of silver at $21.00 an oz

If you set the 2 contracts against each other, I should get 100 X $(21.00 - 20.50) = $50 at the July expiry date.

What would happen if the party which sold me the contract to sell him 100 oz silver at $21.00 goes bust just before the expiry date?

 

You don't even have to look at the situation on expiry.

What if you hold a bunch of derivative contracts and the counterparty to some of those goes bust in the most spectacular manner.

You are then stuck with worthless bits of paper which if the other party was viable, would have offset your trades.

Isn't your exposure very different the day after the counterparty goes bust than the day before the bust?

Actually you probably don't even have worthless bits of paper to wipe your butt with as it's all digital!!

LOL!

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Ha! The point of bringing up AIG wan't to say that specific problem will happen again, but rather that it did happen, and that most people didn't think anything like that could happen.

 

I happen to agree that the predictions of disaster based on total derivative positions are way overdone.

 

But with reference to the op message, I fear that future problems will exist at the state rather than bank level. I'm still trying to work out where the risks lie.

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Let's consider what happens with 2 silver contracts that close out this month

[Please note that I know nothing about silver derivatives and little about derivatives]

I have a contract to buy 100 oz of silver at $20.50 an oz

And another to sell 100 oz of silver at $21.00 an oz

If you set the 2 contracts against each other, I should get 100 X $(21.00 - 20.50) = $50 at the July expiry date.

What would happen if the party which sold me the contract to sell him 100 oz silver at $21.00 goes bust just before the expiry date?

 

You don't even have to look at the situation on expiry.

What if you hold a bunch of derivative contracts and the counterparty to some of those goes bust in the most spectacular manner.

You are then stuck with worthless bits of paper which if the other party was viable, would have offset your trades.

Isn't your exposure very different the day after the counterparty goes bust than the day before the bust?

Actually you probably don't even have worthless bits of paper to wipe your butt with as it's all digital!!

LOL!

 

Okay - Let's talk about Silver.

First, let me tell you I used to RUN commodity derivatives businesses for two big banks.

Think Blythe Masters. My job would have been like reporting to her, running a business in a major location.

Or, in another case, splitting her job with another individual. Yes. I was pretty senior. And I used to do business

with her husband (ex-Husband?), before she came on the scene as a junior person.

 

I wasn't running the silver business, since Gold and Silver, were a separate business from what we called Commodities.

Most of my business was Oil derivatives, with some Natural Gas, and a few other commodities transacted occasionally.

In my days, we were not handling physicals, everything was cash-settled, no barrels of oil changed hands.

We were dealing only in PRICE-related contracts, and my comments here will come from that perspective.

 

Okay, so you have Two Contracts:

 

+ You Bought : 100 ounces of Silver at $20.50 - Face Amt.: 100 x $20.50 = $2,050, and:

+ You Sold --- : 100 ounces of Silver at $21.00 - Face Amt.: 100 x $21.00 = $2,100,

= Book Profit- : $21.00 - $20.50 = $0.50 x 100 = $50

 

You asked what happens when the party that bought Silver at $21 goes bust and cannot perform.

 

Let's examine that situation in two cases: Silver rises to $25, and Silver falls to $15...

 

Remember the Nature of these derivatives contracts is: They are cash-settled contracts for Differences. So no money has been paid up front, and no Silver was delivered. So the only payment, will be when the price difference has been determined, and then the Loser will pay the winner the difference. If a party goes bust, it may go bust with a profit, or with a loss, as we shall see.

 

So at the $25 settlement price, you are owed $25.00 - 20.50 = $4.50 x 100 = $450 from the Party from whom you bought Silver. Let's assume that party is solid and pays you - so you collect your profit. You also owe the busted party $400. They may owe you that amount on other trades, and so you can offset that amount against what they owe you from other trades. Depending on the nature of the contract, and default provisions, then you may owe that $400 to a bankruptcy court, or you may even be able to escape from paying it altogether. The main point is: Since you will the LOSER on the trade with the defaulting party, you are no worse off when they go bust. The only money due was from You to Them. They owe you nothing on a trade where you were the loser.

 

At a $15 settlement price, you owe $20.50 - 15.00 = $5.50 x 100 = $550 to the Party from whom you bought Silver. You will have to pay that on Settlement date, since they are not in default. You expected to have a $50 profit on that date. But now you have a loss instead, because the busted party has defaulted. If you are lucky, you may reclaim some of that loss from other trades with the same party, or through a bankruptcy court, if nothing is left.

 

Here's another consideration: Before your buyer of Silver goes bust, there are usually warning signs, and if you are smart you will not sit passively and just wait from them to go bust. You may enter trades to close off or hedge the risk. (And that is what banks did in 2008.) So if the price is $21, and that is breakeven on the trade, you may buy Silver at $21.00 to effectively close that trade at breakeven, and eliminate the possibility of a loss. Or you may even enter a new trade, Buying Silver at $20 - to limit the Net amount they owe you to $1.00, so that it will not go to some bigger number.

 

The main point is: No Money changes hands until settlement. And the likely losses, if any will be far, far less than the $2,100 Face Amount you have reported on the trade. The Press is running around with its hair on fire, talking about huge amounts of derivative exposure, without having a clear understanding of the actual risk. I have even seen people write about "Derivative Loans". WTF is that ? I think it is a made-up term, designed to scare people.

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OK.

I think I understand that.

Thank you for the explanation.

 

That's good.

What do you make of all those ill-informed folk, wanting to blame a future financial crash on derivatives?

My opinion is, they are looking in the wrong place.

 

FEAR is a dangerous thing. It can get triggered even when there is little to Fear. Then, as FDR said:

"The only thing we have to FEAR, is Fear itself !" That's how I feel about a possible derivatives panic.

 

There are real risks out there (Solar flares? Nukes in 25 cities? Over gearing of risky assets?) more deserving of our concerns

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Following is Typical of the confused garbage you will read in the press, or online...

 

NO, Marilyn, CDO's are NOT Derivatives !

They are securities, where money is paid upfront

(they may however contain a derivative, or be tied in with one)

 

She needs to go back to school, and unravel her confusion

 

What are Derivatives ? »

toxic_derivatives-55x55.jpg

Marilyn MacGruder Barnewall -\

"Derivative investments also allow product developers to create securities that do not actually exist. they mimic real securities but do not…"

Part 4: US Debt Obligations Known as CDO’s, aka Derivatives

When one invests in derivatives

(?? You don't "invest" in derivative in the transaction - you mighty invest in a CDO, which contains an imbedded derivative),

two entities are betting: The broker and the investor. Sometimes, the broker is betting against the investor to whom he is selling the derivative. If you doubt that, check out stories about Goldman Sachs being fined for doing exactly that.

Derivatives are synthetic. “Synthetic” means artificial. It means unreal, non-genuine.

(B.S.! They are derivative, because the price is derived from and underlying asset, to which they are tied. The CDO is synthetic, not the derivative)

“Synthetic” means a thing made in imitation of something that is natural. Breast implants are a good example of “synthetic.”

In addition to being an imitation rather than an original, derivative investments also allow product developers to create securities that do not actually exist. What did I just say? You read it correctly.

Derivatives are imitations of a real investment… they mimic real securities but do not have to be real, and the security being mimicked doesn’t have to exist. If that doesn’t confuse you, nothing will.

. . .

That's enough...

She is horribly confused, and it is not worth reading !

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What do you make of all those ill-informed folk, wanting to blame a future financial crash on derivatives?

My opinion is, they are looking in the wrong place.

 

That is the point we should be exploring.

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I mentioned three already...

 

There are real risks out there :

+ Solar flares?

+ Nukes in 25 cities?

+ Over-gearing of risky assets?

... are more deserving of our concerns

 

Of course, the main problem is that low rates, have led to over-valuation of stocks

 

Somehow, the Fed managed to get liquidity to go into Stocks rather than Gold:

 

: Dr.B's Trading Diary : 2014, the Diary's 6th Year

 

The Fed's Racetrack: Gold (GLD) vs Stocks (SPY) ... update :vs.CRB : GLD-hr : SPY-hr : GLD/SPY-Ratio

 

FRT_zps81791064.gif

 

The Fed's money-printing has maintained confidence in markets - but the money has gone not only into stocks, but also into other areas.

Obviously, money has also flowed into commodities like Gold, pushing prices higher even faster than stocks, as the chart above shows.

 

 

Did manipulation (buying equities by Central Banks) HELP this to happen ?

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