While no names will be mentioned I will soon document receipt of a $10 Federal Reserve Note (while it still holds value).

You know I write about the Fed a lot. They are at the epicenter of the American and global economic and monetary crisis. These same elitist powers now want to take their act world wide. The Fed’s 100-year reign has all but ruined this country. Only a second American Revolution that totally dismantles this monstrosity and strips away the power of those behind its curtain will allow us to once again function according to our founding roots.

In late 2007 I proclaimed 2008 would be “the year of the bailout”. What a dummy … thinking just one year would suffice. Neither did I suspect bailout money would find its way overseas. What do you expect from a mere dentist?

The Fed is busy handing over trillions of dollars to well-connected US based cronies. The sum of present promises is close to $13 trillion and counting. These are monstrous commitments on yours and your children’s behalf. Please reply at the bottom of this piece if any of this money has found its way to your doorstep.

Fed digital-entry funny money has also been sent to France’s Societe Generale ($11.9 billion), Germany’s Deutsche Bank ($11.8 billion), Britain’s Barclays PLC ($8.5 billion) and Switzerland’s UBS ($5 billion). Yep, these foreign elite banks were provided these funds through the perpetual AIG bailout. The overall plan includes sending hundreds of billions of dollars in “currency swaps” to foreign banks. The blood boils.

You can also rest assured that we are at the mercy of many foreigners at this point. If China, Japan or Middle Easterners dump the Treasuries they hold or refuse to buy more, the Treasury market and the dollar will tank. Nothing like compromising foreign policy.

Why do you think the Fed sends this unfathomable amount of money to foreign entities?

1. They are charitable.
2. The global system is so fragile that no domino can fall.
3. Blood is thicker than water. Elitist connections rule. Period.

Could it be that the Fed bails out foreign entities because the Fed itself is largely a foreign entity? Home and abroad, the Fed takes care of its own first and foremost. You’d better protect yourself.

Source: Why is the Fed Bailing Out Foreigners?

• Manufacturing in the U.S. shrank again last month and consumer spending recorded an unprecedented sixth monthly decline in January. The Institute for Supply Management’s factory index was 35.6 in January; readings of less than 50 signal a contraction. Meanwhile, the Commerce Department said personal spending fell 1% in December, offering no sign the economy has hit bottom.

• Macy’s Inc. (M), the second-largest U.S. department-store company, said it is cutting 7,000 jobs, or 3.9% of its workforce after slashing prices failed to lure shoppers during the worst holiday season in 40 years, Bloomberg reported.  The retailer also cut its quarterly dividend to 5 cents a share from 13.25 cents.  Sales at stores open at least a year have dropped in 10 of the past 11 months.

• A majority of U.S. and foreign banks tightened lending standards to businesses and households over the past three months, despite government efforts to spur banks to increase lending, Reuters reported.  In its January senior loan officers report, a closely watched quarterly survey of lending conditions, the U.S. Federal Reserve said the number of banks that tightened lending remains “elevated.” The central bank also said demand for loans from both businesses and households continued to weaken.

• Renew Energy LLC, a closely held ethanol producer based in Jefferson, Wisconsin, filed for bankruptcy amid falling prices for the grain-based fuel and rising costs for corn, Bloomberg reported. Ethanol producers have idled about 1.8 billion gallons, or 16%, of total U.S. production capacity, according to the Renewable Fuels Association in Washington.  Ethanol plants were forced to reduce capacity in January as volatile corn prices hit profits.

• Morgan Stanley (MS) will cut about three to four percent of its work force, up to 1,880 people, Reuters reported, citing an anonymous source.  Most of the cuts will be in back-office jobs where trades are processed.  The broker has been struggling with spiraling costs and slowing business as stock market volatility has whipsawed investors since the Dow Jones Industrial Average peaked at over 14,000 in October 2007.

• Oil prices fell nearly 4% Monday as gloomy U.S. economic data darkened projections for energy demand. U.S. light crude for March delivery fell $1.60 to settle at $40.08 a barrel on the New York Mercantile Exchange. London Brent crude shed $2.06 to $43.82 a barrel, Reuters reported. News that union and oil industry negotiators in the United States averted a strike that would have cut fuel production put added pressure on oil prices.

• Steelcase Inc. (SCS), the world’s largest office furniture maker, said it will cut base salaries of its North American salaried workforce by about 5% and suspend matching contributions to its retirement plan for 2010, Reuters reported.  The company also will cut the annual salaries of its chief executive and chief financial officer, and its board members will take a voluntary salary reduction of 15% for one year.

Source: Global Investment News Briefs Tuesday, February 3rd, 2009

The decline of the global financial services industry from its unsustainable 2006 peak may produce a similar effect in a once economically thriving country – Britain.

Thirty years ago, Britain had its own rust-belt problems. The British automobile industry, a shining star until the Morris Motor Co.’s Lord Nuffield died in 1963 (remember 1959’s hot new model, the Mini?), was subjected to a series of government-directed merger deals in the 1960s, and the resulting mess, British Leyland, was nationalized in 1975, amid appalling losses.

The steel industry was nationalized in 1950, denationalized in 1954, and nationalized again in 1965; not surprisingly, the political football became a byword for high costs, strikes and inefficiency. Even Rolls-Royce Ltd., Brian’s premier high-tech company and maker of both luxury automobiles and aircraft engines, was effectively bankrupted and forced into public ownership in 1971.

In 1979, however, Margaret H. Thatcher became prime minister. Whereas her American contemporary, U.S. President Ronald Reagan, had little direct effect on U.S. industry, Thatcher had a huge direct effect on the shape of the British economy – she had little option, since the government owned so much of it. She forced British Leyland to shrink drastically, privatized British Steel, British Telecom and Rolls-Royce, and dramatically downsized British Coal after a yearlong face-off with the miners union.

At the same time, she deregulated the City of London’s financial-services business on a supposed “level-playing-field” basis, allowing foreign banks to dominate it and effectively putting the 200-year-old London merchant banks out of business.

Thatcher’s restructuring of British manufacturing, together with her tax cuts and government spending restraint, put Britain on a growth path that lasted a generation. Even after her Labour Party political opponents under Tony Blair gained power in 1997, growth continued, although government spending began creeping back upwards, and is now slightly above its 1970’s peak as a percentage of the economy.

Her restructuring of the City of London brought immense wealth to London itself, as huge global banks deployed increasing amounts of resources to growing their London-based international finance businesses. By 2006, London was rivaling New York as a financial center, even though the base of British domestic business was a fraction of that available from the giant U.S economy.

Traders, hedge fund managers, private-equity managers and dealmakers in general were paid fabulous sums. Since London residents were not liable to British tax on their non-U.K. income, the city also attracted footloose glitterati of all kinds, from the Indian steel billionaire Lakshmi Mittal to the seedier but immensely rich top members of the Russian mafia.

In the United States, financial services doubled its share of gross domestic product (GDP) and trebled its share of Standard and Poor’s 500 Index profits between 1980 and 2006; in London, the growth was even greater and its dominance of the economy more extreme. House prices, too, became far more overblown in Britain than in any but the most speculative areas of the United States.

The 2006 celebrations of the twentieth anniversary of the Financial Services Act of 1986, Thatcher’s deregulatory bombshell, rejoiced in London’s newfound wealth, sneered at the relative impoverishment of Britain’s provinces and missed one key weakness of the economy: Almost none of the major institutions generating such fabulous wealth were owned or headquartered in Britain.  When London-based “masters of the universe” wanted to speak to those controlling the huge amounts of capital they deployed, they had to pick up the phone to New York, Frankfurt, Paris, Tokyo or Dubai.

Now, the financial services business is in trouble. What’s more, the parts of the business in which London specialized are in most trouble. Securitization and derivatives were the two immediate causes of the credit crisis, while the 50% declines in the emerging-market stock markets have made the exorbitant fees of the private-equity and hedge-fund managers seem extortionate.

It is now abundantly clear that the financial services sector has incurred gigantic losses and that even when those losses have been subsidized by some unfortunate group of taxpayers, the sector is likely to end up being far smaller than it was. In fact, as a share of the economy the sector will probably end up being only a little larger than it was back in the 1970s.

For Britain, this has three appalling costs.

First, the assets of its financial services sector are around 400% of its GDP, below only the much smaller Iceland, Switzerland and Ireland and twice the U.S. ratio (and most Swiss banks were notably cautious in the bubble). Because of the importance of Britain’s financial sector, its bank bailouts need to be nearly as large as those in the United States, yet its tax base is only one quarter the size.

Second, the downsizing of financial services will produce an immensely damaging decline in British asset prices, particularly those of London and southeast England housing, in which so many middle-class Britons have invested their entire life savings (investing in the stock market is much less embedded there than it is here in the United States). That will have a further unpleasant effect on bank loan portfolios, pension and insurance assets and the British tax base, which will deepen the economic downturn.

Third, and most serious, since the British financial services sector is almost entirely controlled from overseas, there is very little long-term reason why it should remain in Britain. After all, it’s not as if London’s climate is particularly attractive except to aficionados, while its infrastructure is appalling.  The product areas in which London-based houses appeared to have a particular expertise have mostly been shown to be over-elaborate Ponzi schemes.

Even if the top management of a German, American or Japanese bank wishes to keep its stable of overpaid London financial whiz kids, it will have to deal with enormous shareholder and political opposition to do so. The Lehman Brothers Holdings Inc. (LEHMQ) bankruptcy, in which money was remitted at the last moment to the United States, so that London-based employees and creditors fared far worse than those in New York, is symptomatic of the “hollowing-out” process that is likely to continue for several years. Even the Russian mafia may find it prefers somewhere warmer.

Eventually, probably after a steep decline in the value of the British pound sterling and a major reorganization of the British economy, and at the cost of an enormous increase in British government debt, the inventive and entrepreneurial British will no doubt find new ways to make a living. In the meantime, I wouldn’t put my money there.

Source: Great Britain – The “Rust Belt” of Global Finance

Less than two months later, however, BofA sold $2.8 billion of its shares in the Beijing-based China Construction Bank, a jarring about face made necessary by the U.S. bank’s need to raise cash.

And Bank of America isn’t the only Western lender making such a move.

Just this week, the Royal Bank of Scotland Group PLC (ADR: RBS), Great Britain’s biggest government-controlled bank, sold its $2.3 billion stake in the Bank of China Ltd. (Pink: BACHF), the No. 3 Chinese lender – also because RBS needed to replenish its capital position. That stake represented 4.3% of the Bank of China’s outstanding shares.

RBS, BofA and UBS AG (UBS) – all early “strategic investors” in China’s biggest banks – have now each trimmed their investments in those banks, thanks to the expiration of restrictive “lockup periods.” UBS said last month that it had sold its entire 1.33% stake in the Bank of China.
More divestitures are expected.

“Undoubtedly, foreign banks will continue to expand their footprints in China,” Zhao Xijun, deputy director of the School of Finance at Renmin University of China, told The Wall Street Journal. “But they will be more focused on developing their own businesses, rather than buying a Chinese lender.”

Cash-strapped Western banks – desperate to raise money in the face of the worst financial crisis since the Great Depression – are paring their stakes in top China banks. That will bring in needed capital today but at the cost of lost future profits tomorrow in an economy that’s the world’s fastest-growing, and a market in which a burgeoning middle class figures to create all sorts of lucrative businesses for players with the ability to stay in the game.
On China’s end, the divestitures are forcing Beijing to reassess its strategy of using foreign know-how to assemble a world-class banking system.

Since 2005, foreign financial institutions such as Bank of America and the RBS have pumped more than $25 billion into Chinese banks as part of a high-dollar game of quid pro quo engineered by the Red Dragon’s regulators: Foreign investors would gain access to China’s banking market, and in return would show China’s banks how to make money in a free-market environment.

As these developments demonstrate, the global financial crisis continues to worsen, meaning the bailout strategies used so far haven’t had the desired benefit. BofA received a $15 billion infusion from the U.S. Treasury Department’s $250 billion “recapitalization” effort. The Edinburgh-based RBS received $29 billion in bailout money of its own after taking $10.2 billion in write-downs in 2008.

As a Money Morning investigation has demonstrated, many U.S. banks used bailout money to go on a global shopping spree, instead of retiring bad debts or boosting lending to businesses and consumers. The payback has been rather quick in some cases.

As the divestments have now demonstrated, the worsening financial crisis is forcing financial institutions to sell promising assets, and to do so at a point when the value of those holdings is probably at or near their nadir.

“For RBS, they don’t really have much choice,” Samuel Chen, a Hong Kong-based analyst at JPMorgan Chase & Co. (JPM), told Bloomberg News. “They would probably rather hold it.”

Indeed, as one analyst said, Western banks are selling out at prices where they should actually be buying.

“Although the selling by foreign strategic investors may put some short-term pressure on prices, bank stocks are undervalued given their long-term growth prospects,” Zhang Xi, a Beijing-based analyst at China Galaxy Securities Co., told Bloomberg News.. “Now is a good time to buy Bank of China and other big lenders.”

Goldman Sachs Group Inc. (GS) still owns 16.5 billion shares in Industrial & Commercial Bank of China, the world’s largest bank by market value, and has agreed not to sell the shares until after April 28, according to published reports. American Express Co. (AXP) and Allianz SE (ADR: AZ) are among the Commercial Bank of China’s other U.S. and European shareholders.

Source: The Global Financial Crisis Will Cost Western Banks a Share of Future China Profits

True, a big barrel of West Texas Intermediate crude oil might be hard to fit under a Christmas tree. And it’s probably a fire hazard. But it also makes an excellent end table or lectern. However, we would wait for the post-Christmas sale, or maybe even until 2009, for a lower price.

Speaking of Christmas, just a reminder that our third annual Doomer’s Ball is tomorrow night. The location is BLVD Bar, located at 6 Queensbridge Square on Southbank in Melbourne, from 6:30 p.m. until later. There will signs directing to the right room and even be a red carpet, we hear. If you’ve RSVPd, there will be a check in desk where you can pick up a name badge at your ticket for a free drink . See you then!

Today’s AFR reports that Australia has a funding gap. The credit crisis is causing foreign banks to pull up stakes, pack up their cash, and head back to wherever they’ve come from. The AFR reckons about $50 billion in lending will have to be replaced by Aussie banks.

Those banks, by the way, may not be so keen to make new loans. ANZ boss Mike Smith was in Melbourne Friday swinging the axe. Eight hundred heads toppled from their shoulders by the time he was done. If the banks do as good a job deleveraging their balance sheets, things might start to look better in 2009.

You’d expect job losses and a bad year for stocks to impact consumer confidence and spending habits. You’d be right. Australia had a $20 billion current account deficit in March, according to David Uren in today’s Australian. That was seven percent of Aussie GDP and pretty remarkable for a country in the middle of an export boom.

Now, though, consumers are rolling back their spending ways. The weaker Aussie dollar makes imports more expensive. The current account deficit has halved to 3.2% of GDP. This probably isn’t great news for retailers. But if household’s rebuild their balance sheets on savings, it’s not a bad development.

Over the long run, in fact, an increase in the savings rate increases the amount of credit banks can lend to businesses. Household savings are the source of bank deposits. And in a fractional reserve banking system, every new dollar deposited is multiplied into ten dollars that can be lent. If the banks are lending, that is.

Christmas has come early for Leighton Holdings (ASX:LEI). Dubai’s Department of Civil Aviation awarded Leighton’s Middle East operation a $1.3 billion airport contract. At $21.31, Leighton is not selling for much above its 52-week low of $18.68. It trades at just 10 times earnings. Is it a buy?

That depends on whether you think countries like Dubai are going to keep building and spending. Dubai has the money, generated from the oil trade. And it’s in the middle of an ambitious project to turn oil money into the capital stock of a new economy, via tourism, finance, and trade. But it could also be just another example of the credit bubble.

Take away Western demand fueled by credit, and the world needs less oil. Ironically, this actually accelerates the rate of depletion in global oil fields. How? When a good falls in price, people tend to use more of it. The cheaper it is, the more you use it. But wait. There’s more.

While cheaper oil prices in 2009 accelerate the depletion rate by encouraging more use (and lulling us all into a false sense of oil security) they also discourage smaller firms from going out and finding more. The majors are always looking for oil. They have to constantly replenish reserves to match production, or the stock price falls. But what about all the other searchers and explorers. Will they keep looking for oil with the price at $40?

In America, Barrack Obama is already busy spending money America doesn’t have. And he hasn’t even officially taken office yet. Impressive. Obama is dusting off construction plans for bridges, highways, and schools that he says are “shovel ready.” That means all the blue prints and plans are drawn up. They just need men, machines, and money.

America doesn’t have the money. But that has never stopped anyone with a can-do attitude. Obama says we can’t worry about the deficit in the short term. Right. It doesn’t look like anyone has been worried about the deficit in America for a long time.

Dig a hole. Fill it up. We’re not sure where we heard that. Maybe it’s a Buddhist way of dealing with stress, and realizing…something. But we get the feeling a lot of holes are about to be dug across the world. And most of it will be paid for with borrowed money.

But who will be doing the lending? So many new government bonds are going to hit the market in the next year from the U.K. and the U.S. that you wonder if the world’s creditor nations aren’t starting to get a bit nervous. What happens if they balk? Interest rates should rise.

That’s not happening yet. Just the opposite. “Yields on two-, 10- and 30-year securities fell to the lowest levels since the Treasury began regular sales of the debt,” reports Bloomberg. And get this. The yield on three month T-bills is a sparkling 0.01%.

Hear that sound? It’s the sound of the bond bubble stretching to historic levels. Cover your ears.

Source:$40 Barrel of Oil for Christmas

That concern came into particularly sharp focus last week, when Switzerland’s largest bank, UBS AG, said it expected to write off a staggering US$40 billion in sub-prime losses.

So far, financial regulators have succeeded in preventing a widespread banking panic. The closest we’ve come to that nightmare scenario is in the United Kingdom, where the government nationalized Northern Rock Bank after a run on the bank by depositors last September. Not to mention last month’s mysterious acquisition by JP Morgan-Chase of Bear Stearns.

It remains to be seen whether regulators can continue to sweep multi-billion-dollar portfolio problems under the rug through expanded borrowings, selective capital injections, or further nationalizations. But if you have substantial assets in any bank – either abroad or in your home country – you don’t want to wait for the regulators to act. You should take action now to evaluate how safe your assets really are in your accounts.

The assets in your account at any bank are either on or off the bank’s balance sheet. If your assets are on the bank’s balance sheet, and the bank becomes insolvent, then your assets are at risk. Your funds may or may not be protected by a national deposit insurance scheme. If they’re not, you’re simply another unsecured creditor of the bank.

Assets that are on the bank’s balance sheet include checking accounts, savings accounts, money market accounts the bank operates, “unallocated” holdings of precious metals, and (at some banks) CDs. The basic operating account for a bank (called a current account, giro account, or other names) is also on the balance sheet. At offshore private banks, this operating account is the springboard for all other investments.

When you purchase securities – stocks, bonds, etc. – through your offshore account, the bank establishes a “safe custody” account for these investments. Those assets are off the bank’s balance sheet. Precious metals the bank holds for you in “allocated” storage are also off its balance sheet.

Naturally, investments in safe custody are subject to market risk, but they won’t be affected if the bank becomes insolvent. However, if your offshore bank goes belly up, it will likely be part of a larger economic catastrophe that would decrease the value of any securities portfolio. Also, there may be a period of time where the securities an insolvent bank holds in safe custody can’t be traded.

I’ll be discussing additional ways to protect yourself from catastrophic losses in your bank accounts, both domestic and offshore, in an upcoming issue of The Sovereign Individual, the members-only newsletter for The Sovereign Society.

MARK NESTMANN, Privacy Expert &
President of The Nestmann Group
www.nestmann.com

The first true credit default swap was carried out as late as 1995, although various types of credit protection derivatives existed earlier. Its structure is similar to an ordinary interest rate or currency swap transaction, and the CDS market is covered by the International Swaps and Derivatives Association Inc.

Under a CDS, a bank originates loan to a company. A second bank (or other financial institution) can agree to cover the credit risk for the loan, by agreeing to make payment to originating bank if the company defaults on the original loan. The originating bank pays a small insurance premium to the second bank for assuming the risk of the loan.

Typically, payments under a CDS would only be triggered by the company’s failure to pay interest or principal on its debts due to bankruptcy or some other severe liquidity issue. But there are a host of intermediate or special cases that will doubtless provoke lawsuits when something goes wrong (CDS being a new market, it is by no means “recession-proof”).

Credit default swaps were sold to the world as hedging transactions. Investors were told that they were simply transfers of risk, so that banks that made loans could transfer credit risks to insurance companies, which did not make loans directly, or to foreign banks that could not easily make loans in the U.S. market.

And if an originating bank sells its loan exposure only once, and sells it to a financial firm of undoubtedly solid credit, the CDS does indeed act as a hedge for the originating bank; it transfers the company’s credit risk from the bank to the financial firm that bought its CDS.

But the product did not work as advertised.

Enter the Traders

Salesmen and traders took over, and expanded the volume far beyond what was required for hedging.

After all, bonuses depend on the volume of business. Therefore, bank traders sold the credit risk of a loan not just once, but as many as 10 times. And they sold it not to solid banks and insurance companies, but to three solid banks, one solid insurance company, three dodgy brokers and three hedge funds. Then the traders went out and sold other CDS products that were not even related to actual loans on the books, but to imaginary indices of credit quality in the “widget” industry.

The credit risk of the system was hugely multiplied.

Instead of one $10 million credit risk loan, there are now ten $10 million credit risks on just one loan.

• Three on solid banks – but will they stay solid?
• One on a solid insurance company – probably OK.
• Three on dodgy brokers – who knows?
• And three on hedge funds – probably not OK in a real downturn.

The total credit risk in the system has been increased from the original $10 million loan to somewhere between $160 million to 200 million, depending on whether the banks and insurance company are financially solid.

Of course, a lot of those credit risks offset each other, so that if the company that took the loan goes bust, the only risk to the bank that sold all those CDS is to the profits it expected to make. But since it probably hedged those positions against others, if the company does go bust, and dodgy brokers and hedge funds stop paying up, the total losses in the system from that company’s credit risk are likely to be a substantial multiple of the original $10 million loan.

But please don’t think I was exaggerating when I said as many as 10 credit default swaps got sold for each loan.

The U.S. commercial loan market is worth about $5 trillion, yet the volume of CDS outstanding is currently no less than $50 trillion. In other words, a huge number of traders, salesmen and quants have been making money off this product, without any real “hedging” rationale at all.

And it all worked fine while the volume of defaults remained low, which is why the market expanded from $2 trillion to $50 trillion between 2000 and 2007.