I want to take a moment to relate some information that has come to my attention recently, which has the potential to affect everyone on this planet; but particularly those in the united States of America, since they will first be affected by this.
Over the course of the last couple of decades, the financial managers have been allowed to regulate themselves. There was an implicit mandate to create a boom in the housing market in order to bolster the economy.
In order to create this housing boom, a variety of “exotic” financial instruments were employed, which enable them to leverage their assets, and give more loans than they would have generally been able to give. Most of the troubled financial institutions of today were using “off-balance sheet” entities to hold these financial instruments, many of which were very risky.
Well, it looks as if the widely abused loop-hole that allowed them to keep things off of their balance sheet back-fired in an awesome way. Now the new financial accounting standard regulations FAS 140 are forcing them to move these entities back onto their balance sheet and realize any gains or losses.
Here is an explanation that I first saw at the beginning of June, from Monty Guild and Jim Sinclair, two men who have proven the completeness of their understanding to me, many times over:
This is one of several potential reasons why gold can go ballistic at any time. The US government will have to step in and stop the CPA’s from requiring QSPE’s from going on balance sheets. Simultaneously the Fed must loan money for bank balance sheets. Soon the Fed’s balance sheet will be exhausted with no capital left to loan… so they will do what Jim Sinclair and I have been saying for months. They will actually have to print money and thus will substantially ramp up the money supply in order to loan to banks and stabilize the bank’s balance sheets.
This would be a very bad scenario should it come about. I pray that it doesn’t but if it does… inflation could become a very big problem. As you can see I am of the school of thought that monetary supply increases are felt in the inflation numbers a few months (6-9) later, a view that is widely held among economic commentators.
Jim Sinclair’s Commentary
QSPE = Qualifying Special Purpose Entity, another Geek creation of smoke and mirror assets that has no market so any mark to market is a joke.
FASB = Financial Accounting Standards Board
You buy the story that financial problems are mainly behind us, and the dollar is sound at these levels? If so, you may have missed your dose of lithium this week.
The US Banker’s latest edition is going to make US bankers sick. The following is another disaster for the present disaster filled financials. Un-priceable is a code word for no market, which really means no value. Going on a balance sheet means that you have to value them.
“Now comes a rather under-the-radar bombshell. FASB has decided to “eliminate the concept of the QSPE” in the revised financial-accounting standard, FAS 140, and also will “remove the related scope exemption from FIN 46R,” says FASB director of technical activities Russ Goldin. FASB is sill studying actual implementation and disclosure issues, but it seems pretty clear those un-priceable, lamentable assets are headed for the balance sheets.”
FASB Lobs a Balance-Sheet Bombshell
U.S. Banker | Sunday, June 1, 2008
By Joseph Rosta
Losses tied to banks’ off-balance-sheet subprime-mortgage investments have reached into the hundreds of billions of dollars and caused some real soul searching among the nation’s top accounting group, The Financial Accounting Standards Board, which has moved quickly to radically alter the rules for how banks must account for so-called qualified special-purpose entities, or QSPEs.
Reform is needed and probably inevitable, but is FASB moving too fast? Some banks may sit on QSPEs, whose values are almost equal to their balance-sheet assets, analysts say. Forcing financial institutions to load up their balance sheets too soon with these still largely untradeable holdings could prolong the financial market’s misery.
The IMF, The Bank of England, the Securities and Exchange Commission, the President’s Working Group and other groups have jumped on the reform bandwagon. And since March, FASB staffers have been gathering data and assessing whether risk was masked under current accounting rules used by banks for securitized investment vehicles, collateralized debt obligations and other toxic instruments currently languishing in an illiquid market.
Now comes a rather under-the-radar bombshell. FASB has decided to “eliminate the concept of the QSPE” in the revised financial-accounting standard, FAS 140, and also will “remove the related scope exemption from FIN 46R,” says FASB director of technical activities Russ Goldin. FASB is sill studying actual implementation and disclosure issues, but it seems pretty clear those unpriceable, lamentable assets are headed for the balance sheets.
Final FASB board deliberation is expected this month, with a public comment period starting in July, followed by a roundtable, at which critics are invited to “meet publicly with the board and debate,” Goldin notes. The changes could be finalized by late in the third quarter. The effective date: June 2009.
Well, it was just a couple of days ago that I saw the red flag being raised up by Jim Sinclair, once and for all. He is now urging everyone to brace for a potentially devastating blow to the financial system, which may well send the price of gold up-through the 1,650 range and many of our banks into oblivion.
Here is Mr. Sinclair’s clarion call, which was given in the hopes that more of us will take action to protect our-selves and our families:
The Catalyst For Financial Disaster
A serious event occurred today. This event was the very public international recognition of more off balance sheet so called “assets” revealed as having little, if any, value.
This event is arguably the most serious financial upset ever. If you have not protected yourself, it is getting very late – maybe too late.
Your best hope is that this event is so complex that the herd of self anointed experts has no clue what that vehicle is, how large it is and therefore the profound meaning it has.
Gold, serious junior gold shares (the only seriously underpriced and therefore real value in equities) and non-dollar short term federal currency instruments are your sanctuary. You better get there, and get there FAST!
The meaning of this is not only are Freddie and Fannie’s troubles much costlier than realized, but now there is an entirely new definition of market-less financial entities with off balance sheet assets that undermine primarily the US and now international banking systems. Conduit mortgage OTC derivatives will have to be marked down now that the sun is shining on them.
The U.S. mortgage industry transformed itself in a way that has opened dangerous SIV sub prime real estate conduits to global capital markets.
A conduit loan is priced by swaps and swap spreads, thereby becoming a package of various OTC derivatives generally derived from a formula that would make Einstein look like a kindergarten mathematician.
By turning mortgages into securities, lenders created vast distances between homeowners and their mortgage holders, who can be anywhere in the world such as Australia.
US banks have written down $450 billion in bad housing loans. The revelation from NAB means that they will now certainly need to take provisions to $1,000 billion. Write-downs of $1,300 billion and perhaps even more are in the cards.
That guarantees the USDX at .6200 and more likely at .5200.
That guarantees gold to reach at least $1650 much sooner than I anticipated.
This strongly suggests that my estimate of $1650 is significantly below the price of gold coming soon.
This opens the probability that a modernized and revitalized Federal Reserve Gold certificate ratio tied to the M3 will evolve into the monetary system.
The greatest economic crime ever committed is OTC derivatives. Those that proffered these will have killed more people than most wars.
This is it and it is NOW!
Honestly, I cannot put it any more succinctly than the words of Jim and Monty. There is something coming, in the material world; nobody knows exactly how it will manifest itself or what the response will be.
But it would be prudent for you to pay very close attention to what is going on over the next few months. It would also be wise to get ahold of some hard-cash, such as silver coins and silver dollars, even gold coins if you can afford them, it is also good to keep some regular cash on hand, in case your bank closes its doors.
If enough banks close their doors at once, the FDIC will be overwhelmed. They will be unable to handle the situation, which will lead to many being without cash for, quite possibly, weeks or months.
Keep whatever you are protecting your-self with, at a safe place, which nobody knows about so petty thieves cannot loot them from you. Trust me, I’ve been through this before, and it is not pretty when you work really hard for a bit of protection, only to have someone who has sat on their ass take it at during the final hour.
Also, it wouldn’t be a bad idea to have some non-perishable foods and water on-hand, in case things get really bad. During the worst of disasters, the shelves of the grocery stores are picked clean; so it would behoove you to plan for this possibility.
I really do hope that nothing drastic happens, but it looks as if a great imbalance has been placed into the system, which is finally starting to correct itself. This is something that has to happen and it will happen when it is ready to happen, whether or not you are ready for it to happen. It certainly will not play favorites, like so many other things.
Be ready, stand strong, and hold to your center. If you are able to stay centered and aware, while the toxicity of those who are not strong bombards you from all directions, then you will be just fine during all of this.
Good luck everyone.