A Run On The Global Banking System—How Close Are We?

Nine weeks after its bankruptcy, the general public still hasn’t quite realized the implications of the MF Global scandal.

Once he looks down, then he’ll begin to fall.

My own sense is, this is the first tremor of the earthquake that’s coming to the global financial system. And how the central banks and financial regulators treated the “Systemically Important Financial Institutions” that had exposure to MF Global—to the detriment of the ordinary, blameless customer who got royally ripped off in its bankruptcy—is both the template of how the next financial crisis will be handled, and an accelerator that will make the next crisis happen that much sooner.

So first off, what happened with MF Global?

Simple: It went bankrupt—because it made bad bets on European sovereign debt, by way of leveraging positions 100-to-1. Yeah, I know: Stupid. Anyway, they went bankrupt—which in and of itself is no big deal. It’s not as if it’s the first time in history that a brokerage firm has gone bust. But to me, the big deal in this case was the way the bankruptcy was handled.

Now there are several extremely serious aspects to the MF Global case: Specifically, how their customers were shut out of their brokerage accounts for over a week following the bankruptcy, which made it impossible for those customers to sell out of their positions, and thus caused them to lose serious money; and of course how MF Global was more adept than Mandrake the Magician at making money disappear—about $1 billion, in fact, which still hasn’t turned up. These are quite serious issues which merit prolonged discussion, investigation, prosecution, and ultimately jailtime.

But for now, I want to discuss one narrow aspect of the MF Global bankruptcy: How authorities (mis)handled the bankruptcy—either willfully or out of incompetence—which allowed customer’s money to be stolen so as to make JPMorgan whole.

From this one issue, it seems clear to me that we can infer what will happen when the next financial crisis hits in the nearterm future.

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The European Central Bank Loses Its Virginity

And it means more than is apparent.

This post is adapted from analysis which appeared in The Strategic Planning Group.

Mario, relax . . .

So yesterday, the European Central Bank (ECB) doled out €489 ($639) billion in loans to the European banking sector.

Why’d they do it? ‘Cause Europe’s banks are broke: That is, if all the crap they collectively hold on their books were marked to market, their liabilities would be greater than their assets. American banks shouldn’t smirk: The only reason they aren’t declared bankrupt for the same reason is because of the suspension of FASB 157 back in March 2009.

The ECB lent out the €489 billion against any and all collateral the European banks would put up. In exchange for this collateral—no matter how damaged—the banks got 1% loans, which is not merely free money but essentially subsidized money: Eurozone inflation is around 3%, and except for German and Dutch debt, all sovereign bonds are yielding more than 3%. Thus a 1%-interest loan from the ECB is like being paid to take out a loan—and who wouldn’t want that deal?

Ordinarily, no bank wants to be seen to be taking money from the central bank, because it makes the bank look weak, and therefore hurts its reputation on the markets. But in this case, 523 banks—count ‘em, 523—took the ECB money: Which proves both how fragile the situation really is, and how generalized that fragility really is. European banks no longer care what it looks like, as survival has trumped appearances.

Be that as it may, the banks took the money. And like their American counterparts, who took the Federal Reserve’s $7.7 trillion of free money and used it to buy Treasury bonds, the European banks are likely to plow this ECB largesse into sovereign debt: Thus they will make risk-free profits. And what bank doesn’t want that.

This was a major move, by the way: The ECB—after protesting for months that it was not and would never be the lender of last resort—has become . . . the lender of last resort: It has finally lost its virginity. Not only that, the ECB—like every recently deflowered naïf—will find it next to impossible to say “No” the next time the European banks come looking for nookie.

There are three aspects to this situation that I want to look at here:

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About Gold: Don’t Panic!!!

It’s momentary—and it’s because of the euro.

This post is adapted from analysis which appeared last week in The Strategic Planning Group.

For those of us watching the gold markets—that is, those of us anticipating the collapse of the euro and the eventual collapse of the dollar—the last week has been a scary ride: Gold has fallen over 8.6%, from a high of $1,730 on December 7 to $1,580 on December 14.

WTF???, I can practically hear everyone say. The fundamentals would point to gold being a safe haven play—it should not be falling: If anything, it ought to be rising.

But a fall of 8.6%? In a week?

The first thing that pops into my head is, Don’t Panic!!

The second thing that pops into my head is, This is to be expected—and is only a temporary pullback.

Let’s take the second notion first: The reason the fall in gold is to be expected—and the reason it might well fall further—is because of the euro.

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Why Gay Marriage Doesn’t Make Sense—and Isn’t Fair

I took a lot of slack recently, for saying I’m against gay rights. In a 2,000 word piece, my disagreement with the concept of gay rights was a passing reference of all of three words—exactly three words.

A slogan on a t-shirt
is not a reasoned argument.

The extent of my “homophobic rant”?

“Gay rights—no.”

From the reaction of a surprisingly large number of people, you’d think I’d called for every homosexual to be rounded up and put into Black Marias with no tailpipes. And since I have identified myself philosophically as a conservative Catholic (though not spiritually, as I do not believe in God), a lot of people took my objection to gay rights to mean that I was some close-minded Bible-thumping bigot who hates all gays for the mere fact of being gay.

Amazing, what people will infer out of thin air.

I don’t have an issue with homosexuals or homosexuality. My own sense—which seems to be confirmed by science—is that homosexuality is an inborn predisposition, no different than, say, alcoholism or left-handedness: There isn’t much a person born with the characteristic can do about it.

Those with an inborn predisposition—any inborn predisposition—can choose to not carry out the urgings of their predisposition: That is, they can choose to repress their predisposition. Alcoholics go to AA meetings precisely so as to repress the urge of their predisposition to drink themselves to death; my grandmother (born a lefty) had her left hand tied to her belt when she was taught to write in the 1930’s.

But though people can repress their predisposition—whatsoever that predisposition might be, be it positive, negative or neutral—they can’t choose to have or not to have their particular predisposition. As Lady Gaga says, they were born this way.

As an inborn predisposition which I do not share, I am indifferent to homosexuality, to the same degree that I am indifferent to left-handedness or alcoholism: Two other traits which I do not share. (Parenthetically, I’ve always suspected that those who belligerently “hate the gays” are secretly afraid that they themselves might be gay; but that’s for another post.) And just as I think that people who are left-handed or alcoholic should not be discriminated against, I think it’s wrong to discriminate against homosexuals qua homosexuals.

But what I am saying is that homosexuals should not receive certain privileges that society has deemed befit some citizens and not others.

Like the benefits of marriage.

Our society grants married people certain rights and privileges—certain benefits—which homosexual couples believe they ought to receive as well. Read more »