Author : Bill Holter
Published: May 28th, 2013
I’d like to connect a few dots for you. We had a couple of pieces of news come out on Friday that were strange. One piece did not even seem credible because of size and the other one seemed odd because of the lack of size. Here is what we learned and if this is true THE biggest financial news of the 21st century. Europe announced that they may crack down on the Shadow Banking System. Basically, assets of all sorts that are “deposited” within the system are routinely “re” lent out by the custodian. This “re lending” of assets is called rehypothecation. The scheme has gone on for years and has been abused to the tune of the same asset being lent out 10 times, 50 times or even 100 times over. Legal? Well no, but everyone does it and “it’s the way business gets done all the time”…plus the regulators turn a blind eye to …party on dudes!
Before I talk about the ramifications of the above, another, seemingly unimportant/unconnected piece of news hit the tape. 3 men were arrested in Hong Kong and in their possession were $500 million worth of “fraudulent” letters of credit, letters of guarantee and proof of funds;
these were supposedly issued by HSBC and Standard Charter. A 4th man arrested was not named, only that he is 55 years old. Which coincidentally is the same age as Barry Cheung who sits (sat until his resignations this past week) on the boards of several government agencies, he was chairman of HKMEX and has very close ties to the CEO of Hong Kong, Mr. CY Leung. The investigation and arrests are tied to the HKMEX (metals exchange) that closed a week ago Friday and claimed that all open contracts would be settled in cash…not metal.
OK, so these guys got arrested and had in their possession $500 million fraudulent “collateral.” Is this ALL of the fraudulent collateral? Did they have more Do others possess or have pledged fraudulent collateral? How much? Where and to whom has it been pledged? How many times over has it been pledged? …And then out of nowhere, Europe decides to rein in the Shadow Banking System that is purported to be $80 TRILLION (with a capital “T”)! Do you see any connection here? I’ll make it easy for you, “collateral” is the common denominator.
I also want to mention that “collateral” is what makes the financial world turn. Everything runs on “credit,” if you have “collateral” then you can obtain credit. The problem now, that is being exposed, is that no one knows anymore if collateral is real or even “who’s” collateral it is anymore since it has been lent out so many times. Now, to add even more fuel to the fire, it turns out that some of the so called “collateral” is not and was not even real to begin with! Funds in the trillions of dollars have been lent and now it seems as if the collateral backing many loans may not be real. …And Europe is now considering pulling the plug on shadow banking? How many “assets” will banks and brokers have to sell to keep their capital ratios adequate? Do they even have enough real assets to sell to cover the collateral that turns out to be fake or has been lent out 10 times over (not to mention 100 times over). I might also ask the question, “What happens to the markets?” What will happen to the stock markets, bond markets, and real estate markets, ALL MARKETS if banks are forced into liquidation to cover for fraudulent or many times pledged collateral?
