The Straw That Breaks The Camels Back

The Greatest Bailout of All Time
We are now witnessing a rapid-fire 1-2-3 chain reaction of events that's leading to the greatest government bailout of all time ...

Event #1. In the mortgage market, where this crisis first erupted, nearly half of all subprime loans issued in 2006 are now delinquent ... late payments on mid-quality "Alt-A" mortgages have soared 41.5% ... and delinquencies on prime jumbo mortgages are up a staggering 55.2% in the past 6 months.

Event #2. At Fannie Mae and Freddie Mac, responsible for over half of the nation's massive mortgage market, losses are mounting so quickly — and so obviously — that even their supposedly "safer" preferred shares are crashing in value:

And all of this has happened just since May 15, a meager 102 days ago! All in two giant companies that were the darlings of Wall Street, the creation of Washington and supposedly among the most "conservative" investments in the world!

Event #3. At financial institutions across the country, these devastating losses in Fannie and Freddie paper are ripping through balance sheets like an F-5 tornado. That includes:

Sovereign Bank, the third largest savings and loan in the United States. In our "X" List video, we listed it as a prime candidate for bankruptcy because of its D+ rating and its big exposure to mortgages. Now, it's been revealed that Sovereign has a $632 million stake in Fannie and Freddie preferred shares — the same shares that have lost about two-thirds of their value just since May 15.

Hundreds of other banks and thrifts. They were encouraged by banking regulators to buy billions of dollars in similar Fannie and Freddie preferred shares. In fact, the regulators thought these investments were so reliable, they let the banks use them for capital that's required as a cushion against loan losses. They even allowed banks to take a tax break on 70% of these securities!

Countless U.S. brokerage firms, life and health insurers, property and casualty insurers. Some are in good shape. But many have loaded up with similar investments.
Major financial institutions overseas.

All assumed these shares were safe. All believed they were getting something akin to a government-guaranteed investment. All could be severely disappointed when they discover the truth.
http://www.moneyandmarkets.com/Issues.aspx?The-Greatest-Bailout-of-All-Time-2126

Final Test for Fannie and Freddie
How the crisis will play out from here is uncertain only as to timing rather than outcome. Exercising newly-granted authority, the Treasury Department will have to step in soon to rescue both agencies with an equity infusion because their stocks have shriveled to a combined market capitalization of around $7 billion. Ruinous dilution precludes their raising even $20 billion, let alone filling the $100 billion hole in negative equity that we estimate exists in their combined balance sheet.

...the government bailout would come in the form of a purchase of senior preferred stock with conversion rights that would effectively wipe out the existing common stock and a dividend priority that would choke off dividends to the existing preferred stock for some time, if not forever.

Even though the government last month made explicit for the first time its backing of all Fannie and Freddie senior debt, Freddie last Tuesday had to pay a record 1.13 percentage-point premium over the comparable Treasury on a five-year note.

But the real test for Fannie and Freddie will come over the next five weeks when, according to Barclays Capital, the pair will have to raise and roll over $225 billion of mostly short-term debt. An immediate rescue would be necessary should either agency run into problems raising the money.
http://online.barrons.com/article/SB121944478157364959.html?mod=googlenews_barrons

FDIC gets ready for bank failures
The FDIC, which had shrunk to 4,600 employees from 23,000 at the height of the savings and loan meltdown, has been gearing up for another wave of bank failures.

It's hiring 70 new employees and bringing back 70 retirees to beef up its teams that swoop in, usually over a weekend, to take over and reopen banks under new management.

The FDIC's Atlanta regional office, which covers seven states from West Virginia to Florida, also recently boosted its bank examiner and professional staff by about 10 percent, to about 300. The agency is also expected to soon raise the insurance premiums it charges banks and thrifts to begin rebuilding its reserves.
T
he FDIC won't discuss its projections, but it has been increasing its loss provisions for expected bank failures and adding institutions to its growing "problem" bank list. The list totaled 90 institutions with $26.3 billion in assets at the end of March. The confidential list is expected to be longer when the FDIC issues an update Tuesday.

"We don't predict numbers of bank failures," FDIC spokesman David Barr said. "We do realize that there will be more failures, but it's something that we can manage."
http://www.statesman.com/business/content/shared/money/stories/2008/08/fdic_0824_1.html

Silver Investors Sucker Punched by Two U.S. Banks
On August 5, exactly two U.S. bank’s net short positions for silver futures accounted for over a quarter of all 133,255 of the contracts on the COMEX. Two banks, whose identities are protected and kept secret from U.S. citizens by the rules of the CFTC, had taken an overwhelming net short position in silver (and in the process drove silver much lower in price) and these two banks were so sure of their silver-is-going-lower call that they increased their short positioning AFTER silver had already fallen over 9%.

It would be one thing if these two U.S. banks were merely part of a much bigger exodus out of silver metal; if the positions of these two unnamed U.S. banks were merely a small percentage of many commercial entities taking the short side. It would not raise the slightest question if two bank’s net short positioning was large if the overall commercial net short positioning for silver was much larger. But when we compare the net short positioning of these two U.S. banks on August 5, 2008 to the entire commercial net short position of all commercial traders on the COMEX, we find that these two unnamed U.S. bank’s net short positioning accounted for a sickening 60.95% of the entire silver commercial net short positioning on the COMEX.

Everyone can look at the data and form their own conclusions. But when silver is in short physical supply, commanding injuriously high premiums and difficult to locate; when investors are piling into the silver ETF in droves, a 40% silver price plunge is not only not warranted, it smells.

It is difficult to imagine a legitimate reason that two U.S. banks could quickly and systematically amass a net short position on the COMEX which amounts to over a quarter of the entire action on that bourse. It will not be surprising at all if we learn that these two U.S. banks are taken to task by regulators for their actions. It will be even less surprising to learn that they have become the target of multi-billion dollar class action lawsuits by hungry lawyers representing silver investors everywhere.

Futures markets are supposed to answer the actual physical markets, not the other way around. In other words, futures markets are supposed to be a place where producers or large holders of a commodity can lay off price risk to speculators and thereby hedge against unforeseen adverse movements in the price of the commodity. Futures markets are definitely not supposed to be a place where a couple of well connected and well funded entities can bully the market with their own heavy handed trading.

If silver really was just taken down by a couple of very big U.S. banks to irrationally low levels, it won’t be long before the laws of supply and demand reassert themselves. Got silver?
http://www.resourceinvestor.com/pebble.asp?relid=45611

Where’s the Gold?
Certainly the fundamentals of the economy relative to the price movement of gold have baffled every intelligent theory of pattern recognition postulated throughout the Internet that I’ve ever read.

If the U.S. Mint can’t get gold, yet the reported holdings of these central banks around the world can’t come up with enough to supply the sudden surge in demand, doesn’t that suggest that there’s severe discrepancy between the accounting of the central banks and the unfolding reality of no gold blanks? I mean, did the sudden surge in interest materialize while the CEO of the mint was having a burger somewhere?

I don’t recall seeing the sudden suspension of gold sales by any division of any mint during gold’s more meteoric price surges during 2006 and 2007. Gold has just come off one its most deeply corrective price drops of the entire 6 year gold cycle. Normally I would think that means that nobody is interested in gold anymore and so everyone is selling all they can. Obviously, I am dumb.

Supply and demand theory has clearly gone the way of the Edsel and some mysterious new economic force prevails – one that is not yet known to any save a special handful of (I must assume) carefully appointed individuals who are selected for their discretion and co-operative natures.

I expect the recent drop in the price of oil now portends that some major corporation must soon announce the suspension of gasoline sales, and the recent destruction in real estate demand means we’re running out of houses.
http://news.goldseek.com/GoldSeek/1219676400.php

Washington Post exposes CFTC's failure amid market concentration
The Washington Post story appended here is important for a couple of reasons.

First, it shows the incompetence, negligence, or corruption (most likely the latter) of the U.S. Commodity Futures Trading Commission, its failure to recognize excessively concentrated and thus manipulative positions in the oil futures market, just as the CFTC has failed to recognize even more concentrated and manipulative positions in the gold and silver markets.

And second, the story shows that a major news organization is taking some interest in the market manipulation issue.
http://gata.org/node/6517

Oil rises as tropical storm forms in Caribbean
NEW YORK (AP) -- Oil prices ended a choppy session slightly higher Monday, edging back above $115 a barrel after Tropical Storm Gustav formed in the Caribbean.

"The dollar wants to pull oil lower and the storm wants to pull it higher. It's a bit of a tug-of-war right now," said Phil Flynn, analyst at Alaron Trading Corp. in Chicago.

Gustav, the seventh named storm of the Atlantic hurricane season, was heading for the Dominican Republic and Haiti with maximum sustained winds of near 60 mph, but it was too early to tell if it would enter the Gulf.
http://biz.yahoo.com/ap/080825/oil_prices.html

National Hurricane Center
http://www.nhc.noaa.gov/