How Did It Happen and What are the Ugly Consequences?
By Matthias Chang3-10-9
The Federal Reserve is bankrupt for all intents and purposes. The same goes for the Bank of England!
This article will focus largely on the Fed, because the Fed is the "financial land-mine".
How long can someone who has stepped on a landmine, remain standing hours, days? Eventually, when he is exhausted and his legs give way, the mine will just explode!
The shadow banking system has not only stepped on the land-mine, it is carrying such a heavy load (trillions of toxic wastes) that sooner or later it will tilt, give way and trigger off the land-mine!...
... The land-mine has been triggered and the explosion cannot be averted under any circumstances.
The only issue is the extent of the damage to the global economy and how long it will take for the world to recover from this fiasco a financial madness that has no precedent...
The idea of a central bank going bankrupt is not that outlandish. ...What underlies this crisis ...is the potential collapse of the global banking system, specifically the Shadow Money-Lenders.
Nouriel Roubini, the New York University professor said :
"The process of socialising the private losses from this crisis has moved many of the liabilities of the private sector onto the books of the sovereign. At some point a sovereign bank may crack, in which case, the ability of the government to credibly commit to act as a backstop for the financial system including deposit guarantees could come unglued."
..."Sovereign bank" means central bank. When a central bank "cracks" i.e. becomes insolvent, "all hell breaks lose", because as the professor correctly pointed out, "any government guarantees will ring hollow and will be useless".
If a central bank goes belly up, it is as good as the government going bankrupt. Period!
In another article, Roubini ....wrote: "The US Financial system is effectively insolvent". It follows that if the financial system is bankrupt, it is a matter of time before the "sovereign bank" goes belly up. This is a given!
...So let us not kid each other: The $162 billion bailout of AIG is a nontransparent, opaque and shady bailout of the AIG counter-parties: Goldman Sachs, Merrill Lynch and other domestic and foreign financial institutions...
... that without such a bailout ...Goldman Sachs and every other broker-dealer and major U.S. bank would already be fully insolvent today.
"And even with the $2 trillion of government support, most of these financial institutions are insolvent,..."The disclosures underscore the challenges that the banks face as they struggle to navigate through a deepening recession in which all types of loan defaults are soaring.
"Kopff, the bank shareholders' expert, said that several of the big banks' risks are so large that they are "dead men walking."
...But what is overlooked by many financial analysts is that these very same derivative products have caused another financial organ failure. And there is no way that the said organ can be resuscitated to its former state of health.
...The gridlock of the repo market is the basis for my assertion that over and above the aforesaid dire financial facts, it is the major contributing factor to the bankruptcy of the Federal Reserve!
What is the repo market?
The repo market is the market whereby all financial institutions (regulated and unregulated) invariably go to obtain financing to meet reserve requirements, bridging finance, to lend or purchase securities, to hedge and or to invest on short-term basis.
It used to be that mainly US Treasuries (bear this in mind at all times) were used as security for Repo transactions, as it is considered as most secure i.e. as good as cash since it is backed by the credit of the US government!
This requirement is no longer the case. More of this issue later.
"Another sign of trouble is a 'repo fail'. A 'repo fail' occurs when one side of the agreement fails to abide by the contract. [Fail to deliver the security under the repurchase agreement.]
"Dealer banks would not accept collateral because they rightly believed that if they had to seize the collateral should the counter-party fail, then there would be no market in which to sell it. This was due to the absence of buyers because of the deleveraging. This led to an absence of prices for these securities. If the value cannot be determined because there is no market no liquidity or there is the concern that if the asset is seized by the lender, it will not be saleable at all, then the dealer will not engage in repo... As the crisis unfolded, this combination resulted in US government collateral becoming extremely scarce.  ...
I will now turn to the issue of the FED's solvency.
As has been observed, the Fed intervened aggressively to check the run on the repo market. Various measures were taken, but in my view the most dangerous was the widening of the collaterals which the Fed was willing to accept to secure funding of the players in the repo market. The Fed also intervened by lending a huge chunk of its US treasuries in exchange for junks to facilitate credit expansion.
In the result, what happened was that the Fed's present balance sheet of approximately $2 trillion is made up mostly of junk securities.
But of course, one can argue that the Fed is not your high street bank. It is the central bank of the mighty USA. It will always be able to "print money" or "digitalise" money and keep the markets going.
But beware that the Federal Reserve Note is mere paper, fiat money which cannot be redeemed for anything tangible such as gold. And although it is stated boldly in the notes issued - "In God we trust" - you and I are not actually placing our trust in God when accepting the Federal Reserve Notes as "money"...
,,If confidence could vaporise in a second and cause a stampede in what was once considered solid security, the triple A rated bonds in the repo and money markets, the same confidence that is now reposed in the Federal Reserve Notes can likewise disappear into the memory hole.
All these years, the con was maintained by the Fed that it was solid because it has on its balance sheet over $800 billion of US treasuries i.e. its notes "were so-called backed by these treasuries". It could sell its treasuries in the repo market for cash and thereby control the money flows in the economy and vice versa.
In their subconscious mind, Americans and stupid foreign central banks and their executives (brain-washed by the Chicago School of Economics) somehow believe in the infallibility of the Fed.
Now it has been exposed that the Fed's "assets" comprise of junk bonds and toxic wastes.
The Emperor has no clothes!
... In my opinion, the Fed has already become "unglued". Whatever guarantees given to secure the indebtedness of CitiGroup and others to prevent a run on these banks are useless.
It is bankrupt!
Read entire article: The Federal Reserve Is Bankrupt
Matthias Chang is a prominent barrister, author and analyst of the New World Order based in Malaysia.
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