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Mar 9, 2009

GATA Dispatches "Five biggest U.S. banks are dead men walking

Five biggest U.S. banks are 'dead men walking'

Submitted by cpowell on 07:56PM ET Monday, March 9, 2009. Section: Daily Dispatches By Greg Gordon and Kevin G. HallMcClatchy Newspapersvia Yahoo NewsMonday, March 9, 2009 -- America's five largest banks, which already have received $145 billion in taxpayer bailout dollars, still face potentially catastrophic losses from exotic investments if economic conditions substantially worsen, their latest financial reports show.Citibank, Bank of America, HSBC Bank USA, Wells Fargo Bank, and J.P. Morgan Chase reported that their "current" net loss risks from derivatives -- insurance-like bets tied to a loan or other underlying asset -- surged to $587 billion as of Dec. 31. Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.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.The banks' potentially huge losses, which could be contained if the economy quickly recovers, also shed new light on the hurdles that President Barack Obama's economic team must overcome to save institutions it deems too big to fail.While the potential loss totals include risks reported by Wachovia Bank, which Wells Fargo agreed to acquire in October, they don't reflect another Pandora's Box: the impact of Bank of America's Jan. 1 acquisition of tottering investment bank Merrill Lynch, a major derivatives dealer.Federal regulators portray the potential loss figures as worst-case. However, the risks of these off-balance sheet investments, once thought minimal, have risen sharply as the U.S. has fallen into the steepest economic downturn since World War II, and the big banks' share prices have plummeted to unimaginable lows.With 12.5 million Americans unemployed and consumer spending in a freefall, fears are rising that a spate of corporate bankruptcies could deliver a crippling blow to major banks. Because of the trading in derivatives, corporate bankruptcies could cause a chain reaction that deprives the banks of hundreds of billions of dollars in insurance they bought on risky debt or forces them to shell out huge sums to cover debt they guaranteed.The biggest concerns are the banks' holdings of contracts known as credit-default swaps, which can provide insurance against defaults on loans such as subprime mortgages or guarantee actual payments for borrowers who walk away from their debts.The banks' credit-default swap holdings, with face values in the trillions of dollars, are "a ticking time bomb, and how bad it gets is going to depend on how bad the economy gets," said Christopher Whalen, a managing director of Institutional Risk Analytics, a company that grades banks on their degree of loss risk from complex investments.J.P. Morgan is credited with launching the credit-default market and is one of the most sophisticated players. It remains highly profitable, even after acquiring the remains of failed investment banker dealer Bear Stearns, and says it has limited its exposure. The New York-based bank, however, also has received $25 billion in federal bailout money.Gary Kopff, president of Everest Management and an expert witness in shareholder suits against banks, has scrutinized the big banks' financial reports. He noted that Citibank now lists 60 percent of its $301 billion in potential losses from its wheeling and dealing in derivatives in the highest-risk category, up from 40 percent in early 2007. Citibank is a unit of New York-based Citigroup. In Monday trading on the New York Stock Exchange, Citigroup shares closed at $1.05.Berkshire Hathaway Chairman Warren Buffett, a revered financial guru and America's second wealthiest person after Microsoft Chairman Bill Gates, ominously warned that derivatives "are dangerous" in a February letter to his company's shareholders. In it, he confessed that he cost his company hundreds of millions of dollars when he bought a re-insurance company burdened with bad derivatives bets.These instruments, he wrote, "have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks. ... When I read the pages of 'disclosure' in (annual reports) of companies that are entangled with these instruments, all I end up knowing is that I don't know what is going on in their portfolios. And then I reach for some aspirin."Most of the banks declined to comment, but Bank of America spokeswoman Eloise Hale said: "We do not believe our derivative exposure is a threat to the bank's solvency."While Bank of America advised shareholders that its risks from these instruments are no more $13.5 billion, Wachovia last year similarly said it could overcome major risks. In reporting a $707 million first-quarter loss, Wachovia acknowledged that it faced heavy subprime mortgage risks but said it was "well positioned" with "strong capital and liquidity." Within months, losses mushroomed and Wachovia submitted to a takeover by Wells Fargo, which soon got $25 billion in federal bailout money.Trading in credit-default contracts has sparked investor fears because they are bought and sold in a murky, private market that is largely out of the reach of federal regulators. No one, except those holding the instruments, knows who owes what to whom. Not even banks and insurers can accurately calculate their risks."I don't trust any numbers on them," said David Wyss, the chief economist for the New York credit-rating agency Standard & Poor's.The risks of these below-the-radar insurance policies became abundantly clear last September with the collapse of investment banker Lehman Brothers and global insurer American International Group, both major swap dealers. Their insolvencies threatened to zero out the value of billions of dollars in contracts held by banks and others. Until then, "we assumed everyone makes good on the contracts," said Vincent Reinhart, a former top economist for the Federal Reserve Board. Lehman's and AIG's failures put in doubt their guarantees on hundred of billions of dollars in contracts and unleashed a global pullback from risk, leading to the current credit crunch. The government has since committed $182 billion to rescue AIG and, indirectly, investors on the other end of the firm's swap contracts. AIG posted a fourth-quarter 2008 loss last week of more than $61 billion, the worst quarterly performance in U.S. corporate history. The five major banks, which account for more than 95 percent of U.S. banks' trading in this array of complex derivatives, declined to say how much of the AIG bailout money flowed to them to make good on these contracts. Banking industry officials stress that most of the exotic trades are less risky -- such as interest-rate swaps, in which a bank might have tried to limit potential losses by trading the variable rate interest of one loan for the fixed-rate interest of another. In their annual reports to shareholders, the banks say that parties insuring credit-default swaps or other derivatives are required to post substantial cash collateral. However, even after subtracting collateralized risks, the banks' collective exposure is "a big, big number" and a matter for concern, said a senior official in a banking regulatory agency, speaking on condition of anonymity because agency policy restricts public comments. In their reports, the banks said that their net current risks and potential future losses from derivatives surpass $1.2 trillion. The potential near-term losses of $587 billion easily exceed the banks' combined $497 billion in so-called "risk-based capital," the assets they hold in reserve for disaster scenarios. Four of the banks' reserves already have been augmented by taxpayer bailout money, topped by Citibank ($50 billion) and Bank of America ($45 billion), plus a $100 billion loan guarantee. The banks' quarterly financial reports show that as of Dec. 31: -- J.P. Morgan had potential current derivatives losses of $241.2 billion, outstripping its $144 billion in reserves, and future exposure of $299 billion. -- Citibank had potential current losses of $140.3 billion, exceeding its $108 billion in reserves, and future losses of $161.2 billion. -- Bank of America reported $80.4 billion in current exposure, below its $122.4 billion reserve, but $218 billion in total exposure. -- HSBC Bank USA had current potential losses of $62 billion, more than triple its reserves, and potential total exposure of $95 billion. -- San Francisco-based Wells Fargo, which agreed to take over Charlotte-based Wachovia in October, reported current potential losses totaling nearly $64 billion, below the banks' combined reserves of $104 billion, but total future risks of about $109 billion. Kopff, the bank shareholders' expert, said that several of the big banks' risks are so large that they are "dead men walking." The banks' credit-default portfolios have gotten little scrutiny because they're off-the-books entries that are largely unregulated. However, government officials said in late February that federal examiners would review the top 19 banks' swap exposures in the coming weeks as part of "stress tests" to evaluate the institutions' ability to withstand further deterioration in the economy. Representatives for Citibank, J.P. Morgan, and Wells Fargo declined to comment. Hale, the Bank of America spokeswoman, said that the bank uses swaps as insurance against its loan portfolio -- they "gain value when the loans they are hedging lose value." She said that Bank of America requires thousands of parties that are guarantors on these insurance-like contracts to post "the most secure collateral -- cash and U.S. Treasuries, minimizing risk roughly 35 percent." The collateral is adjusted daily. Bank of America's report of an $80.4 billion exposure doesn't count the collateral and "also assumes the default of each of the thousands of counterparty customers, which isn't likely," Hale said. Counterparties are the investors on the other side of the deal, often other banks or investment banks. In response to questions from McClatchy, HSBC spokesman Neil Brazil said the bank closely manages its derivatives contracts "to ensure that credit risks are assessed accurately, approved properly (and) monitored regularly."
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GATA Dispatches "Telegraph's Ambrose Evans-Pritchard interviewed on Gold"

Telegraph's Ambrose Evans-Pritchard interviewed on gold

Submitted by cpowell on 04:53PM ET Monday, March 9, 2009. Section: Daily Dispatches 7:48p ET Monday, March 9, 2009Dear Friend of GATA and Gold:You've read and admired his work dozens of times. Now you can see and hear Ambrose Evans-Pritchard, international business editor of The Telegraph in London, as he talks about gold with the Robert Miller of Telegraph TV. Evans-Pritchard says gold has decoupled from commodities, has regained its position as an international currency, and likely will continue to do well as central banks strive to avert debt deflation. You can watch the interview at The Telegraph's site here: try this abbreviated link: POWELL, Secretary/TreasurerGold Anti-Trust Action Committee Inc.
* * * Join GATA here:Bahamas Investment ConferenceThursday-Friday, March 26-27, 2009Atlantis Resort and Casino* * *Help keep GATA goingGATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at GATAinfo@gata.orgGold Anti-Trust Action Committee7 Villa Louisa RoadManchester, Connecticut06043-7541 USA

GATA Dispatches "Hedge funds buying much more paer than metal"

Hedge funds buying much more paper than metal

Submitted by cpowell on 07:41PM ET Sunday, March 8, 2009. Section: Daily Dispatches Bearish Big Investors Catch Gold Bug By Gregory ZuckermanThe Wall Street JournalMonday, March 9, 2009 investors, including some who anticipated troubles for the housing and financial sectors, have been buying gold, concerned that moves by governments to shovel money at problem areas could cripple leading currencies.Firms such as Eton Park Capital Management LP, Greenlight Capital Inc., Hayman Advisors, LP and Paulson & Co. have been ramping up gold exposure in recent months, according to investors in the funds. Blue Ridge Capital Holdings LLC and Highfields Capital Management LP also have been recent buyers, according to public filings about their year-end holdings. Those two firms couldn't be reached for comment Sunday.Some of these funds have become among the largest holders of gold exchange-traded funds, such as the SPDR Gold Shares ETF, while also buying gold futures contracts, swaps, and even physical bars of the yellow metal.For years, gold fans often were fast-moving traders and so-called gold bugs, a crowd of bears ever-convinced that the underpinnings of global economies and markets were set to crumble and inflation about to soar. Gold has disappointed some investors because it hasn't been a home-run investment despite recent financial ills.The recent purchases of gold by the hedge-fund investors, some of whom have top records, suggests they are coming to share deep worries about the health of global economies and how ongoing problems are being addressed.Kyle Bass, who runs Hayman, a firm that earned millions of dollars betting against risky subprime home mortgages, is now buying gold. "Confidence in governmental and cenral bank leadership ... is plummetting worldwide," Mr. Bass wrote his investors recently. "As a result, we believe people will look to "old-fashioned" stores of value. Indeed, investors have already begun moving into precious metals. We expect this will continue."Since 1971, the dollar has been backed not by gold but by faith in the U.S. government. Though they worry about the dollar, some of the investors buying gold are even more concerned about European currencies.John Paulson's eponymous firm, which reaped $15 billion in 2007 betting against subprime mortgages and added more profits last year, is beefing up its gold holdings. Last week, it told clients it will offer its investors a new share class denominated in gold.Gold is the largest investment in the portfolio of Greenlight, led by David Einhorn, who has bought exchange-traded funds holding gold as well as gold futures contracts, according to a person familiar to the matter.Some of those buying gold predict nations will default on their debt, as they spend money to help stabilize their economies. The spending could lead to a burst of inflation, at least eventually, some say, which could help gold rise in price. But even deflation, or falling prices, could bolster gold, which usually does a good job storing value, the bulls say. Others simply see gold as a better alternative to crumbling stocks, corporate bonds, and Treasurys with super-slim yields.Still, gold isn't an investment that produces any kind of cash flow, like a share of a company or a fixed-income investment, and consumer demand for gold-related products is down amid the global economic downturn. Those factors have long reduced its attractiveness to many investors.Though gold has been a robust performer of late, hitting $1,000 an ounce recently before closing at $942 an ounce on Friday, it has been stuck in a range of $700 to $1,000 an ounce for much of the past few years. That raises questions about the potential for upside, especially if stocks regain their footing. If gold can preserve value at a time when most other investments drop, that in itself could reward bulls, of course.
* * * Join GATA here:Bahamas Investment ConferenceThursday-Friday, March 26-27, 2009Atlantis Resort and Casino* * *Help keep GATA goingGATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at GATAinfo@gata.orgGold Anti-Trust Action Committee7 Villa Louisa RoadManchester, Connecticut06043-7541 USA