Thursday, July 18, 2013

Bank of International Settlement Basil 3 Accords

Some people don't know that the G20, Private Central Banks have a Momma Bank.  The Momma Bank of all the Private Central Banks is the Bank of International Settlement in Basil Switzerland.  What does this bank in Basil Switzerland do? Among other things, It puts out accords that set reserve requirements.

Basil 1 Accords (1988): Targeted Japanese Banks, increased reserve requirements, reduced fractional reserve leveraging of debt, contracted the money supply, triggered the Japanese "Lost Decade".

Basil 2 Accords (2007): Targeted American Banks, increased reserve requirements, reduced leveraging of debt, contracted the money supply (M3), triggering the Housing and Mortgage Back Securities collapse.

Basil 3 Accords (2013): Targeting all American and European Banks. will increase reserve requirements, reduce leveraging of debt, contract the money supply. Have yet to be implemented.

Basil 3 was supposed to be implemented Jan 2013 but has been posponed. Do we think Basil 3 will be implemented? What will be the consequences?

STERILIZATION: how money at the top does NOT trickle down. The FED is printing massive amounts of money every month. The money is given free (zero percent interest) to the BIG BANKS and BIG COMPANIES that are registered as banks (GAMC). The banks then buy stock and bonds with that money that serves to artificially prop up the stock market. These Banks also buy US sovereign debt in the form of Bonds as the US continues to spend more than it takes in. CEO's then cash out stock options as the stock market continues to rise. CEO's then are sitting on a mountain of cash while the rest of us are forced to sit with unemployment, underemployment and reduced wages.

I am very suspect of any economist who doesn't talk about the effects of Bank of international settlement Basil Accord policy, the realities of demographics of the economy and Sterilization with regard to why we are not seeing more inflation despite FED printing of money. Too often we just hear predictions of imminent collapse and recommendations to buy gold.

How will this Bond and Derivative Market play out? We have Big Banks using free FED cash to buy up US Soverign debt in the form of Bonds. We have Municipalities and Banks invested in toxic Credit-Default-Swap derivatives. So, can the FED keep this going until WW3, or will there be a tipping point? Banks used to just buy Bonds that at least kept up wtih inflation. Now banks and municipalities are buying-credit-default swaps because these pay out in the short term a better rate than bonds.

Credit Default Swaps: Because Bond yields are so low; banks, municipalities, and hedge funds have been enticed to purchase volatile credit default swaps. People are fooled into buying CDS's because 1. they yield more than bonds, 2. the corrupt rating agencies give them a AAA rating the same as bonds. 3. the CDS market would not affect the overall 32 Trillion US bond market in 2011 (the tail won't wag the dog). 25-62 Trillion CDS market from 2007-2012.

When the US goverment sells bonds, it buys insurance to protect the buyer in the case of US default. The US government pays a monthy insurance premium to a bond insurance (CDS) company. However, like AIG, the bond insurance company knows in the case of a default of the US, or a city or whatever, it could not possibly pay for the bonds it is insuring. The bond insurance company just likes spending the insurance premium cash that comes in every month. If a default comes, they would just default and walk away or get bailed out like AIG. 

However, the bond insurance company had an even better idea. Instead of holding on to the insurance policy and collecting the monthly premiums and carrying the liability, the bond insurance company sells the CDSs to other people. That way the if a default were to come, the bond insurance company has gotten some money out of the sale of the CDS but they have sold the responsibility to repay to someone else. If default happens, the insurance company is off the hook and not "left holding the bag". Whoever is holding the CDS gets the monthly bond insurance premium payment, but also has the responsibility to repay the bond owner. Furthermore, If I read things correctly, in the case of the default, the CDS hold is responsible to pay the bond holder, and the original CDS seller ends up with the bond.

Credit default swaps are bad news because:
1. the insurance companies know they couldn't possibly cover the cost of a default.
2. the CDS buyers can't possibly cover the cost of a default
3. When Greece restructured their debt instead of default, they decided to repay pennies on the Euro. Not technically a complete default, hedge funds hold Greeking bonds lost their shirt, and CDS holders only took a haircut.
4. IMF told private Greek Bond holders that they had to independently negotiate a settlement with the Greek government. This lets the Greek Government and IMF decide how much it wants to repay who.
5. CDS's do affect and depress the bond market (wag the dog).

No comments: