Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
If You Don’t Understand Bonds, You Don’t Understand Investing - 25th Aug 19
Gold's Next Move - 25th Aug 19
Fresh Water Crisis Unfolding - 25th Aug 19
Newbie Guide to Currency Pairs in Forex Trading – Review - 25th Aug 19
When A 16-Year-Old Earns $3 Million, You Know It's Not A 'Silly Fad' - 24th Aug 19
The Central Bank Time Machine - 23rd Aug 19
Stock Market August Breakdown Prediction and Analysis - 23rd Aug 19
U.S. To “Drown The World” In Oil - 23rd Aug 19
Modern Monetary Theory Could Destroy America - 23rd Aug 19
Seven Key Words That Explain "Stupidly High" Bond Market Prices - 23rd Aug 19
Is the Fed Too Late Prevent A US Housing Bear Market? - 23rd Aug 19
Manchester Airport FREE Drop Off Area Service at JetParks 1 - Video - 23rd Aug 19
Gold Price Trend Validation - 22nd Aug 19
Economist Lays Out the Next Step to Wonderland for the Fed - 22nd Aug 19
GCSE Exam Results Day Shock! How to Get 9 A*'s Grade 9's in England and Maths - 22nd Aug 19
KEY WEEK FOR US MARKETS, GOLD, AND OIL - Audio Analysis - 22nd Aug 19
USD/JPY, USD/CHF, GBP/USD Currency Pairs to Watch Prior to FOMC Minutes and Jackson Hole - 22nd Aug 19
Fed Too Late To Prevent US Real Estate Market Crash? - 22nd Aug 19
Retail Sector Isn’t Dead. It’s Growing and Pays 6%+ Dividends - 22nd Aug 19
FREE Access EWI's Financial Market Forecasting Service - 22nd Aug 19
Benefits of Acrobits Softphone - 22nd Aug 19
How to Protect Your Site from Bots & Spam? - 21st Aug 19
Fed Too Late To Prevent A US Housing Market Crash? - 21st Aug 19
Gold and the Cracks in the U.S., Japan and Germany’s Economic Data - 21st Aug 19
The Gold Rush of 2019 - 21st Aug 19
How to Play Interest Rates in US Real Estate - 21st Aug 19
Stocks Likely to Breakout Instead of Gold - 21st Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 21st Aug 19
Holiday Nightmares - Your Caravan is Missing! - 21st Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

US Banks Going Straight to Hell on $1.5trillion Eventual Loss

Companies / Credit Crisis 2008 Jul 27, 2008 - 08:40 PM GMT

By: Alex_Wallenwein

Companies Best Financial Markets Analysis ArticleNAB, National Australia Bank, was just forced to write down over ninety percent of its exposure to US mortgages via so-called SIV's or conduits last Friday, to the order of $830 million dollars. This was by no means a matter of choice for NAB. The bank had just issued and sold $850 million worth of new debt paper. Buyers of that debt are now screaming bloody murder. They are asking why this information, which surely must have been known to the bank at the time of the debt sale, was not disclosed to the market beforehand. They are now demanding their money back or some other way to back out of the deal.

Yet, what happened to this single Australian bank is nothing compared to what will happen to US equity and bond markets when they wake up on Monday morning, July 28, 2008. Robert Gottliebsen of The Business Spectator, an Australian financial news and analysis portal, wrote a commentary pointing to the possible consequences of NAB's write-down.

The Ugly Truth

The low-down on this write-down: According to Gottliebsen, after having written down $450 billion of mortgage loan related assets since last year, US banks will have to take an additional hit of a whopping trillion buckos if the system as a whole wants to come clean, the way NAB just did.

The reason: Bad loans on banks' balance sheets were written off at market value, but those bad loans that had been repackaged and sold off to shady SIV's or 'conduits' (so that they would not burden a bank's balance sheet and restrict its future loan-making capabilities) were not. Those loans were not written off at market value because the market for them had simply disappeared, vanished into thin air - the realm from whence the 'money' they once added to M1 had originally hailed.

In order to account for that lack of a market, NAB has taken the as yet unprecedented step of writing off almost the entire amount of these CDO's or collateralized debt obligations – since it is impossible to predict when and how many of the underlying mortgages get defaulted upon. So far, the usual way of dealing with these imploding assets has been to value them on an "accrual basis". That pretty much entails accounting for bad debt losses based on past experience. The only problem is that there is no past experience with a near-complete collapse of these loan assets, so no reliable figures could be named. At least, that was the best excuse these banks could find to hide behind in their required disclosures.

Now, however, NAB's unprecedented disclosure has broken the dam. US investors are going to demand that US banks do the same thing NAB did, namely, to write off nearly the entire amount of the loans generated and sold off to SIV's! Will the US government pass a new law that prevents banks from marking their SIV assets to market?

Who knows.

When US banks see themselves forced to do more or less the same, they may well find they are floating in a very small vessel up a certain creek without an effective propulsion device. In other words, they will not have any capacity for further lending because the liabilities from their conduit markdowns will have eaten up much, if not all, of their capital.

In still other words, Hell's gates will yawn wide on Wall Street Monday morning - which is where those gates have apparently been all along.

The Effect on Gold

My personal take is that the power brokers on Wall Street and their lackeys in DC will be far too busy to effectively lean on gold and silver during that time. They will frantically try to slap down the forest fire with their wet-rag regulatory powers.

How will they extinguish this fire? Is JP Morgan Chase going to buy the entire failing US financial system as its forbear nearly did in 1907? Will they powers of the air sell oil futures to drop its price back to $50 or so to counter the "bad news effect" this will have on traders and investors? Will they manufacture news about unexpected rises in oil stocks? Will the Treasury announce that it will sell the entire US gold stock into the market? I doubt it, but who knows?

We might easily see some new "banking holidays", though.

Poor bankers. They worked so hard getting us all into debt and into houses and SUV's we can't sell anymore. They surely deserve a holiday or two, don't they?

Making calls like this is dangerous, but it's very much within the realm of the possible for gold to go up by $50 bucks or so tomorrow. We will see. We'll be able to gauge the remaining power of this benighted and abusive financial system by the degree to which gold's rise tomorrow will be controlled – or not controlled.

Got gold?

Alex Wallenwein
Editor, Publisher
In this multi-decade gold bull market, the old investment maxim of "know when to buy and when to sell" has been replaced by "know when NOT to sell!" Euro vs. Dollar & Gold Monitor subscribers know when not to sell.

Copyright © 2008 Alex Wallenwein - All Rights Reserved

Alex holds a B.A. degree in Economics and a juris doctorate in Law. His forte is research. In late 1996, he began to research how money is used by some to exert political and economic control over others' lives. In the process, he discovered that gold (along with silver) is the common man's antidote to this effort. In writing and publishing the Euro vs Dollar Monitor, he explains the dynamics of this process and how individuals can harness the power of gold in their efforts to regain their political and financial autonomy.

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is the golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

Alex Wallenwein Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules