The Resourceful Bear Blog

It was a hey day for all, except the yen carry traders, as the US Dollar, US Stocks, world stocks, debt, and gold rose on the massive support of the US Dollar by the Federal Reserve. Joe Bel Bruno of the Associated Press wrote that Wall Street moved higher on hopes of credit recovery. Hope is all that can be expected.

The ongoing five cay Yahoo Finance chart of UUP, HYG, LQD, MUB, CMF, and SPY, shows a "pop" came to debt instruments, as the US Dollar, US stocks and world stocks rose as the US Federal Reserve provided Dollar support ... The rise seen here in the chart of UUP, HYG, LQD, MUB, CMF, and SPY is likely capitalism's finale rally.

Eddy Elfenbein documents today's fall in The Ted Spread to 3.27; it closed down at 2.83.

Mike Mish Sheldon relates: 'Armageddon in Corporate Bonds'; and I say 'Ditto In Municipal Bonds'.

Gold, $GOLD, rose $2 to close at $790.

The gold ETF, GLD, rose to $78.50

Oil, USO, rose to $61.80

The US Dollar, $USD, rose to a new high at 83.07 ... $USD

The chart of the dollar bull ETF, UUP, suggests that a top is being made in the US Dollar ... UUP.

US stocks, VTI, closed up, in a pennant formation, to close at 49; prices usually fall from such patterns ... VTI

World stocks, EFA, closed up in similar fashion to close at 47.35.

US Treasury Bond, TLT, rose to 94.62

World currencies, DBV, rose 2.75% in a pennant pattern to close at 22.

The S&P, SPY, and the Dow, DIA, rose more than the Nasdaq 100, QQQQ, and the Russell 2000, IWM:
SPY 6%
DIA 6%
QQQQ 3%
IWM 4%

The chart of the Russell 2000, IWM, shows the death of capitalism quite well. The Russell 2000 is comprised of small US companies highly dependent on a functional financial, banking and credit system. Unfortunately the lending system had a cardiac arrest on September 11, 2008 when the banks found they could not sell stock to obtain capital; in consequence lending ceased across the board. While the Federal Reserve and world central banks have provided liquidity facilities in the extreme, and even provided full dollar funding to the markets, trust between lender and debtor has expired and cannot be and will not be enjoyed again. The stock and bond markets are going to fall desperately.

Notice the fall off of value in the Russell 2000 beginning on September 11, 2008, that is 9-11-2008, and then a short sell covering rally and a crescendo fall, that is waterfall, lower; and now a rise in a pennant pattern. Prices are usually resolved down from such patterns ... IWM

Risers of the day included:
Metal and mining manufacturing 15%
Energy producers XLE 10%
Utilities VPU 8%
Energy services OIH 11%
Steel SLX 11%
Brazil EWZ 9%
China FXI 8%
Russia 8%
BRICS EEB 7%

A major part of today's rally was simply a rally to get the oil stocks back up to the edge of a massive head and shoulders pattern that goes back to April 2006. Take for example, Exxon Mobil, XOM: it has moved back up to 75 so it can fall once again ... XOM

Despite the central banks moving towards extending 0% interest, the bond markets have declared a defacto interest rate hike. For example, the interest rate on the 10 year US Government note, $TNX, has been rising. It is going up from 38 ... $TNX

The joy on Wall Street and on many investment blogs was simply capitalism's death rattle -- a gurgling or rattle-like noise produced shortly before or after death by the accumulation of excessive respiratory secretions in the throat.

Financial services, IYF, rose 2%, and Real estate, IYR, rose 1% ... Chart of IYR shows the bearish dragonfly candlestick

The yen carry trade, EUR/JPY, FXE:FXY, termed the Armageddon Trade for its recent damage to global wealth and liquidity recently, fell 0.10%; and the yen, FXY, fell 0.25%. The chart of FXE:FXY shows the Armageddon Fall in the Armageddon Trade, the term applied to the ability of the yen carry trade to cause a total wipe out of stock, commodity and currency values. This chart is the chart of the century. The chart of the once lucratively rewarding energy service providers, OIH, shows three black crows as the yen carry trade, better termed, the euro carry trade unwound; the fall is always more dramatic than the rise ... OIH ... FXE:FXY

The Euro, FXE, fell 0.4%.

The British Pound, FBX, fell 0.8%.

The Canadian Dollar, FXC, fell 0.3%.

World currencies, DBV, rose in a pennant pattern to close at 22 ... DBV

The ongoing five day Yahoo Finance chart of USD/CHF compared to USD/EUR, USD/JPY, UUP, and GLD, shows all the currency pairs taking the US Dollar higher; surprisingly liquidity flowed into gold, despite the rise in the US Dollar. I attribute gold's rise to the rise in the metal and mining manufacturing stocks, XME, 15% rise ... Chart of currency trades shows gold to be surprisingly up

The chart of gold relative to stocks, GLD:VTI, provides clear, cogent, and convincing evidence of both the value of gold and the investment demand for gold ... GLD:VTI

I hope for those still invested in the stock markets that they went short at the end of the day.

The suretors, that is the debt guarantors, were especially good candidates to go short; these included Ambac, ABK, Radian Group, RDN, and MBIA, MBI as these had hoped to get Federal Reserve funding. They are now set to fall greatly ... ABK ... RDN ... MBI

The risk of loss of investment principle is at the highest level ever, despite assurances from central banks globally that monies in banks is guaranteed; given the fall of stock and bond market value I believe that is coming, their statements of surety are going to be severely tested.

If one has wealth, it is best to put it far, far away from the current financial system, safe and sound in a guarded vault, like BullionVault and GoldMoney, with an account personally at streetTracks Gold Trust, and in physical possession of gold coins.

This especially being the case, as I cite the horrific experience of clients of Lehman Brothers whose accounts were frozen and now have to come up with money to secure their position.

Tom Cahill of Bloomberg on October 15, 2008 reports that "Lehman Brothers ... hedge-fund clients may have to pay more collateral on $65 billion of assets frozen when the investment bank went bankrupt a month ago. Lehman’s London-based prime brokerage has about 3,500 active clients including hedge funds that own about $45 billion in securities, Steven Pearson, the partner at PricewaterhouseCoopers responsible for unraveling the unit, said ... They hold an additional $20 billion in short positions, or bets that prices will fall. While investors are largely unable to access their Lehman accounts, the value of the securities continues to fluctuate along with the markets. The clients may be required to put up more collateral if the value of those securities drops, a process known as a margin cal ... ‘Who is the holder of the risk of the securities? The hedge funds. If the value of the securities fell, they have to meet margin calls.’ Lehman’s bankruptcy, the world’s biggest, has rocked hedge funds that relied on the firm to provide loans, clear trades and handle administrative tasks."

Jesse in chart article is suggesting support for gold will come in at $740 before it soars again to $930 and beyond.

Elaine Meinel Supkis provides appropriate social commentary; "As the US tumbles into a bad, bad recession, we are having an election. And there is virtually no discussion about what is really wrong. Indeed, the main focus in this election isn't war or our trade deficit or yawning budget deficit, it is nearly all about race. To the fury of many who want otherwise. But then, from day one in the US, it has been all about race and slavery which were embedded within our Constitution and excised very painfully and often, extremely violently. I will discuss this history later. First, the economic news. After central banks nationalized the G7 banking systems, they managed to sort of restart the old status quo. This is bad".

Julie Creswell and Ben White of the New York Times in article 'The Guys From Government Sachs' document the bloodless political and economic coup effected by Hank Paulson to overthrow the neoliberal laissez faire capitalism established by University of Chicago professor Milton Friedman.

The Secretary of the US Treasury has appointed Wall Street Goldman Sachs investment bankers as stakeholders in state capitalism, that is state corporatism, to be taskmasters enslaving Americans and the world to debt.

"This summer, when the Treasury secretary, Henry M. Paulson Jr., sought help navigating the Wall Street meltdown, he turned to his old firm, Goldman Sachs, snagging a handful of former bankers and other experts in corporate restructurings.

In September, after the government bailed out the American International Group, the faltering insurance giant, for $85 billion, Mr. Paulson helped select a director from Goldman’s own board to lead A.I.G.

And earlier this month, when Mr. Paulson needed someone to oversee the government’s proposed $700 billion bailout fund, he again recruited someone with a Goldman pedigree, giving the post to a 35-year-old former investment banker who, before coming to the Treasury Department, had little background in housing finance.

Indeed, Goldman’s presence in the department and around the federal response to the financial crisis is so ubiquitous that other bankers and competitors have given the star-studded firm a new nickname: Government Sachs.

The power and influence that Goldman wields at the nexus of politics and finance is no accident. Long regarded as the savviest and most admired firm among the ranks — now decimated — of Wall Street investment banks, it has a history and culture of encouraging its partners to take leadership roles in public service.

It is a widely held view within the bank that no matter how much money you pile up, you are not a true Goldman star until you make your mark in the political sphere. While Goldman sees this as little more than giving back to the financial world, outside executives and analysts wonder about potential conflicts of interest presented by the firm’s unique perch.

They note that decisions that Mr. Paulson and other Goldman alumni make at Treasury directly affect the firm’s own fortunes. They also question why Goldman, which with other firms may have helped fuel the financial crisis through the use of exotic securities, has such a strong hand in trying to resolve the problem.

The very scale of the financial calamity and the historic government response to it have spawned a host of other questions about Goldman’s role.

Analysts wonder why Mr. Paulson hasn’t hired more individuals from other banks to limit the appearance that the Treasury Department has become a de facto Goldman division. Others ask whose interests Mr. Paulson and his coterie of former Goldman executives have in mind: those overseeing tottering financial services firms, or average homeowners squeezed by the crisis?

Still others question whether Goldman alumni leading the federal bailout have the breadth and depth of experience needed to tackle financial problems of such complexity — and whether Mr. Paulson has cast his net widely enough to ensure that innovative responses are pursued.

“He’s brought on people who have the same life experiences and ideologies as he does,” said William K. Black, an associate professor of law and economics at the University of Missouri and counsel to the Federal Home Loan Bank Board during the savings and loan crisis of the 1980s. “These people were trained by Paulson, evaluated by Paulson so their mind-set is not just shaped in generalized group think — it’s specific Paulson group think

There are people at Goldman Sachs making no money, living at hotels, trying to save the financial world,” said Jes Staley, the head of JPMorgan Chase’s asset management division. “To indict Goldman Sachs for the people helping out Washington is wrong.”

Mr. Paulson himself landed atop Treasury because of a Goldman tie. Joshua B. Bolten, a former Goldman executive and President Bush’s chief of staff, helped recruit him to the post in 2006.

Neel T. Kashkari arrived in Washington in 2006 after spending two years as a low-level technology investment banker for Goldman in San Francisco, where he advised start-up computer security companies.

The A-team includes Dan Jester, a former strategic officer for Goldman who has been involved in most of Treasury’s recent initiatives, especially the government takeover of the mortgage giants Fannie Mae and Freddie Mac. Mr. Jester has also been central to the effort to inject capital into banks, a list that includes Goldman.

Another central player is Steve Shafran, who grew close to Mr. Paulson in the 1990s while working in Goldman’s private equity business in Asia. Initially focused on student loan problems, Mr. Shafran quickly became involved in Treasury’s initiative to guarantee money market funds, among other things.

Other prominent former Goldman executives now at Treasury include Kendrick R. Wilson III, a seasoned adviser to chief executives of the nation’s biggest banks. Mr. Wilson, an unpaid adviser, mainly spends his time working his ample contact list of bank chiefs to apprise them of possible Treasury plans and gauge reaction.

Another Goldman veteran, Edward C. Forst, served briefly as an adviser to Mr. Paulson on setting up the bailout fund but has since left to return to his post as executive vice president of Harvard. Robert K. Steel, a former vice chairman at Goldman, was tapped to look at ways to shore up Fannie Mae and Freddie Mac. Mr. Steel left Treasury to become chief executive of Wachovia this summer before the government took over the entities.

Treasury officials acknowledge that former Goldman executives have played an enormous role in responding to the current crisis. But they also note that many other top Treasury Department officials with no ties to Goldman are doing significant work, often without notice. This group includes David G. Nason, a senior adviser to Mr. Paulson and a former Securities and Exchange Commission official.

Robert F. Hoyt, general counsel at Treasury, has also worked around the clock in recent weeks to make sure the department’s unprecedented moves pass legal muster. Michele Davis is a Capitol Hill veteran and Treasury policy director. None of them are Goldmanites.

Timothy F. Geithner, the president of the Federal Reserve Bank of New York, told him no, according to a former Lehman executive who requested anonymity because of continuing investigations of the firm’s demise. Its options exhausted, Lehman filed for bankruptcy in mid-September.

Mr. Geithner, 47, played a pivotal role in the decision to let Lehman die and to bail out A.I.G. A 20-year public servant, he has never worked in the financial sector. Some analysts say that has left him reliant on Wall Street chiefs to guide his thinking and that Goldman alumni have figured prominently in his ascent.

After working at the New York consulting firm Kissinger Associates, Mr. Geithner landed at the Treasury Department in 1988, eventually catching the eye of Robert E. Rubin, Goldman’s former co-chairman. Mr. Rubin, who became Treasury secretary in 1995, kept Mr. Geithner at his side through several international meltdowns, including the Russian credit crisis in the late 1990s.

Mr. Rubin, now senior counselor at Citigroup, declined to comment.

A few years later, in 2003, Mr. Geithner was named president of the New York Fed. Leading the search committee was Pete G. Peterson, the former head of Lehman Brothers and the senior chairman of the private equity firm Blackstone. Among those on an outside advisory committee were the former Fed chairman Paul A. Volcker; the former A.I.G. chief executive Maurice R. Greenberg; and John C. Whitehead, a former co-chairman of Goldman.

The board of the New York Fed is led by Stephen Friedman, a former chairman of Goldman. He is a “Class C” director, meaning that he was appointed by the board to represent the public.

During his tenure, Mr. Geithner has turned to Goldman in filling important positions or to handle special projects. He hired a former Goldman economist, William C. Dudley, to oversee the New York Fed unit that buys and sells government securities. He also tapped E. Gerald Corrigan, a well-regarded Goldman managing director and former New York Fed president, to reconvene a group to analyze risk on Wall Street.

Some people say that all of these Goldman ties to the New York Fed are simply too close for comfort. “It’s grotesque,” said Christopher Whalen, a managing partner at Institutional Risk Analytics and a critic of the Fed. “And it’s done without apology.”

But when bankruptcy loomed for A.I.G. — a collapse regulators feared would take down the entire financial system — federal officials found themselves once again turning to someone who had a Goldman connection. Once the government decided to grant A.I.G., the largest insurance company, an $85 billion lifeline (which has since grown to about $122 billion) to prevent a collapse, regulators, including Mr. Paulson and Mr. Geithner, wanted new executive blood at the top.

They picked Edward M. Liddy, the former C.E.O. of the insurer Allstate. Mr. Liddy had been a Goldman director since 2003 — he resigned after taking the A.I.G. job — and was chairman of the audit committee. (Another former Goldman executive, Suzanne Nora Johnson, was named to the A.I.G. board this summer.)

Like many Wall Street firms, Goldman also had financial ties to A.I.G. It was the insurer’s largest trading partner, with exposure to $20 billion in credit derivatives, and could have faced losses had A.I.G. collapsed. Goldman has said repeatedly that its exposure to A.I.G. was “immaterial” and that the $20 billion was hedged so completely that it would have insulated the firm from significant losses.

As the financial crisis has taken on a more global cast in recent weeks, Mr. Paulson has sat across the table from former Goldman colleagues, including Robert B. Zoellick, now president of the World Bank; Mario Draghi, president of the international group of regulators called the Financial Stability Forum; and Mark J. Carney, the governor of the Bank of Canada."

I am glad the New York Times is telling us the truth about the ruling elites from Goldman Sachs. But note, that they confuse readers by praising these bankers. This is a prime example of Orwellian disinformation where left is right and down is up, bad becomes good, and error becomes policy. God's Word reassures me greatly that He is Sovereign throughout all of this, and that He has two kinds of vessels, the first vessel is found in Romans 9:20-23 and the second vessel in Isaiah 51:20 and I Thessalonians 5:9.

Elaine Meinel Supkis provides the charts from the Federal Reserve which document how much the insolvent banks are borrowing to stay alive. The FRED GRAPH documents the banks have no reserves, and are borrowing to recapitalize their balance sheets to protect them as long as they can from being wiped out by exposure to settlement on credit default swaps and other derivatives. This chart shows capitalization after the banks discovered they could not sell stock to obtain capital.

Here are the charts of the money center banks, KBE, and regional banks, IAT; the yen carry traders sold out of their interest already, leaving others holding the bag in these toxic walking dead men. Both charts show today's bearish dragonfly candlesticks ... KBE ... IAT

The US Government will be carrying out state corporate rule through the CPFF lending facility at the nine banks it acquired. Lending which use to come from the commercial lending marketplace, will now be coming from the Federal Reserve, that is the Banks of Banks, and flowing to corporations deemed essential for the purposes of the security and prosperity needs of the North American homeland, that is combined Canada, Mexico, and America, that, is CanMexAmerica.

Eddy Elfenbein in article 'October 20, 2008 CEO Pay at the Nine Government-Owned Banks' presents the CEO pay of the nine banks which have been nationalized.

Clearly, the liquidity meltdown that began September 11, 2008, when the banks discovered that they could not issue stock and raise capital, is intensifying. (It was at that time they quit lending and gold soared from $750 to its current price of $850).

Rising exposure to settlement of credit default swaps is draining liquidity out of the financial system faster than the central banks pour it in.

All liquidity added to the system is trapped, and evaporated, or better said, discharged from the system as soon as it is added to settle credit default swap liabilities.

The governments of the world must stop their wasteful adding of liquidity immediately, as they are burdening the taxpayers with debt, debt and more debt. Austrian economist Mike Mish Sheldon "tells it like it is": You cannot patch a busted dam with water

They are enslaving mankind to the financial organizations of the world and their derivatives; definitely these are weapons of financial mass destruction.

The Gaius Marius article It's Lehman CDS Settlement Day relates: "Based on the results, sellers of protection may need to make cash payments of more than $270 billion, BNP Paribas SA strategist Andrea Cicione in London said.

No one knows exactly how much is at stake because there's no central exchange or system for reporting trades. It's that lack of transparency that has increased the reluctance of financial institutions to do business with each other, exacerbating the global credit crisis and prompting calls for regulation of the market. More than 350 banks and investors signed up to settle credit-default swaps tied to Lehman.

The list of participants includes Newport Beach, California-based Pacific Investment Management Co., manager of the world's largest bond fund, Chicago-based hedge fund manager Citadel Investment Group LLC and American International Group Inc., the New York-based insurer taken over by the government, according to the International Swaps and Derivatives Association in New York".

I suggest a re-read of the Gaius Marius statement: "It's that lack of transparency that has increased the reluctance of financial institutions to do business with each other." The fallout is that of credit gridlock, that is lending gridlock, where the lending marketplace is shut not only by the bankers but by the debtor and lender not coming to the table to do business.

There are a number of terrible consequences of the current lending crisis;
1) There is a fall in the value of the debt instruments such as the credit ETFs ongoing Yahoo Finance Yahoo Finance Chart of CVY, HOG, HYG, JNK and LQD ... CVY, HOG, HYG, JNK, and LQD

While the Federal Reserve announced the CPFF facility; it will be too little too late; and will only work to a limited degree with and for corporations that will be integrated into the government.

2) There is a fall in the value of emerging market bonds, EMB; it fell 5% today, making for an average of 2% per day this week ... EMB

3) The rise of the US Government as the sole lender; that is the sole provider of capital; this means capitalism is dead; and can only lead to state corporatism, that is state corporate rule in the extreme; and a situation where the Federal Reserve is the bank of banks.

4) There is coming with days, at the most, weeks, 'a financial blackout', where all of a sudden the corporations will have no short term capital, that has traditionally been provided by the commercial paper marketplace. This means there is not going to be money and liquidity to make payroll, cut account payable checks, let alone roll over maturing debt, or make capital imporvements.

5) A meltdown of the municipal bond market place as is seen in the daily fall this week in value of MUB of about 2 percent. There has been no CPFF type of facility announced by the Federal Reserve for the municipal bond marketplace; and one may not be forthcoming. Therefore, I anticipate an implosion in the muncipal bonds arena, with municipalities and states having to lay off, municipalities going bust, and a run on the municipal and tax free bonds and mutual funds by investors.

The Fidelity Massachusetts Municipal Income Bond Fund, seen here in the ongoing Yahoo Finance Chart of FDMMX compared to MUB and CMF which shows the ongoing decline since September 11, 2008 ... FDMMX, MUB, CMF

Suggested Reading
The Purpose Of Modern Capitalist Banking Systems Is To Create Increasing Debt And Not Increasing Wealth

Richard of the Resourceful Bear News Service reports that in early morning trading, US stocks, VTI, fell almost a full 1% after central bankers around the world took emergency and coordinated action to cut their lending rates.

Both world shares, EFA, and emerging market shares, EEM, fell 1.5%, on falling world currencies, DBV, which tumbled 3.8%.

Also, US Treasury Bonds, TLT fell to 98.25 manifesting bearish engulfing ... TLT

The interest rate on the 10 Year US Government note, ^TNX, rose to 3.5840 ... ^TNX

The Yahoo Finance ongoing chart of the gold ETF, GLD, relative to the EUR/JPY and the USD/JPY and UUP, provides fascinating insights into the interplay of gold and the two major currency pairs as well as the US Dollar. Today gold is up on both a lower EURJPY and a lower USDJPY ... GLD

Kitco.com reports that gold, $GOLD, is trading up at 914; and the US Dollar, $USD, down at 80.90.

Trading confirms that Peak US Dollar and Peak US Treasuries occurred Tuesday, October 7, 2008 as the US Federal Reserve announced the Commercial Paper Funding Facility, CPFF, to purchase U.S. commercial debt.

The chart of gold relative to US Stocks, GLD:VTI, and that of gold relative to world stocks, GLD:EFA, and that of gold relative to the Euro, GLD:FXE, shows gold rising not deflating ... GLD:VTI ... GLD:EFA ... GLD:FXE

The evidence is now in; and it is clear, cogent and convincing, that gold has arisen as the means of preserving wealth.

Investment application
I recommend that one be invested in gold, because of financial system instability, lack of liquidity and because of possible inability of the US government to make good on its surety promises of insuring bank accounts, brokerages, money markets and now commercial paper. I recommend diversification of investment in gold in four locations immediately, yes immediately: the gold ETF, GLD, directly through streetTRACKS Gold Trust, and not in a brokerage account; two BullionVault, three GoldMoney; and four a limited number of gold coins purchased from sources like Kitco.com.

Final thoughts
The central banks are trying to provide liquidity and keep liquidity in the world financial system; they will not be able to do so, because the banks are insolvent; and because they are refusing to lend; and because derivatives, the financial weapons of mass destruction are being settled, and stock traders are short selling, and the yen carry traders are borrowing at 0.5% interest from the Bank of Japan to go short the EUR/JPY and the USD/JPY.

The Federal Reserve yesterday became provider of liquidity and capital to facilitate ongoing economic activity via its new CRFF facility.

The Federal Reserve's role has expanded to become the US Bank of Banks, that is, the nation's bank.

The Federal Reserve will become the United States' monetary authority and capital provider.

Today's move toward zero percent interest, only causes a flight to gold. Those with savings and money in investment accounts must flee to gold because there is no way anyone can earn any interest on savings in banks or profit from going long in today's dilutive and unstable climate.

In as much as the bankers moved significantly closer to zero percent interest today, we have gone beyond the tipping point, we have gone over the edge, into greater financial market place instability, and an into ever increasing dissolution of liquidity.

The central bankers had to lower interest rates so they can say: "it's not our fault, we have done every thing we could do".

In the days ahead, as social chaos breaks out, and the government declares martial law and announces measures of civil security by enforcing the emergency management provisions of framework agreements, such as the Security and Prosperity Partnership of North America, the SPP, and unemployment soars, then the US Dollar's value will fall sharply, and we will have hyperinflation.

Not only is gold, now the means of preserving wealth, it will soon be the defacto world currency.

Once there is a total worldwide financial system breakdown, and currencies other than gold are totally burned out; then the mark, that is the charagma, of Revelation 13:17 will be introduced by the Seignior: "And that no man might buy or sell, save he that had the mark, or the authority of the beast, or the currency of his name."

Keywords
Revelation13:17, currencyofhisname

Charts show that gold rose and stocks fell when Bush took his pen to sign EESA; perhaps this week saw Peak US Dollar and Peak Treasuries and a bottoming in gold providing a safe entry point for buyers of the safe haven metal.
The Russell 2000, IWM, fell 2.87% for the day to close at 619 ... IWM

The ongoing Yahoo Finance one year chart of gold, GLD, compared to IAT, IWM, IWN, and IWO, shows a rise of 18% for gold ... Gold is up eighteen percent since the Citigroup CDO Bust started October 8, 2007.

The ongoing Yahoo Finance dive day chart of gold, GLD comapred to ITA, IWM, IWN, and IWO, shows gold's stunning rise in value as stocks fell when Bush took his pen out ... Five day chart of gold shows gold's rise and stocks fall at Bush's command

The ongoing MSN Finance one month chart of gold, GLD, compared to ITA, IWM, IWN, and IWO shows the breakout of gold on September 11, 2008 ... One Month chart of gold shows the breakout of gold since the banks were unable to sell assets or raise capital beginning on 9-11-2008

The Stockcharts.com chart of the gold ETF, GLD shows a close at $82.59.

The Yahoo Finance ongoing chart of GLD relative to the EUR/JPY and the USD/JPY, provides fascinating insights into the interplay of gold and the two major currency pairs. A rising USDJPY and a falling EURJPY took the US Dollar up and gold down as the market took the bailout to be dollar friendly ... GLD down for the week.

One supporting factor for gold is the James Chen USD/JPY update which shows the chart of USDJPY at the brink of resistance.

Valeria Bednarik confirms in article USD/JPY For Today suggesting that the USDJPY is down from today's 105.35.

James Chen's USD/CHF made chart of the day; it suggests that the USDCHF has hit resistance and is headed down.

The Elliott Wave Analysis Of EUR/USD, USD/JPY and GOLD by TheLFB News for Oct 03 08 provides the EUR/USD chart suggesting that it will be going up; and the GOLD chart suggesting it will soon be fininishing an Elliott Wave 2 down and also heading up with a floor of $770 to $800 ... EURUSD soon to be going up ... GOLD bottoming from and Elliott Wave 2 down

US Government Bonds, TLT, closed for the week at $97.40 ... TLT

The Ten Year US Government Note, $TNX shows a close at 36.44.

The US Dollar, $USD, closed the week at $80.47 ... $USD Weekly and $USD Daily

Jesse in Committment of Trader report for the US Dollar provides this chart of DX Dollar at resistance.

The dollar bull ETF, UUP, courtesy of Jack Chan from JC's Buy and Sell Signals shows a bearish lollipop hanging man candlestick ... UUP manifests a lollipop

Gold, $GOLD, closed the week at $835 ... $GOLD

S&P 500, $SPX, closed down 9.4% for the week at 1099.23; this is the first time in four years Eddy Elfenbein relates.

Fertilizer manufacturer, Agrium, AGU fell 36% this week; this chart more than any shows how the Euro drove commodity stocks up and it relates took that the Euro as part of an unwinding yen carry trade lives up to its name the Armageddon Trade ... AGU

At the beginning of the week, I asked blog readers, Which Way For SFK And SDK?

Well, charts show SFK rose 21% and SDK rose 27% ... SFK and SDK

Debt ETFs were stable today; these include LQD, HYG, CFT and EMB which will likely continue to loose value; and the principal value of the tax free municipal bond mutual funds like USSTX, will likely continue to fall, as interest rates rise. And the municipal bond ETFs such as MUB and TFI will likely continually go lower as well.

The Ted Spread closed at 3.85; this is the code red alarm relating that a total financial system breakdown can come at any time!

Here are various helpful charts for your examination.
The on going monthly MSN Finance chart of the gold ETF, compared to world stocks, EFA, and US Stocks, VTI, and US Treasuries, TLT

The ongoing five day Yahoo Finance chart of gold, GLD, relative to the US Dollar ETF, UUP, and the Euro, FXE, and oil, USO

The on going five day Yahoo Finance chart of the gold ETF, GLD, compared to FXE, EFA, and EEB

The on going five day Yahoo Finance chart of the gold ETF, GLD, compared to IWM, and SPY

The on going five day Yahoo Finance chart of the gold ETF, GLD, compared to FXE, USO, and RJI

The ongoing ten day MSN Finance chart of EUM, compared to TWM, SDK, and SFK

The the ongoing five day Yahoo Finance chart of EUM, compared to TWM, SDK, and SFK

The ongoing five day Yahoo Finance chart of the yen, compared to gold and the world's major currencies

Gold relative to world stocks: GLD:EFA

Gold relative to US Stocks: GLD:VTI

Gold relative to the euro: GLD:FXE

Gold relative to world currencies: GLD:DBV

Gold relative to oil: GLD:USO

Here is the news report at 4:30 PM announcing that President Bush had signed EESA.
At approximately 4:30 PM ET on Friday, October 3, 2008, Julie Hirschfeld Davis and David Espo of the Assoicated Press reported:

With the economy on the brink and elections looming, Congress approved an unprecedented $700 billion government bailout of the battered financial industry on Friday and sent it to President Bush who quickly signed it. (Here is the roll call vote courtesy of MyWay showing how the House members voted).

"We have acted boldly to help prevent the crisis on Wall Street from becoming a crisis in communities across our country," Bush said shortly after the vote, although he conceded, "our economy continues to face serious challenges."

Underscoring that somber warning, the Dow Jones industrials, up more than 200 points at the time of the House vote, ended the day down 157.

The final vote, 263-171 in the House, capped two weeks of tumult in Congress and on Wall Street, punctuated by daily warnings that the country confronted the gravest economic crisis since the Great Depression if lawmakers failed to act. There were 58 more votes for the measure than an earlier version that failed on Monday.

"We all know that we are in the midst of a financial crisis," House Republican leader John Boehner of Ohio said shortly before casting his vote for a massive government intervention in private capital markets that was unthinkable only a month ago.

"And we know that if we do nothing, this crisis is likely to worsen and to put us into an economic slump like most of us have never seen," he said.

House Speaker Nancy Pelosi, D-Calif., said the bill was needed to "begin to shape the financial stability of our country and the economic security of our people."

Treasury Secretary Henry Paulson pledged to begin using his new authority quickly, and Federal Reserve Chairman Ben Bernanke said the central bank would work closely with the administration.

At its core, the bill gives the Treasury Department $700 billion to purchase bad mortage-related securities that are weighing down the balance sheets of institutions that hold them. The flow of credit in the U.S. economy has slowed, in some cases drying up, threatening the ability of businesses to conduct routine operations or expand, and adversely affecting consumers seeking financing for mortgages, cars and student loans. Some state governments have also experienced difficulty borrowing money.

The House vote marked a sharp change from Monday, when an earlier measure was sent down to defeat, largely at the hands of angry conservative Republicans.

On Friday, 91 Republicans joined 172 Democrats to support the bill, while 108 Republicans and 68 Democrats opposed it. Twenty-five Republicans and 33 Democrats switched their votes from "no" to "yes." One Democrat who supported Monday's version, Rep. Jim McDermott of Washington, opposed the bill Friday. One Republican who didn't vote Monday, Rep. Jerry Weller of Illinois, voted "yes" on Friday.

Several of the Democrats who switched were members of the Congressional Black Caucus who said presidential candidate Barack Obama had pledged to support legislation easing the burden on consumers if he wins the White House.

Republican presidential candidate John McCain also lobbied for the measure, according to aides who declined to release a list of lawmakers he called.

Following Monday's vote, Senate leaders quickly took custody of the measure, adding on $110 billion in tax and spending provisions designed to attract additional support, then grafting on legislation mandating broader mental health coverage in the insurance industry. The revised measure won Senate approval Wednesday night, 74-25, setting up a furious round of lobbying in the House as the administration, congressional leaders, the major party presidential candidates and outside groups joined forces behind the measure.

In addition, the measure was changed to broaden the federal government's deposit insurance program, and the Securities and Exchange Commission loosened a regulation to ease the impact of the distressed assets on the balance sheet of financial institutions.

Despite occasionally strong criticism of the added spending and tax measures, the maneuvers worked — augmented by a sudden switch in public opinion that occurred after the stock market took its largest-ever one-day dive on Monday.

"No matter what we do or what we pass, there are still tough times out there. People are mad — I'm mad," said Republican Rep. J. Gresham Barrett of South Carolina, who opposed the measure the first time it came to a vote. Now, he said, "We have to act. We have to act now."

Rep. John Lewis, D-Ga., another convert, said, "I have decided that the cost of doing nothing is greater than the cost of doing something."

Critics were unrelenting.

"How can we have capitalism on the way up and socialism on the way down," said Rep. Jeb Hensarling of Texas, a leader among conservative Republicans who oppose the central thrust of the legislation — an unprecedented federal intervention into the private capital markets.

It was little more than two weeks ago that Paulson and Bernanke concluded that the economy was in such danger that a massive government intervention in the private markets was essential.

White the main thrust of their initial proposal was unchanged, lawmakers insisting on greater congressional supervision over the $700 billion, measures to protect taxpayers and steps to crack down on so-called "golden parachutes" that go to corporate executives whose companies fail.

Earlier in the week, the legislation was altered to expand the federal insurance program for individual bank deposits, and the Securities and Exchange Commission took steps to ease the impact of the questionable mortgage-backed securities on financial institutions.

In the moments before the vote, Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, pledged "serious surgery" next year to address the underlying causes of the crisis.

If anything, the economic news added to the sense of urgency.

The Labor Department said initial claims for jobless benefits had increased last week to the highest level since the gloomy days after the 2001 terror attacks. The news of the payroll cuts came on top of Thursday's Commerce Department report that factory orders in August plunged by 4 percent.

Typifying arguments the problem no longer is just a Wall Street issue but also one for Main Street, lawmakers from California and Florida said their state governments were beginning to experience trouble borrowing funds for their own operations.

Pelosi said, "We must win it for Mr. and Mrs. Jones on Main Street."

One month before Election Day, the drama unfolded in an intensely political atmosphere.

Members of the Congressional Black Caucus credited Obama with changing their minds.

Reps. Elijah Cummings and Donna Edwards, both Maryland Democrats, were among them. They said Obama had pledged if he wins the White House that he would help homeowners facing foreclosure on their mortgages. He also pledged to support changes in the bankruptcy law to make it less burdensome on consumers.

Obama's rival, Republican Sen. McCain, announced a brief suspension in his campaign more than a week ago to try and help solve the financial crisis.

Republican Rep. Sue Myrick of North Carolina, who switched her vote to favor the measure, said, "I may lose this race over this vote, but that's OK with me. This is the right vote for the country."

Myrick said she hadn't heard from McCain as she made up her mind about how to vote. "They told me he was going to call me. He didn't," she said.

The vote on Monday had staggered the congressional leadership and contributed to the largest one-day stock market drop in history, 778 points as measured by the Dow Jones Industrials.

Associated Press writers Jim Abrams, Charles Babington, Alan Fram, Suzanne Gamboa, Kimberly Hefling, Andrew Miga, Andrew Taylor, and Erica Werner contributed to this story.

The Emergency Economic Stabilization Act, EESA, doesn't make the credit crisis go away; it makes the credit crisis worse, much worse -- Here are 4 problems with EESA.

Problem #1: EESA helps only a few select banks and not banks as a whole.
... I relate that while Regional Banks, IAT, are currently up 22% since the US Dollar stock rally began, July 14, 2008, when the yen carry traders, sold oil, USO, and commodities, RJI, to go long the banks, the facility of TARP provided under the Emergency Economic Stabilization Act of 2008, that is EESA, is unlikely to be of much help to most regional banks.

The authority and facilities given to the Federal Reserve Chairman by the Paulson-Bush-Pelosi bailout legislation provide a rescue of derivative laden and threatend JPMorgan, Citigroup, Bank of America and Morgan Stanley, and not of the community and smaller banks.

The President said: "We have acted boldly to help prevent the crisis on Wall Street from becoming a crisis in communities across our country."

That is understatement, they acted unconstitutionally, to provide frightening auhority and facilities to the Chairman of the Federal Reserve. The legislation does nothing to resolve the crisis; it assures that it will quickly escalate.

The reporter relates: "The Securities and Exchange Commission loosened a regulation to ease the impact of the distressed assets on the balance sheet of financial institutions."

Yes I know, that was unconscionable; the action is a denial and abandonment of The Truth. And as I write the Suspension Of The Fair Value Accounting Rule By SEC And Congress Is Causing Credit Gridlock And Places One's Investments At Risk .

Problem #2: EESA doesn't resolve the current crisis of confidence, that is a lack of trust, it exasperates risks stemming from unknown and unrevealed counterparty risk on derivaties and from a suspension of fair value accounting by ruling of SEC and by mandate of Congress.
... Blair Lee in October 3, 2008, Gazette.NET article Who Killed The House Bailout? wrote:

Predictably, the media gave congressional Republicans the full discredit for the $700 billion bailout plan's 228-205 defeat on Monday. But the voting patterns show a different story. A once-in-a-lifetime, unholy and inadvertent coalition of disparate congressional voting blocs sank the measure.

First, a bipartisan combination of conservative Republicans and Blue Dog Democrats balked at such a risky and expensive taxpayer-financed free market intervention.

Second, 78 percent of the 41 incumbents in tight re-election contests voted "no," responding to angry constituent e-mails. Political self-preservation knows no party lines: 17 of the "no" votes were Republicans, 15 were Democrats. Lesson: Don't propose sweeping, highly controversial legislation five weeks before a national election.

Third, the Congressional Black Caucus broke ranks with the Democratic House leadership and overwhelmingly voted against bailing out white, wealthy Wall Street.

House Democratic leaders, in one of those inexplicable Capitol Hill double standards, excoriated the Republicans but excused the Black Caucus because its members were casting "a vote of conscience."

Maryland's Congressional delegation offers a good example of what happened. The four white Democratic liberals (Hoyer, Van Hollen, Sarbanes and Ruppersberger) all voted "yes." Meanwhile, "no" votes were cast by Roscoe Bartlett, the Western Maryland conservative Republican, and by Maryland's two liberal Democratic blacks, Elijah Cummings (Baltimore City) and Donna Edwards (Prince George's and part of Montgomery). This has to be the first and last time in history that the 4th, 6th and 7th districts band together against the rest of Maryland's congressional delegation.

Missing from Maryland's voting pattern was a "no" vote by a closely contested incumbent. Wayne Gilchrest, the Eastern Store moderate Republican, might have played that role, but he was defeated in the primary, so he voted "yes." Likewise, in a fit of lame duck spite, he's backing Obama for president.

Congressman Bartlett and congresspersons Cummings and Edwards voted "no" together, but for completely different reasons. Bartlett, a free market conservative, wants to let the financial institutions solve their problems by themselves. In his view, the extent of permissible government intervention is taking the current $100,000 ceiling off FDIC deposit insurance and making it unlimited.

Meanwhile, Cummings and Edwards want to bypass Wall Street and spend the $700 billion directly on home foreclosure aid, unemployment payments, food stamps, home heating assistance and Medicaid. It's no coincidence that, together, Cummings' and Edwards' districts contain 58 percent of the state's recent home foreclosures. But neither their plan nor Bartlett's has a prayer of becoming law. Nor is doing nothing an option. Without a comprehensive approach, the government is left limping along, dealing with one bank failure after another.

Our financial system runs on credit and confidence. People must borrow money to make money. But banks won't lend to businesses and depositors won't lend to banks (or governments) without the reasonable expectation of being repaid, with interest. When that confidence disappears, so does our economy. The bailout stabilizes lenders and investors by having the government take $700 billion of devalued mortgage-backed securities off the balance sheets. In other words, in order to jump-start the nation's financial system, Uncle Sam becomes this toxic paper's buyer of last resort.

Maybe this is a bad idea. Maybe Roosevelt's New Deal was, too. But what's the alternative? Or put it this way: Isn't it wiser and cheaper to try something before, instead of after, the train wreck? How much would our parents and grandparents have paid to avoid the 1930s Great Depression and its aftermath, World War II?

Apparently, public opinion against the bailout is shifting somewhat: 45 percent now support it, while 44 percent say do nothing. Meanwhile, a revised $700 billion bailout bill passed the Senate on Wednesday night and heads to the House.

Senate passage was less difficult, because only one-third of that body is up for re-election, as opposed to all 435 House members, so only three senators in tight re-elections felt compelled to vote "no." Also, the Senate's Black Caucus is a group of one, Barack Obama, and he's now playing to a national constituency.

To gain House passage, the Senate's bill is loaded with billions and billions of new tax cuts and new spending to win the votes of naysayers like Bartlett, Cummings and Edwards. It will probably work at the expense of ballooning, even further, our national debt and national interest payment. Yes, folks, we're addressing the national crisis brought on by fiscal recklessness by being even more reckless. God help us.

Blair Lee is CEO of the Lee Development Group in Silver Spring.

Presented below are my related comments to Blair Lee.

He related "Congressman Bartlett and congresspersons Cummings and Edwards voted "no" together, but for completely different reasons. Bartlett, a free market conservative, wants to let the financial institutions solve their problems by themselves. In his view, the extent of permissible government intervention is taking the current $100,000 ceiling off FDIC deposit insurance and making it unlimited."

"Meanwhile, Cummings and Edwards want to bypass Wall Street and spend the $700 billion directly on home foreclosure aid, unemployment payments, food stamps, home heating assistance and Medicaid. It's no coincidence that, together, Cummings' and Edwards' districts contain 58 percent of the state's recent home foreclosures. But neither their plan nor Bartlett's has a prayer of becoming law."

"Nor is doing nothing an option. Without a comprehensive approach, the government is left limping along, dealing with one bank failure after another."

I say one option could have been to convene a Congressional investigation to completely investigate events of late, especially after September 11, 2008 when banks were unable to sell assets and raise capital. And of course to thoroughly investigate credit default swaps and their destabilizing ways as well as the destabilizing ways of yen carry traders who borrow at 0.5% interest fromt the bank of Japan to go short the EUR/JPY for great personal gain and the destruction of the world's economy.

Mr. Lee continues: "Our financial system runs on credit and confidence. People must borrow money to make money. But banks won't lend to businesses and depositors won't lend to banks (or governments) without the reasonable expectation of being repaid, with interest. When that confidence disappears, so does our economy."

I say there is indeed a crisis of confidence and a complete lack of trust, and it comes in large part from countyparty risk on default event settlement of derivatives of existing, and future financial organizations. Our nation and the world needed to address these risks but failed to do so.

Jesse in article Waves of Credit Default Swaps Incoming relates that its "time to start settling those Credit Default Swaps for Fannie and Freddie (Oct. 6), Lehman Brothers (Oct. 10) and Lehman Brothers (Oct 23)".

A lack of trust is that which is going to cause the destruction of the US Dollar, $USD, and send interest rates higher, such as the interest rate on the 10 Year US Government Note, $TNX, and send the value of US Government bonds, traded by the ETF, TLT down.

The legislation will accelerate an exit from municipal bond mutual funds and ETFS as well as money market funds, MMFs, owned by the wealthy.

"The bailout stabilizes lenders and investors by having the government take $700 billion of devalued mortgage-backed securities off the balance sheets. In other words, in order to jump-start the nation's financial system, Uncle Sam becomes this toxic paper's buyer of last resort."

I say the bailout stabilizes only a few select financial organizations JP Morgan and possibly Morgan Stanley, and actually destabilizes the rest as these two organizations and other crony bankers are likely going to be given preferential treatment. The debt will indeed be coming off the the publically approved SEC and FASB 157 balance sheets and income statements; but the assets are marked to fantasy and not to market, thus the securitized CDOs, mortgage backed securities, and other debt creates even more of a greater risk now becuase no one knows the true value as fair value rules, that is fair value accounting, has been thrown out the window.

We indeed are entering a new era, Uncle Sam is now the world's investment banker. The Federal Reserve becomes the Bank of Banks, and goes into the business of securitization of CDOs. The legislation nationalizes US Banks, and privatizes profits to a select group of elites, while it socializes risk and losses unto the US taxpayers.

Yes Uncle Sam is indeed the purchaser of the toxic paper, and becomes the buyer of last resort; and in so doing enslaves Americans, and really the whole world unto debt of the worst kind. The debt should have been liquidated, that is done away with, but it now remains and is the world's heritage and inheritance of a bygone era of credit liquidty, that started with the fairy tale neoliberal laissez fair economic policies of Milton Friedman, and continued through with the easy credit of The Purveyor of Credit Liquidity, Alan Greenspan, and culminated with the neocon helicpter drops of Ben Bernake lowering of the central bank rate, and provisions of TAF, TSLF, and PDCF facilities.

The econonomy will not be jump started, only a small portion of crony capitalists, that is those who participate in state corporate rule, that is state corporatism get a boost through public private partnerships to be signed by the government. Here stakeholders from business and government will become overlords and taskmasters of Ameican citizens.

"Senate passage was less difficult, because only one-third of that body is up for re-election, as opposed to all 435 House members, so only three senators in tight re-elections felt compelled to vote "no." Also, the Senate's Black Caucus is a group of one, Barack Obama, and he's now playing to a national constituency."

I wonder how many of the Black Caucus caved in. Those who did so, forgot their ancestor's history of slavery: their vote enslaved Americans and the world unto debt, and established bankers and government officials as the beast's task masters and overlords.

Problem #3: EESA's increased FDIC limits: these are going to take gullible leming investors up a hill, and then off a cliff to their destruction -- that is sad but true.

The smart investor anticipates what's gona happen to his money in banks and appreciates the value of gold.

Whereas, the gullible investor simply gets led off a cliff like a leming .... click here for image of gullible investor

... The reporter relates that "Earlier in the week, the legislation was altered to expand the federal insurance program for individual bank deposits." The raising of the limit of FDIC insurance accelerates the process of liquidity evacuation as investors flee stocks, and unfortunately municipal bonds which are especially liquidity stressed; the legislation herds investors into banks and away from the physical asset which will protect their wealth.

Problem #4: All liquidity supplied by EESA gets trapped and instantly vaporized.
... The facility of TARP provided under the Emergency Economic Stabilization Act of 2008, that is EESA, is designed to provide liquidity. Yet, all liquidity that has been provided by the Federal Reserve under currency swaps with other central banks, facilities of TAF, TSLF, PDCF, acquisitions of companies such as AIG and Bear Stearns, and emergency grants has literally disappeared as soon as it went into the system. The $700 billion to be provided will meet the same doom: instant vaporization.

The liquidity goes only to banks and major broker-dealers, the rest of the financial system has no access to it; the credit transmission mechanisms will not see even a dime of it, so thus corporations, educational institutions, municipalities desperately in need will be frozen out.

Peter Schiff in Safehaven.com article Liquidity Is In The Eye Of The Holder writes: The government is seeking to "create liquidity" by overpaying.

The government's assumptions about the "held to maturity" value of these mortgages completely understate the likelihood of widespread default. Some of the "illiquid" assets represent tranches of mortgage-backed securities that will be completely wiped out. Even the higher quality tranches will suffer severe losses due to mortgages that will inevitably go bad.

For example, take a $500,000 adjustable rate mortgage on a condo in Las Vegas that has a current value of only $250,000. To assume that this asset can be safely held to maturity is absurd, when in all likelihood the borrower will default shortly after the rate re-sets, even if the borrower has not yet shown signs of distress. Of course such a mortgage would be completely illiquid if one tried to sell it anywhere near par, but would be extremely liquid if priced to reflect a more realistic value; say 35 cents on the dollar. But if the government pays prices that fairly factors in likely defaults, it will bankrupt the very institutions it is trying to bail out.

Also missing in the discussion is the concept of the time value of money. Even if a substantial percentage of the $700 billion is eventually recovered, it will still represent a huge loss for taxpayers who theoretically have to come up with the cash today to buy the mortgages. Further, the inflationary nature of the bailout ensures a substantial rise in long term interest rates. This will further suppress the present values of the low coupon mortgages the government will be restructuring.

In addition to the government bailout, distressed lenders are looking to the suspension of "mark to market" accounting rules as a means of salvation. These rules require institutions to value their mortgage assets according to the most recently traded price. However, suspending these rules will not make the losses go away. Rather it will simply allow lenders to pretend that the losses do not exist.

Armed with such fantasies, banks could pretend that their mortgage assets had more value, and that their balance sheets were well capitalized. They would not need to raise more capital in order to fund new loans. But, just as a person with no sensitivity to pain runs the risk of catastrophic injury, such a move would encourage financial institutions to take greater risks which, in the end, will produce more bankruptcies and greater losses.

In fact, the Senate version of the bailout bill, which authorizes a suspension of mark-to-market, also increases the dollar limit on FDIC insured deposits from $100,000 to $250,000 (with no extra money budgeted to fund the increased taxpayer liability). Only in Washington would a bill pass which simultaneous makes banks more likely to fail while increasing taxpayer exposure when they do!

Gold is the timely safe haven.
I believe a run on stock brokerages is coming soon; and I suggest that one take one's money out of brokerage accounts, and that one buy gold, even though gold can easily fall from its current $835 to $825, $800 or $775, with a falling EURJPY.

And the gold ETF, GLD, could very easily fall to $77.50.

While bank accounts will have higher FDIC limits, I want something that is tangible, that I can secure, that I can personally own and have a large degee of personal control over.

I recommend diversification of investment in gold in four locations immediately because of financial system instability and lack of liquidity: the gold ETF, GLD, directly through streetTRACKS Gold Trust, and not in a brokerage account; two BullionVault, three GoldMoney; and four a limited number of gold coins.

I am simply a blogger who communicates what I see as an investment demand for gold; I suggest that one consult with a licensed investment professional before making any investment decisions.

Credit Markets Are Drying Up And Short Term Funds Used To Pay Payrolls Are Not Available
Runs on funds are causing the death of the short term funds used by organizations to meet payroll and pay bills, as the value of short term commercial debt diminishes and the value of other debt is unknown and cannot be sold. The underlying issue here is a "crisis of confidence" which comes from the FASB accounting rules being so lax, that "fair value" can not be ascertained on the asset values, that is the value of debts, in the funds portfolios.

The current situation is that the fair value accounting rules have been suspended by the SEC.

This is something that John McCain applauds as is documented in the Newsday article McCain Says Mark To Market Suspended

Companies and funds are buying only Treasury Bills and Paper as is seen in the Capstone Report which focuses on how the Liquidity Meltdown Crisis affects colleges:

"An investment fund that serves about 1,000 colleges and private schools partially froze withdrawals this week amid the credit crunch, forcing colleges to develop new plans to pay bills.

Wachovia Bank, trustee for the $9.3 billion Short Term Fund offered by Commonfund, said Monday it was terminating the fund and establishing a process to ensure the orderly liquidation and distribution of the fund's assets. Wachovia initially told investors Monday that they could only withdraw 10 percent of their money, but that figure was increased to 34 percent by Wednesday and 37 percent by Thursday, October 2, 2008.

Commonfund, a Wilton, Conn.-based nonprofit that advises colleges and schools on money management, also said Thursday it put a 30 percent limit on withdrawals from its Intermediate Term Fund after investors in the Short Term Fund tried to withdraw money from that fund, said Keith Luke, managing director of Commonfund.

About 200 colleges and universities have about $1 billion in the intermediate fund, which is used for long-term needs, such as equipment plant purchases, he said.

"We just didn't have the liquidity in the fund to do that," Luke said. "We will relax that as soon as market conditions permit."

Partially freezing the Short Term Fund as officials prepare for liquidation prevents a run on money and protects investors, said Laura Fay, a Wachovia spokeswoman.

"It was not something we took lightly," Fay said. "In this environment, we felt this was the best way to proceed."

Some colleges are securing lines of credit because of the restriction on accessing money from the short-term account, according to Matthew Hamill, senior vice president of the National Association of College and University Business Officers. That means borrowing costs that effectively reduce their rate of return in the original investment, he said.

Hamill said he does not expect the issue to affect students and their families and noted that the crisis has eased somewhat with a greater percentage of cash allowed to be withdrawn.

"I think most institutions are feeling far more confident in the short run the fund will be there for what its needs are," Hamill said. "The remaining question on everyone's mind is exactly when the remaining balance in the account will be available."

The fund provides returns slightly above U.S. Treasury bills. About 85 percent of the fund was invested in high-quality commercial paper from blue chip companies, while the rest is in securities backed by mortgages and other assets, Luke said.

Amid the housing industry slump and turmoil affecting banks and credit markets, such investments have become increasingly unpopular as investors seek safer options like Treasury bills.

Commonfund said recently volatile markets have hurt the 15 percent to 20 percent of the Short Term Fund's portfolio held in mortgage- and asset-backed securities.

There have been no defaults in the fund's portfolio so far, Luke said.

"Credit markets have frozen, which has made trading of even the highest quality short term financial assets impossible at virtually any reasonable price," Commonfund wrote in a letter to clients Wednesday. "In light of these markets, we believe that the trustee feared that a sudden increase in redemptions could force a liquidation of securities in a frozen market and decided to take pre-emptive action."

Commonfund said it pledged $50 million of its corporate reserves in April to back the fund.

Fay said Wachovia's decision was not affected by last week's announced $2.1 billion deal for Citigroup to buy Wachovia's banking operations.

Wachovia's decision to slowly liquidate the fund is designed to prevent a rush by investors. When a fund sees such a rush, fund managers must sell assets — typically at a loss when it must be done quickly, and especially amid the recent market turmoil.

A slow liquidation helps protect investor returns and ensure each investor would be treated equally.

A rescue package approved by the Senate late Wednesday would let the government spend billions of dollars to buy bad mortgage-related securities and other devalued assets held by troubled financial institutions. If successful, advocates say, that would allow frozen credit to begin flowing again and prevent a serious recession.

By the end of the year, investors in the Short Term Fund will be able to withdraw at least 57 percent of their money, Luke said. Asked if investors will ultimately get all their money back, Luke said, "We certainly expect that."

Commonfund is working with the colleges and schools to help them find alternative sources of financing, Luke said.

"We feel terrible for them," Luke said. "We want to help them. We're working very hard to do so."

Bethany College — a Lutheran school in Lindsborg, Kan., with 600 students and a $12 million budget — has $700,000 invested in the fund.

"Obviously we weren't planning on withdrawing all at once," said Aubrey Streit, a spokeswoman. "We're just re-evaluating our plan for how we will work with the cash flow over the course of the next academic year."

Bethany College is not in a state of panic, Streit said, but she noted that the investment was a significant part of its budget.

"It wasn't something we expected," Streit said. "It really makes it real to see the financial impact coming here."

Grinnell College in Iowa had about $4.8 million in the fund, but was able to withdraw 34 percent, said Russell Osgood, the college's president. With a $1.5 billion endowment, he was not worried.

AP business writer Mark Jewell in Boston contributed to this report. Source: AP News

One Response to “Liquidity crisis for colleges?”
Christopherson Says: October 2nd, 2008 at 7:14 pm
I’ve already heard from numerous sources that UA will be a lot harder to be accepted into now that they’re at an all time high of 27,000+ students. I imagine the economy crisis is only playing into the university officials’ plan.

The Bailout Bill Has Gone Back To The House Providing Tax Breaks, An Increase In FDIC Insurance, And A Restatement Encouraging Suspending Fair Value Accounting Provided
James Rowley and Nicholas Johnston Bailout Bill Sent Back to House After Senate Passage (Update2) report that "The Senate also sweetened the (bailout) measure for Republicans by authorizing the government's purchase of troubled assets with a $149 billion package of tax breaks. They would spare 24 million households from a $62 billion alternative minimum tax and extend $17 billion in benefits to companies that produce alternative energy.

And added to the rescue plan this week is a temporary increase in the limit on federal deposit insurance to $250,000 from $100,000 aimed at discouraging people from pulling their money out of banks.

The Senate bill also reiterates the U.S. Securities and Exchange Commission's authority to suspend an accounting rule that bankers and other corporate executives say exacerbates their troubles; as indicated in the Elizabeth Williamsonand Kara Scannell Wall Street Journal article Momentum Gathers to Ease Mark-to-Market Accounting Rule

The so-called fair-value standard requires companies to review assets and report losses if their values decline. Lawmakers, the American Bankers Association and companies including American International Group Inc. have urged the SEC to suspend or ease the rule, saying it forces firms to report deeper losses than needed on assets such as subprime mortgages.

Jesse Westbrook of Bloomberg in SEC, FASB Resist Calls to Suspend Fair-Value Rules (Update2) reports that "The U.S. Securities and Exchange Commission probably will resist calls to suspend the fair-value accounting rules that some members of Congress blame for exacerbating the global financial crisis, people familiar with the matter said.

The SEC and Financial Accounting Standards Board today issued ``clarifications'' on how banks should interpret existing rules requiring them to review assets each quarter and report losses if values decline. A moratorium isn't being considered, said the people, who declined to be identified because the plan hasn't been completed.

Congressmen, banking lobbyists and companies including American International Group Inc. have urged the SEC to suspend fair-value accounting, saying it forces firms to report losses they never expect to incur. Federal Reserve Chairman Ben S. Bernanke and other proponents say removing the rule would erode confidence that firms are owning up to losses.

``In the past couple of weeks, fair-value accounting has been under attack,'' JPMorgan Chase & Co. analyst Dane Mott wrote in a report today. ``Blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick.''

SEC spokesman John Nester declined to comment. FASB spokesman Neal McGarity didn't return a phone call seeking comment.

House Rejection

Representative Todd Tiahrt, a Kansas Republican, said the House probably would have approved a $700 billion bailout of financial companies yesterday had the legislation included a suspension of fair value accounting. The House rejected the measure 228-205.

It would have passed ``easily'' if the rules had been suspended, Tiahrt, who opposed the legislation, said today in a Bloomberg Television interview.

Bernanke said in Sept. 23 testimony before the Senate Banking Committee that if regulators repeal the rules, ``nobody knows what the true mark-to-market price is.''

Fair value rules require companies to determine how much assets are worth based on what they could expect to sell them for on the open market.

``Suspending the mark-to-market prices is the most irresponsible thing to do,'' said Diane Garnick, who helps oversee more than $500 billion as an investment strategist at Invesco Ltd. in New York. ``Accounting does not make corporate earnings or balance sheets more volatile. Accounting just increases the transparency of volatility in earnings.''

`Unrealistic Prices'

Anne Canfield, executive vice president of the Consumer Mortgage Coalition, counters that businesses have been forced to ``mark down their assets to unrealistic fire-sale prices,'' because trading has dried up. Canfield, whose group represents mortgage lenders, urged the SEC to suspend fair-value rules ``immediately'' in a Sept. 29 letter to the agency.

The SEC and FASB, in today's statement, encouraged companies to rely more on their own judgments, such as expected cash flows, in determining the current value of assets that aren't trading. The regulators also said price quotes provided by brokers when markets are frozen may not be the most reliable way to determine how much securities are worth.

Norwalk, Connecticut-based FASB, which writes U.S. accounting rules, is preparing ``additional interpretive guidance on fair-value measurements'' to be released this week, the SEC said. FASB will discuss fair-value accounting at its board meeting tomorrow.

Bankers Association

The American Bankers Association, a trade group representing lenders that has lobbied the SEC over fair value accounting, praised the agency's clarifications, saying they will ``help auditors more accurately price assets,'' according to a statement released today.

The collapse of the subprime-mortgage market has contributed to more than $500 billion of losses and writedowns at global financial companies. Treasury Secretary Henry Paulson is seeking authority from Congress to ease the crisis by buying mortgage-securities and other assets from banks.

U.S. Senate leaders and President George W. Bush vowed today to revive the $700 billion financial-rescue plan after the House rejected the legislation.

House Plans Second Vote On $700 Billion Bailout
Friday October 3, 6:40 am ET, Julie Hirschfeld Davis of the Associated Press writes that converts in the House are "reluctantly embracing" $700 billion bailout ahead of today's make-or-break 2nd vote.

Black lawmakers said personal calls from Democratic presidential nominee Barack Obama helped switch them from "no" to "yes," as Republicans and Democrats alike said appeals from credit-starved small businessmen and the Senate's addition of $110 billion in tax breaks and other sweeteners had persuaded them to drop their opposition.

Rep. John Lewis, D-Ga., told a closed-door meeting of House Democrats that he would support the bill after speaking with Obama about it.

Congressional leaders "worked over" wayward colleagues wherever they could find them.

Rep. Bobby Rush, D-Ill., also said Obama was asking him to reconsider his vote. "I'm seriously listening," Rush said

The Investment Application
The SEC has stated that the fair value accounting rules have been suspended. And the bailout legislation is likely to be passed with a statement to the SEC that it suspend fair value accounting, which is redundant given that it has already suspended the rules.

Yet, the suspension of fair value is modern day Enron accounting, and is obscuring the true market value of their assets in fund values and in debt instruments, intensifying the credit crisis day-by-day. Liquidity is freezing up. This means there is no liquidity to grease the wheels of the economy.

There is coming ever increasing credit gridlock where companies will be unable to meet payroll and pay debt as it comes due, as the funds they rely on do not honor redemptions.

When the legislation passes, and is signed into law by the President, then the US government will be stuck with buying assets that are market to fantasy. And I can assure you that the Federal Reserve is going to be buying assets primarily from chrony organizations, such as JP Morgan and Morgan Stanley, and from only those organizations which if they fail would hurt JPM and MS.

What this means is that the assets, that is the debts, on the books of massive numbers of banks and others, will really be reinforced as worthless.

The passage of the legislation will mean a write down of commercial debt instruments across the board with the longer out, getting a greater marketplace haircut.

Debt ETFs, such as LQD, HYG, CFT and EMB will continue to loose value; and the principal value of the tax free municipal bond mutual funds like USSTX, will continue to fall, as interest rates rise. And the municipal bond ETFs such as MUB and TFI will continually go lower as well.

The suspension of fair value accounting means an ever increasing flight of capital out of the municipal bond market, and thus will soon cause a shut out of municipalities from the credit markets.

The suspension of fair value accounting means companies will find no buyers of corporate debt; and thus, a closure of lending markets.

We are quickly moving from a situation where the US Treasury Notes and Paper is desirable, to a situation where only the US Government Debt will be honored, that is bought and sold!

In other words, only US government debt will be held as valuable, because fair value accounting rules have been suspended by both the SEC and by congressional mandate.

I relate that while Regional Banks, IAT, are currently up 22% since the US Dollar stock rally began, July 14, 2008, when the yen carry traders, sold oil, USO, and commodities, RJI, to go long the banks, the facility of TARP provided under the Emergency Economic Stabilization Act of 2008, that is EESA, is unlikely to be of much help to most regional banks. The authority and facilities given to the Federal Reserve Chairman by the Paulson-Bush-Pelosi bailout legislation provide a rescue of derivative laden and threatend JPMorgan, Citigroup, Bank of America and Morgan Stanley, and not of the community and smaller banks.

If one is invested in these, it's best to sell out now of all Regional Banks, as they will be falling in value once the legislation is passed.

The 3 month on going Yahoo Finance chart of IAT, compared to ITB, and IYR, shows the 22% rise. Here is the chart showing the 22%.

Yes, pull out as my perspective is much the same as that of Joshua Crown in The Accounting Rule You Should Care About where he relates: A change of course!

Tuesday afternoon, the SEC and FASB seemed to change course on the rule, as they published new guidance to firms. The two organizations said when the market for a security disappears, it is now allowable to arrive at a value using "estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable."

In plain English, banks may not be forced to take huge writedowns on investments that lost all their value. But the guidance is just that: guidance. The SEC and FASB suggested that more concrete rule changes could come later.

While the possible end of mark-to-market might please critics of the rule, it doesn't satisfy everybody.

Some financial experts argue that even though banks and Wall Street firms may be able to make their balance sheets look better if the rule changes, these companies will be less attractive to investors because there isn't as much information about their true financial condition.

"The garbage is on the books and no one wants to admit the original error of purchasing this class of assets," said Barry Ritholtz, CEO of Fusion IQ, a research firm.

Ritholtz said mark-to-market accounting forces banks to honestly disclose what they own and how much those investments are worth. Changing the rule would make it tougher to come up with a bank's real value.

"I would advise our clients and the investing public that owning any financials that failed to disclose their holdings accurately is no longer an investment. It is pure speculation, with more in common to spinning a roulette wheel," he said.

Gold Is The Safe Haven
I believe a run on stock brokerages is coming soon; and I suggest that one take one's money out of brokerage accounts, and that one buy gold, even though gold can easily fall from its current $840 to $825, $800 or $775, with a falling EURJPY.

And the gold ETF, GLD, could very easily fall to $77.50.

While bank accounts will have higher FDIC limits, I want something that is tangible, that I can secure, that I can personally own and have a large degee of personal control over.

I recommend diversification of investment in gold in four locations immediately because of financial system instability and lack of liquidity: the gold ETF, GLD, directly through streetTRACKS Gold Trust, and not in a brokerage account; two BullionVault, three GoldMoney; and four a limited number of gold coins.

I am simply a blogger who communicates what I see as an investment demand for gold; I suggest that one consult with a licensed investment professional before making any investment decisions.

Helpful Interactive Charts For Gold
The Yahoo Finance ongoing chart of GLD relative to the EUR/JPY and the USD/JPY, provides fascinating insights into the interplay of gold and the two major currency pairs.

Gold, $GOLD.

The gold ETF, GLD.

The US Dollar, $USD.

US Treasuries, TLT

The Ten Year US Government Note, $TNX

The on going monthly MSN Finance chart of the gold ETF, compared to world stocks, EFA, and US Stocks, VTI, and US Treasuries, TLT

The ongoing five day Yahoo Finance chart of gold, GLD, relative to the US Dollar ETF, UUP, and the Euro, FXE, and oil, USO

The on going five day Yahoo Finance chart of the gold ETF, GLD, compared to FXE, EFA, and EEB

The on going five day Yahoo Finance chart of the gold ETF, GLD, compared to IWM, and SPY

The on going five day Yahoo Finance chart of the gold ETF, GLD, compared to FXE, USO, and RJI

The ongoing ten day MSN Finance chart of EUM, compared to TWM, SDK, and SFK

The the ongoing five day Yahoo Finance chart of EUM, compared to TWM, SDK, and SFK

The ongoing five day Yahoo Finance chart of the yen, compared to gold and the world's major currencies

Gold relative to world stocks: GLD:EFA

Gold relative to US Stocks: GLD:VTI

Gold relative to the euro: GLD:FXE

Gold relative to world currencies: GLD:DBV

Gold relative to oil: GLD:USO

Suggested Reading And Things To Reflect On
LIBOR Rates Pushing World To Hyper-inflation? Is disregard for fair value rules of accounting going to create massive hyperinflation?

The Ted Spread as of the writing of this article it has gone into uncharted territory at 3.83, that may be a new high; this is like throwing a wrench into a working machine; all I can relate is that the global financial system is going to come to a screeching break down very, very soon.

KeNo's Housing And Economic Portal provides a section of various state, municipality and small businesses being hurt by the credit crunch.

The SEC May Get New Authority Over Fair Value Accounting Two little noticed provisions are Sections 132 and 133, which represent a significant and potentially far-reaching intrusion by Congress into the process by which accounting principles are formulated and implemented. Section 132 gives the SEC the authority to “suspend … Statement Number 157 of the Financial Accounting Standards Board, FASB.

Stop Enronization Of Banking The current bailout legislation does not instill or create trust in wall street and banking.

Goldman Is Getting The Best Of The Credit Crisis Goldman Sachs opponents have been vanquished and bad bets wiped away. Given that its charter has been changed to the status of a bank holding company, it will be the last bank standing.