This Game Is About Over
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2011-08-11 08:28 by Karl Denninger
in Editorial , 12 references Ignore this thread
This Game Is About Over

We blew it.

We, the people, and governments, blew it.

In 2007 I began writing about the banks and the fraudulent accounting that they were employing world-wide, and had been for decades.  The premise of holding things on their balance sheet at "unobservable" prices, yet counting them as assets and claiming that they were "money good" is in fact a scam as that "value" is predicated on one and only one thing - trust in the person making the claim.  There is no externally-observable and verifiable confirmation on these valuation claims - it is a parlor trick in that the alleged "chocolates" have proved time and time again to be used dog food.

Bear Stearns and then Lehman blew up when the charade of their claimed valuations became subject to reasonable doubt, the market refused to accept their collateral and claims of "value" and ultimately those "values" were exposed as falsehoods, resulting in the destruction of the company and loss of all shareholder value.

Now it's happening again.  Bank of America is trading at half of their claimed book value.  There are only two possibilities: The book value is a lie or the market is radically wrong about valuation.

The "black box" at the time was counterparty derivative exposure - and still is.

We refused, after the 2007/08/09 crash, to force full and complete transparency on these books of risk by forcing them all onto an exchange with nightly mark-to-market and the posting of cash margin against any underwater positions.

Clearinghouses do not solve this problem

This morning we have Grasso on CNBS once again trying to defend the practice of these "customized OTC derivatives." 

Abject nonsense.

These so-called "customized" derivatives are nothing more than an ability to rob customers by denying them the ability to see, in real time, bid, offer, open interest and size across the entire market.  This in turn means that the bank on the other side can take advantage of its customer because the customer is severely disadvantaged. 

This is one of the banks' big money-makers - and why not?  When the customer can't see it's easy to rob him blind!

But it is this very structure, along with allowing banks to mark their assets wherever they wish along with understating provisions and releasing loss reserves far in excess of reason that allows playing with earnings numbers but results in gross overstatements of value - and capitalization.

Ultimately, as the market calls "BS!" on the claimed values, rumor becomes reality as nobody will accept your claim of solvency if you potentially are on the hook to pay them but the market says your book value is half of what you claimed it to be!

The solution to this is to prevent banks from playing this game.  One Dollar of Capital ends all of this cock-and-bull nonsense instantaneously by requiring that for each dollar of unsecured lending - that is, a loan that is not backed by a market-priced asset - the bank must have one dollar of actual capital - free-and-clear cash or a cash-equivalent (which is NOT pledged in a repo or other transaction.)

It also ends the ability to crank leveraged returns by banks, of course. 

But is this bad?  No, it's good - because all of the panics in recent memory have had to do with banks that have lost confidence.  1987.  The Asian and Latin American implosions.  2007/08. 

And now.

This morning the source of the dive is a rumor from un-named sources that Asian banks are "reducing counterparty exposure" to French banks.  The effect was instantaneous - it detonated our futures, sending them down more than 30 handles, or about 3%, in minutes.

We cannot stop these rumors and the periodic panics that are easily-ignited and destroy value until we get rid of the ability of banks to lie and obscure asset valuations.  Only when we demand that these institutions place an actual dollar of capital behind every unsecured act of lending, no matter how it's conducted (e.g. in derivatives), and that every asset be marked to the market on a daily basis and treated as unsecured if the claim is made that no market price is available will this crap end.

This is NOT about fiat .vs. hard-backed currencies.  It has nothing to do with the form of money and everything to do with the issuance of credit against hot air - that is, nothing - where the liability created is real but the asset's value is a myth.

Our CONgress and Executive, along with Ben Bernanke, must be held personally accountable for their utter refusal to stop the balance sheet games and false claims of value.  This is nothing more than state-sanctioned fraud and our refusal to put a stop to it is now threatening to once again blow our markets and economy straight to Hell.