International Forecaster Weekly

Accounting for the Counterparties in the Goldman Sachs Debacle

Housing bubble histories, Now the Fed runs the system, the system has not improved, despite claims, gold a better shelter than T-Bills, how long will nations tolerate US monetization? Seven banks seized, Goldman Sachs Counterparties described and named, Majority of counterparties were foreign entities.

Bob Chapman | July 28, 2010

As we long ago predicted, 2005 was the beginning of the collapse of the housing bubble. The result was financial chaos and a credit crisis that enveloped the US, Europe and eventually the world. Some would like us to believe that materialism and selfishness were the reasons for bubbles, but the causes go far deeper than that. US, UK and European central banks, due to their greed for power, and a desire for world government, allowed debt to get totally out of control.

America’s monetary problems began on August 15, 1971, when the country left the gold standard, although GATT, which became WTO in 1986, began the cycle of destruction in the early 1960s. The presidency of Ronald Reagan opened and initiated the floodgates of debt after cutting taxes far too much and then destroying upper income taxpayers with the 1986 Tax Reform Act, which thrust 8 million millionaires into bankruptcy. Reagan’s failure to cut spending set a precedent, which lives with us to this day. During his time in office debt doubled. The result was the economy came unglued in 1989 and didn’t recover until the beginning of 1994. His successors had the opportunity to purge the system of debt and malinvestment, but they and the Fed passed up that opportunity to again cover up the mess they created. A boom in the stock market followed in the late 1990s and economic failure by 2007.

After the collapse of 1987, it was decided that the economy and financial structure needed support and insurance and derivatives came on to the scene to replace productivity in the economy. Free trade, globalization, offshoring and outsourcing began its bite into the economy. After the collapse of 1987 in August 1988 the President’s Working Group on Financial markets appeared having been created by Mr. Reagan’s executive order to assist collapsing markets as Alan Greenspan flooded the economy with money and credit in an attempt to halt the severe correction in real estate and the market. That eventually worked after five years more of debt creation. A great opportunity to purge the system had been deliberately lost. This last opportunity began the failure of the middle class as wages versus inflation stagnated, buying power was decimated and debt accumulation by individuals began in an ever-widening cycle. During the 1980s deregulation was the watchword and we were treated to the criminal collapse of the savings and loan industry. We predicted a $500 billion collapse although to this day the government only admits to $300 billion. Every crook in the nation was involved, led by the Bush and Clinton crime families. As usual few heeded our warnings.

Over the past 30 years, as a result of lower purchasing power and debt, savings fell from 12% to minus 2%, finally recovering over the past two years to 3%. From 1990 on debt became a way of life, because purchasing power was falling every year. The banks were very happy to lend at 8% to 10%, as they created credit out of thin air. As we all now know lenders lent to anyone starting in 2002 and they knew better. These are professionals who are responsible for 80% of individual debt problems. Not only did they lend when they should not have been lending, but they encouraged debt along with the government, particularly for those unable to pay. Then came zero interest rates and market intervention by the Fed, which has kept all interest rates low. Even 10-year US T-rates are yielding 2.93%. Essentially all the rules have been thrown out the window. This is really a continuum of what we have seen since 2002.

We had the chance to fix the system in 1990 and again in 2000, but the Fed refused to do so. The Fed created one last fling. It was undecided whether to go ahead with the real estate and credit bubble. In June of 2003 they made the decision to go ahead knowing they couldn’t turn back after that time. The party is over and the unraveling has been going on for three years. The credit crisis is about to enter a second phase worse than the first phase. After two stimulus packages and $3 trillion, the economy has continued slightly higher to sideways at a terrific price. Now in addition we have a massive sovereign credit crisis that has only begun. The gravity of the fiscal and monetary madness has yet to be assisted. Over the next several months all the furies will break loose as pessimism deepens. Government deficits will worsen as will residential and commercial real estate and the stock market will finally again move lower, as the presidents, “Working Group on Financial Markets” finds there is a limit to what they can accomplish through manipulation. The powers behind government are going to find out they cannot do anything they want. Due to the internet and talk radio the public is being quickly educated and it won’t be long before most everyone understands what the Illuminists are up to and what their intentions are and that is for world government and the enslavement of humanity.

Why is it we hear that the US economy is emerging from its credit crisis and the worst economic crisis since the depression, even from conservative writers? As far as we can see the monetary and fiscal situation along with unemployment haven’t improved. Congratulating the administration and the Federal Reserve is ridiculous in as much as they were both responsible for the horrible situation we are in today. Over the past four years the euro zone governments’ debt has grown more than 20% and the US and Japan by 45%.

In Europe the head of the ECB, the European Central Bank, says austerity now. No more government stimulus, because of the great risk. In Washington we find just the opposite opinion. Wall Street, banking and government want more stimulus, Fed intervention and manipulation. Europe is pleased with recent stress tests, which were self-conducted, and which did not include the banks’ capital exposure to sovereign debt risk, which renders their test invalid. We might also ask about their two sets of books. What a farce.

Investors looking for safety and shelter have been piling into US Treasuries as the dollar falls again instead of buying into gold. Gold has no yield, but essentially speaking after inflation is factored in, neither does Treasuries. Wall Street, banking and Washington see no problem with debt. It is only 66% of GDP and next year should be 82%. They believe that is better than most countries and it is of no concern at present.

Money and credit creation has been expanding for 15 years and the Treasury and the fed and other central banks have been fighting the results for seven years. This has enabled the consumer and the financial sector, never mind government, to spend far beyond their ability to pay back, as a method of temporarily saving the financial system. That battle still rages and it is a battle that is un-winnable for the elitists.

We wonder how long other nations, which hold 59-1/2% of their foreign reserves in US dollars, are going to tolerate massive monetization and fiscal ineptitude? Seven years ago we wrote that Fannie Mae and Freddie Mac were broke and everyone within the beltway knew it. We said it was America’s way of nationalizing housing, so 60% as a goal. This way renters could be herded hither and yon wherever government wanted to put them. Since then both became wards of the US taxpayer.

The big banks have borrowed substantial amounts of money from the Fed to hold as reserves at zero interest rates and rent it back to the Fed at higher rates. We wonder how much of those funds have been used to monetize treasuries and whether the banks will ultimately lend those funds, which will eventually monetize them? On the other front the government tells us they’ll have fiscal deficits of $1.5 trillion annually. That certainly isn’t the way to put the government’s house in order and adds to monetization. We find it of interest that such issues are not discussed on CNBC and Fox or other elitist venues. At the same time the financial system is being torn apart internally and little is done about it. Outright fraud by Warren Buffett’s Berkshire Hathaway - they steal $300 million and pay a $100 million fine. Goldman Sachs defrauds for $5 billion and gets a $550 million fine, which is two weeks income. Is it no wonder these Wall Street criminals do what they do. Look at the rating agencies, all partners in crime and no charges. And, of course, none of the Illuminists go to jail.

We find it of interest that the administration and its Treasury Department, an extension of Goldman Sachs, wants the tax cuts imposed by the previous administrations to lapse. That would increase taxes 15% and smother the economy. Such a position makes us wonder whether the Fed will loosen up on quantitative easing.

Then there is the matter of Treasury securities sales, which are running about $145 billion a month. The question is where is all the money going? This is about 50% more money then the government needs. As we have pointed out many times before the Fed, we believe has been printing money and using various fronts to run the money through, and has been indirectly and directly funding Treasury and agency sales. We reported on this as long as seven years ago. First it was emergency loans to European and US banks, then swaps and now we have nations like England buying boatloads of Treasuries and they cannot even pay their bills. We supposedly have American households buying massive amounts, which is ludicrous. There is massive monetization going on and the Fed is hiding it. Mind you, this has been going on for a long time, but especially so over the past three years. It is out of control and we should have written more on it previously. Between foreign buyers, the household sector and the Fed about $1.5 trillion of Treasuries were purchased last year, which is simply impossible and it is part of which the Chinese are complaining about. This is how surreptitiously the Fed has supplied the Treasury with funding and offset deflation at least temporarily.

It now looks like the next step is to re-liquefy; the domestic economy via bank lending. This past week the Fed said it intends to stop paying interest on bank deposits with the Fed. This ability of the Fed to pay member banks interest is relatively new. Excess reserves of banks heretofore were lent out into the market. The funds were kept at the Fed in reserve, bearing interest, and remained sterilized. They served the purpose of giving banks interest. The banks borrowed from the Feds at zero interest and then lent it back to the Fed to hold at 2-1/2% interest. That was a blatant action to keep the banks in income and an unbelievable scam that the taxpayer got to pay for. The end of the interest payments will force banks to either return the funds or lend them and, of course, they’ll be lent out probably in a large way to small- and medium-sized companies that will find various uses for those funds and their use will create jobs. Lending to these companies has fallen 25% over the past 15 months. These companies also produce 70% of the jobs in the economy. Thus, you can expect a business resurgence and falling unemployment. That activity should also keep the Dow above 8,500 and perhaps take it back to 11,200. The banks, the lenders, may also use part of those funds to buy Treasuries, which will take pressure off of the Fed’s subliminal Ponzi scheme. This is in part where the $5 trillion will come from to fund the economy over the next 28 months, which will take us through two elections. This will be wave 2 of quantitative easing, which few will pick up on until next year. We domestically will go from sterilization to monetization.

Due to these massive influxes of funds the dollar should head down again, which it is in the process of doing presently. The Fed will not admit this monetization fraud, nor will fiscal deficits be reduced. Both are like a train under full power headed toward the bunter, which will end in a spectacular crash. Even with all this liquidity the economy will only show at best 3% to 3-1/2% GDP growth as it did over the last 1-1/2 years. A futile attempt to keep the system functional until the elitists decide to pull the plug and accompany the event with another war. These actions are not an attempt to save an unsaveable economy. They are part of the far bigger picture of the deliberate attempt to destroy the US and European economies and as a result force people to accept world government.

These events are laying the groundwork for higher gold and silver prices, which will reflect the loss in buying power in all currencies, as they have over the past five years. Gold prices could range from $3,000 to $7,600 based on today’s rate of inflation. Silver will follow in lock step and could have an even more powerful move.

The move to monetize is on and the signal for the beginning was the signing into the law of the financial reform package that made the Fed a financial and monetary dictatorship. This is what Andrew Jackson and others warned us would happen if we are not vigilant.

2011 will be a banner year for bank failures as toxic securities and real estate are written off and we move toward nationalization of banking and many other major industries. This is the corporatist fascist model of maintaining power. More and more industries and services will leave the US and Europe bringing both further to their knees.

During this period an attempt will be made to dethrone the dollar and introduce a gold-less SDR, Special Drawing Right, which has been kicking around the IMF since 1965. This is where the dollar is headed, or at least this is where the elitists will try to take us.

This past week the Dow gained 3.2%; S&P 3.5%; the Russell 2000 6.6% and the Nasdaq 100 4%. Banks rose 1.8%; broker/dealers 3.1%; cyclicals surged 7.1%; transports 6.1%; consumers 2.9%; utilities 2.3%; high tech 3.4%; semis 4.4%; Internets 5.1% and biotechs 3.6%. Gold bullion fell $5.50, the HUI rallied 1.8% and the USDX was unchanged at 82.49.

The 2-year government yields fell 1 bps to 0.56%; the 10’s rose 8 bps to 3.00% and the 10-year German bunds rose 10 bps to 2.71%.

Fed credit remained unchanged. Foreign holdings of Treasury and Agency debt surge $18.1 billion to a new record $3.132 trillion. Custody holdings for foreign central banks have increased $176 billion YTD or 10.7%. Custody holdings have risen $176 billion YTD and YOY by $345 billion, or 12.4%.

M2, narrow, money supply expanded $14 billion to $8.603 trillion. It is up $90.4 billion YTD and 2% YOY.

The total money market fund assets fell $17.8 billion to $2.798 trillion. YTD assets have fallen $496 billion and YOY 23.5%.

The Chicago Fed says economic activity weakened in June. The national Activity Index fell 0.63 in June, down from plus 31 in May.

The FDIC’s Friday Night Financial Follies continued its dismal record as: Seven banks were seized in seven U.S. states, marking the second year in a row in which at least 100 lenders have collapsed.

Banks with total deposits of about $2 billion were shut down yesterday, according to statements on the Federal Deposit Insurance Corp. website. The failures cost the FDIC’s deposit- insurance fund $431 million. The U.S. bank-failure count this year rose to 103.

Iberiabank Corp., based in Lafayette, Louisiana, acquired Lantana, Florida-based Sterling Bank in its fifth FDIC-assisted transaction. Iberiabank picks up six branches and about $372 million in deposits.

“This acquisition is an excellent fit for our company, providing a nice complement to our current franchise in Broward and Palm Beach counties,” Iberiabank Chief Executive Officer Daryl G. Byrd said in a statement. “We anticipate a smooth transition.”

Regulators may close the most banks this year since 1992 as souring residential and commercial mortgages impair capital levels. The FDIC included 775 banks with $431 billion in assets on the confidential list of problem lenders as of March 31, an increase from 702 banks with $402.8 billion at the end of the fourth quarter. FDIC Chairman Sheila Bair has said 2010 failures will surpass last year’s total of 140.

Banks were also closed in Georgia, South Carolina, Kansas, Minnesota, Nevada and Oregon, the FDIC said.

Renasant Bank, of Tupelo, Mississippi, paid a 1 percent premium to take on the deposits at Crescent Bank & Trust Co. in Jasper, Georgia, the FDIC said. Renasant picked up “essentially” all of the more than $1 billion in assets at Crescent, the agency said.

South Valley Bank & Trust of Klamath Falls, Oregon, paid the FDIC a 1.05 percent premium to acquire the deposits of Cave Junction, Oregon’s Home Valley Bank, which stood at about $230 million at the end of March, the FDIC said.

Roundbank of Waseca, Minnesota, acquired New Prague, Minnesota-based Community Security Bank. First Citizens Bank & Trust Co. of Columbia, South Carolina, acquired Williamsburg First National Bank of Kingstree, South Carolina.

Las Vegas-based SouthwestUSA Bank and Thunder Bank of Sylvan Grove, Kansas, were also closed.

Goldman Sachs Group Inc. said it made payments to banks including Germany’s DZ Bank AG and Banco Santander SA of Spain for mortgage-related losses as it received U.S. taxpayer funds through the American International Group Inc. bailout in 2008.

The list of 32 counterparties to Goldman Sachs on collateralized debt obligations was released today by U.S. Senator Charles Grassley. The largest payments were to European lenders that also included the London branch of Rabobank Nederland NV, Zuercher Kantonalbank and Dexia Bank SA.

“The majority of these beneficiaries appear to be foreign entities,” Grassley wrote in a set of questions directed at Elizabeth Warren, chairman of the Congressional Oversight Panel, and published on his website. “Can you please explain how ensuring that these institutions were paid in full, rather than required to suffer the consequences of the risks that they took, benefited the U.S. taxpayer?”

Goldman Sachs turned over the list to the Congressional Oversight Panel and Financial Crisis Inquiry Commission, which are reviewing the use of taxpayer funds in financial bailouts. Grassley, the ranking Republican on the Senate Finance Committee, had suggested Goldman Sachs could be subpoenaed if the New York-based bank didn’t provide the information.

Goldman Sachs executives including Chief Operating Officer Gary Cohn and Chief Financial Officer David Viniar had defended the firm’s collection of $8.1 billion after AIG’s bailout, tied to swaps contracts. The money helped Goldman Sachs pay out offsetting contracts with other parties, they said, without naming the companies until now. In addition, Goldman Sachs received $4.8 billion after the bailout for securities lending contracts.

“We had transactions on the other side,” Cohn, 49, told members of the Financial Crisis Inquiry Commission at a hearing earlier this month. “In AIG, we sat in the middle of buyers and sellers.”

The documents released by Grassley’s office show that Goldman Sachs’s counterparties received a total of about $14 billion in payments for the bonds that ended up going into the Maiden Lane III special purpose vehicle established by the Federal Reserve for AIG’s bailout.

Other names on the list include the Hospitals of Ontario Pension Plan and a GSAM Credit CDO Ltd., a collateralized debt obligation managed by Goldman Sachs Asset Management. Collateralized debt obligations, or CDOs, are securities backed by pools of financial instruments such as mortgage bonds or loans. [Now after 2 years we should all feel warm and fuzzy about who our money went too and the secret bailout, which the Fed refused to disclose.]

Goldman Sachs Group Inc. documents show that it depended on banks including Citigroup Inc. and Lehman Brothers Holdings Inc. for protection against a failure of American International Group Inc.

Citigroup, which received the biggest government bailout of any U.S. bank, was Goldman Sachs’s largest provider of credit- default swaps on AIG as of Sept. 15, 2008, according to documents released by Senator Charles Grassley. Lehman Brothers, which declared bankruptcy that same day, is listed as fifth- biggest. Credit-default swaps act like insurance contracts, paying the owner in the event of a default.

Goldman Sachs, the most profitable securities firm in Wall Street history, has argued that it didn’t depend on the U.S. government’s $182.3 billion rescue of AIG because the investment bank had collateral and credit-default swaps to protect itself. Joshua Rosner, an analyst at research firm Graham Fisher & Co. in New York, said the list of counterparties indicates that Goldman Sachs may have had difficulty collecting on those swaps.

“Clearly Goldman’s calculation was more tied to their expectation of the political dynamics of forcing moral hazard than the fundamental realities of the financial strength of counterparties,” Rosner said. Moral hazard is created when government bailouts are perceived to reward risky activity.

Goldman Sachs’s relationship with AIG has been under scrutiny since AIG revealed in March 2009 that the bank had received $8.1 billion after the insurer’s 2008 bailout. The funds made good on credit-default swaps that AIG had provided to Goldman Sachs on mortgage-linked investments called collateralized debt obligations.