Rob Kirby explains the Genesis of the Libor debacle - and whose fingerprints are on the smoking gun..... Eric Sprott and Mark Grant produce two massively important pieces highlighting incredible Central Banker high crimes , fraud , collusion --- if these guys are right " cuts will be necessary "

http://www.silverdoctors.com/rob-kirby-the-genesis-of-the-libor-crisis/

ROB KIRBY: THE GENESIS OF THE LIBOR CRISIS

OCTOBER 3, 2012 BY THE DOC 1 COMMENT

By SD Contributor Rob Kirby:

The roots of the LIBOR crisis can be found in the broad based sub-prime FRAUD in America circa 2000 – 2007.  The sub-prime fraud involved American investment banks securitizing [bundling] poor mortgage credits into “pools” – then working hand-in-hand with credit rating agencies like S & P and Moodys – having these pooled securities rated AAA.
In Q1/2007 American investment bank – Bear Stearns, a major player in this sub-prime securitization – had a number of these sub-prime pools FAIL to perform.

The failure of AAA credit – up till then – was UNHEARD of in modern finance and precipitated a GLOBAL CREDIT CRISIS where banks became UNWILLING TO LEND – even to one another.  The sanctity of triple “AAA” credit had been violated.  So by August 2007, Global Credit Markets were “locked up” – Commercial Paper markets, which function on “creditworthiness” – are the oil that greases the wheels of world industry.  These critical markets were brought to a standstill.

America Panicked
In response to Global Credit Markets being locked up – the U.S. Treasury [Hank Paulson] in conjunction with the U.S. Federal Reserve [Benjamin Bernanke] undertook EXTREME MEASURES – via 7.5 TRILLION of off-balance sheet, OTC [over the counter] Derivatives Trades done with J.P. Morgan Chase. 

The reason we definitively know this is EXACTLY WHAT HAPPENED is that Morgan’s “less than 1 year” portion of their OTC swap book grew by 7.5 Trillion in Q3/2007 only to contract by virtually the same amount in Q4/2007 [data available at the OCC's Quarterly Reports].   FRA’s are the ONLY OTC Swap instrument at allows a bank to grow their book by such an amount in one quarter and have it reverse itself in the following quarter.  Given the fact that banks were not lending or extending credit  to anyone at the time – and FRA’s require TWO WAY CREDIT – the notion that Morgan could put 7.5 Trillion in these instruments on in such a short period of time TELLS US that their counter party in this trade was NON BANK.  From here, it’s academic – who has the motive and means to conduct such trade??? The Answer is a universe of ONE!!!!!!

Acting for the U.S. Treasury was the Exchange Stabilization Fund [ESF] – a clandestine division of the U.S. Treasury which is beyond oversight/supervision by Congress and U.S. Law.  The trades the ESF engaged in were “brokered” by the N.Y. Federal Reserve [Turbo Timothy Geithner] and specifically targeted to J.P. Morgan Chase to “compel” them to purchase TRILLIONS in short dated U.S. Government T-bills [maturities of 1 yr. and less].  Procedurally, this is how this worked:

In Q3/07, the U.S. Treasury [ESF] gets the N.Y. Fed to ask the treasury at J.P. Morgan to place multi-Trillion dollar bets on what 3 month LIBOR will be in one or two months in trades called Forward Rate Agreements [FRA’s].  If you purchase a FRA you are “synthetically borrowing money”.  Morgan showed a price [bid] at a yield less than the yield on 3 month T-bills.  When the U.S. Treasury “hit” Morgan’s bid – at say .28 basis points – J.P. Morgan hurriedly went into the T-bill market to purchase virtually unlimited quantities of 3 month T-bills – at say .33 basis points to “lock in” perhaps a 5 basis point risk free profit on their gargantuan trade.  THIS DID HAPPEN!!!

These trades were undertaken/administered in a defibrillator like fashion to “jolt the frozen credit markets” into once again purchasing commercial paper.  This practice worked “in part” but only gained “traction” when the U.S. Treasury/Fed introduced a host of ‘swap programs’ where holders of illiquid commercial paper were allowed to “freely” swap their dubious paper for the “perceived safety” of U.S. Government Securities [T-bills].

As a result of these MASSIVE J.P. Morgan led T-bill purchases – short term T-bill rates plummeted 200 basis points in Q3/2007 from roughly 5 % to 3 % in a matter of days.  However, this did nothing to solve the core issue at first – namely, that banks were unwilling to lend which is/was reflected by the 3 month Eurodollar Futures contract [a proxy for LIBOR] refused to decline [and in fact initially went up] with plummeting T-bill rates; hence the TED Spread widened significantly from roughly 25 basis points or less to well over 200 basis points:

The difference [expressed in basis points] between the 3 month T-bill rate and the 3 month Eurodollar Futures rate is called the TED Spread.  As the TED Spread widened dramatically – LIBOR was seen to be “broken” – because LIBOR rates [rates posted by the likes of Barclays, UBS etc.] were not reflecting falling short term Treasury rates.

Why LIBOR [London Interbank Offered Rate] is important?

The British Bankers Association [BBA] has historically been responsible for polling member banks daily for reference rates as to where they would be willing to lend to their most creditworthy clients in periods ranging from “overnight” to 1 month and right out to 1 year.  These reference rates stand as the basis for resets in floating rate corporate loans as well as floating rate / reference rates for hundreds of Trillions worth of OTC Swap transactions.

Conclusions

1                     LIBOR would NEVER have appeared broken in the first place – if U.S. ratings agencies had done their job and properly rated poor credit U.S. Mortgage paper appropriately.

2                     LIBOR would NEVER have appeared to be broken if the U.S. Treasury has STAYED OUT of the markets.  Of course, this also means we would have already had a VERY SEVERE, BUT CLEANSING, ECONOMIC CONTRACTION.  Instead, government intervention / Central Planning has kept the economy somewhat moving along – albeit at an ever burdened pace with the costs being the sanctity of our capital markets – EVERYONE in global finance is awakening to the fact that our capital markets are rigged.

3                     The U.S. Treasury’s ESF and U.S. Federal Reserve – utilizing derivatives – had a LARGE, DIRECT hand in precipitating the LIBOR crisis.  The “free” mainstream media – which is really and truly complicit, and bought-and-paid-for could have / should have spotted this FRAUD a mile away.

4                     Imperialist U.S. monetary policy is factually being enacted through the trading desks of banks like J.P. Morgan, Citibank, Goldman Sachs, BofA and Morgan Stanley – all in the name of National Security and preservation of the U.S. Dollar as the world’s reserve currency.  This gives these “insider institutions” privileged insider information as to the near term direction in interest rates and makes possible a multitude of further abuse of our capital markets.

5                     Interest Rate Derivatives broadly classified as OTC Swaps are regularly utilized by the U.S. Treasury to manipulate the entire U.S. yield curve.  The specific instruments employed to do this are Forward Rate Agreements [FRA’s] which influence T-Bill rates in the < 1 yr. space and Interest Rate Swaps [IRS] – with embedded U.S. Government bond trades – in the 3 – 10 yr. segment of the curve.

and the full piece at the link......

http://www.zerohedge.com/news/2012-10-02/eric-sprott-do-western-central-banks-have-any-gold-left

Eric Sprott: Do Western Central Banks Have Any Gold Left?

Submitted by Tyler Durden on 10/02/2012 - 18:49Bank of Japan Belgium Bill Gross Book Value Central Banks China David EinhornEric Sprott Estonia ETC European Central Bank Eurozone Exchange Traded FundFederal Reserve Finland France Germany Greece Greenlight Hong KongInstitutional Investors International Monetary Fund Ireland Italy Japan KazakhstanNetherlands None PIMCO Portugal Precious Metals Quantitative Easing Ray DalioReuters Ron Paul Slovakia Switzerland Turkey Ukraine United Kingdom World Gold Council Yen

Somewhere deep in the bowels of the world’s Western central banks lie vaults holding gargantuan piles of physical gold bars… or at least that’s what they all claim.

Our analysis of the physical gold market shows that central banks have most likely been a massive unreported supplier of physical gold, and strongly implies that their gold reserves are negligible today. If Frank Veneroso’s conclusions were even close to accurate back in 1998 (and we believe they were), when coupled with the 2,300 tonne net change in annual demand we can easily identify above, it can only lead to the conclusion that a large portion of the Western central banks’ stated 23,000 tonnes of gold reserves are merely a paper entry on their balance sheets – completely un-backed by anything tangible other than an IOU from whatever counterparty leased it from them in years past. At this stage of the game, we don’t believe these central banks will be able to get their gold back without extreme difficulty, especially if it turns out the gold has left their countries entirely. We can also only wonder how much gold within the central bank system has been ‘rehypothecated’ in the process, since the central banks in question seem so reluctant to divulge any meaningful details on their reserves in a way that would shed light on the various “swaps” and “loans” they imply to be participating in. We might also suggest that if a proper audit of Western central bank gold reserves was ever launched, as per Ron Paul’s recent proposal to audit the US Federal Reserve, the proverbial cat would be let out of the bag – with explosive implications for the gold price.... We realize that some readers may scoff at any analysis of the gold market that hints at “conspiracy”. We’re not talking about conspiracy here however, we’re talking about stupidity. After all, Western central banks are probably under the impression that the gold they’ve swapped and/or lent out is still legally theirs, which technically it may be. But if what we are proposing turns out to be true, and those reserves are not physically theirs; not physically in their possession… then all bets are off regarding the future of our monetary system.

http://www.zerohedge.com/news/2012-10-02/ecb-eur22-trillion-missing

The ECB - EUR22 Trillion Is Missing

Submitted by Tyler Durden on 10/02/2012 09:02 -0400

• European Central Bank
 
• Gross Domestic Product
 
• Money Supply
 
• Reality

Via Mark J. Grant, author of Out of the Box,

The ECB: The Missing Assets/Liabilities

“To treat your facts with imagination is one thing, but to imagine your facts is another.”

                        -John Burroughs

Yesterday I published the assets/liabilities of the European Central Bank as provided by them. I provided some analysis that I thought was relevant as I also asked all of you to look at the numbers yourself. To be quite open; I was stunned by the data they provided and shocked by the implications. I had not seen the data in any other source or commented about by anyone and the subject, while admittedly complex, and perhaps made more complex by design, is a huge wake-up call for anyone investing in Europe.

The ECB lists, as of the end of the 1st quarter of 2012, 16.304 trillion Euros ($ 21.032 trillion) in assets and 17.334 trillion Euros ($22.631 trillion) in liabilities. It is right there in black and white as I showed in the ECB provided data that I presented yesterday. However when you get to their consolidated balance sheet you find the numbers they bandy about in public to be a ledger of 3.240 trillion Euros ($4.00 trillion) and you catch your breath and pause. Utilizing normal American accounting practices this variance would be impossible and yet here it is; staring us all right in the face.

“Europe has put a ‘stop payment’ on our reality check!”

                       -The Wizard

I can report that I did hear from a number of large institutions yesterday that also looked at the numbers themselves and were stunned. Conversations were held, questions were asked and I think an accurate summation of the conversations was that everyone was in some state or another of astonishment. The numbers were not my numbers after all and while many good issues were raised in terms of how to properly analyze the data that was presented there was a clear sense that we were being duped by the European Central Bank and played for suckers.

“Reality is the leading cause of stress amongst those in touch with it.”

                     -Jane Wagner

Forget that the liabilities are greater than the assets and forget that that both have increased rather appreciably in the last several years and just concentrate on the size of the numbers presented and then ask the central questions; who is responsible for these assets and liabilities and where are they counted? We know that they are not counted at the ECB as they are not a part of their consolidated balance sheet. You may ask how this is possible and I re-print, once again, the applicable note from the ECB:

“Recognition of assets and liabilities

An asset or liability is only recognized in the Balance Sheet when it is probable that any associated future economic benefit will flow to or from the ECB, substantially all of the associated risks and rewards have been transferred to the ECB, and the cost or value of the asset or the amount of the obligation can be measured reliably.”

So there is the rationale, like it or not, but then where are these assets/liabilities counted? We are talking about $21.032 trillion in assets here and $22.631 trillion in liabilities which are larger numbers that all of the GDP of Europe. We can surmise that the ECB does not count these loans, securitizations and collateral as they belong to a given nation or a bank guaranteed by the nation or the securitization is guaranteed by some country but the rub is the country doesn’t count them either. When a European nation reports out its debt to GDP ratio I knew that they did not count contingent liabilities and I knew that government backed bank bonds were not included and I knew that regional debt guaranteed by the government was not included but this, and the sheer size of it, had lain underneath everyone’s radar.

Think of it; twenty-two trillion dollars worth of assets and liabilities and accounted for nowhere. No need to worry anymore about Target2; a mere tuppence at one trillion dollars, a decimal point. Just exactly what these assets and liabilities might be is anyone’s guess. Just which nations generated them is also anyone’s guess as no data or explanation is provided. Just what any country’s real debt to GDP ratio might be if these assets/liabilities were included in the equation is also anyone’s guess but I think it is safe to assume that the numbers would be off the charts; far off the charts.

“Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces.” 

                        -Sigmund Freud

You know, these are not blue fairies or gnomes or elves that have gone missing. These are twenty-two trillion dollars ($22 trillion) of loans and securitizations and mortgages that are found and accountable for by no one. These are real assets and real liabilities that have been turned into cash by the ECB and it causes me to wonder just how accurate the Money Supply numbers are for Europe with this amount of cash being pumped into the system. I also wonder what anyone’s real balance sheet looks like and I wonder what kinds of losses are being incurred and by whom. To be quite forthright, and in my opinion, this seems to me not just the rigging of the game or the gaming of the system but something far past that; something out beyond the realm of the credible and of real world experiences.

This is what we are investing in when we buy European bonds? This is where we are putting our client’s money? I don’t know; they may have gone mad but I have not.

Have you?

“An error does not become truth by reason of multiplied propagation, nor does truth become error because nobody sees it.” 

                    -Mahatma Gandhi