These were the shock troops of the Persian army, warriors that had built the Persian Empire into the most powerful military presence in the world of 490 BC.

The Greeks were absurdly outnumbered and some of the Greek generals hesitated going into battle, considering that a wait for reinforcements would be more prudent. But one of the generals, Miltiades, counseled attack.

The vote was split, so Miltiades went to the Polemarch of Athens (a dignitary, who, by custom, was permitted to vote with the generals). His name was Callimachus.

The Greek historian Herodotus, the “Father of History,” reports the conversation between Miltiades and Callimachus.

‘With you it rests, Callimachus, either to bring Athens to slavery, or, by securing her freedom, to be remembered by all future generations.’

The Greeks attacked. They fought for their lives. They fought for their families. But most of all, they fought for their freedom.

When it was over, 6,400 Persians lay slain on the field of battle. One hundred ninety-two Greeks had died.

The Battle of Marathon was the first of the three battles of the Persian Wars between Greece and Persia – the outcome of which would alter the course of Western Civilization forever.

(According to legend, it was a man named Phidippides, who ran the 26 miles from Marathon back to Athens in three hours to tell the Athenians of the great victory. He died after delivering his message. It is the modern day marathon that memorializes his run.)

It was the victory at Marathon, and subsequent victories over the Persians, that created the sense of pride and power that ushered in the century of Athenian greatness known as The Golden Age of Greece.

During these years, Greece produced: one of the greatest statesmen in human history – Pericles; two of the most preeminent thinkers the world has ever known, Socrates and Plato, who brought whole new realms of thought and philosophy to the Western World; the Parthenon, which is still revered as one of the architectural marvels of the world; and a culture imbued with a majesty of art, literature and theater.

Greece is the birthmother of Democracy.

Today, the former Athenian nation-state, takes the spotlight as the lead in a pitiful play, which shines the spotlight of history on that nation’s economic chaos. The play is produced by the International Monetary Fund and is directed by perennial banking bad boy, Goldman Sachs. It is titled, The Global Financial Crisis.

I know it is a harsh metaphor, but the Glory that was Greece is gone. That was then and this is now, and the country has become a broken pawn in a real life drama that is being played on the stage of international finance. Some of the cast know it is a play. Most do not. The audience – legislators, regulators, finance ministers, and nations large and small – think it is real. Which it is.

They just don’t know that it is an orchestrated reality.

Here’s the story.

DEBT AS ADDICTION

The political descendents of those magnificent Athenians are addicts today. Like a junkie on Horse, they are driven by an insatiable lust to spend. And like all governments, they spend without regard to consequence – on war and welfare, on interest and infrastructure, on beggars and banks, on anything that will keep them in power and soothe their collective Marxian conscience.

To feed their habit, they must borrow.

The Greeks have borrowed in excess of $330 billion. This is a meaningful sum anywhere. In Greece, it is Everest.

The Greek Tragedy has been shoved off the front pages of the financial press by their Euro-cousins in Ireland as this is written. And Ireland will soon be followed by Portugal and Spain. Still, I am using Greece for illustrative purposes because this kind of financial freebasing has turned the planet into a playground for the ultimate drug dealers – the pirates in pinstripes. It is time it was exposed and hung from the yardarm of public opinion.

Here’s how that rolls out.

The Greek economy is managed like a free drug clinic in the Haight Ashbury. The government provides literally hundreds of benefits and subsidies: health care is essentially “free,” civil servants can retire with pensions in their 40s, and the government-run utilities and enterprises lose more money than a convention of Bernie Madoff investors. Greek legislators must have apprenticed with the financial masterminds in the United States Congress: the Post Office is broke, AmTrak is broke, Social Security is broke, Medicare is broke, Fannie Mae and Freddie Mac are broke, and AIG, the insurance company that the government acquired last year, has cost the taxpayers $182 billion… so far.

In 2001, Greece wanted to get into the European Union (EU). They also wanted to use the Euro as their national currency. (The countries in the EU that also use the Euro are referred to as the Eurozone. Not all European Union members use the Euro.)

But their debt was too high. Too much welfare, too many pensions, too much interest and the 12th largest military budget in the world (taken as a percentage of GDP). Perhaps they are still fighting the Persians in their collective mind.

In any case, the EU said, “No can do.”

What to do?

Some suggested that the country cut back on spending and use their income to pay their debt down. But these people were arrested and burned at the stake as economic heretics.

The problem seemed unsolvable to the money men of Athens. How do we get into the European Union with our current debt load? How do we get in, and also keep the needle in our veins?

In the distance we hear a bugle signaling a cavalry charge. This is followed by the sound of screeching tires as a Humvee stretch-limo the size of the Hindenburg squeals around the corner, roars up the street and pulls to a stop in front of the Presidential mansion in Athens.

The chauffeur exits the driver’s side and walks briskly around the car and opens the rear door. The first person out is a Julia Roberts look-alike in a Valentino pantsuit. She is wearing designer shades and is carrying a Prada briefcase. She is followed by an unusually tall man wearing a midnight blue Armani suit with teal pinstripes. He is ostrich egg bald, is wearing granny glasses and has a Tumi laptop bag slung over his shoulder. He is furiously working the keys of a Blackberry while talking on a Bluetooth headset.

Goldman Sachs has arrived.

Greek treasury officials fall to their knees and weep with joy.

Saviors of nations, bankers to the over-borrowed, Goldman is there to help. Help, that is, as long as the country is willing to pledge some national assets with their tax revenues attached as collateral. They are team players, by God; give them some of your country’s tax revenue and the boys from Goldman Sachs will climb any mountain, ford any stream, follow any rainbow ‘til you find your dream (a lender with deep pockets and the ethics of a crack dealer).

What that dream looked like in real life was a package of financial sophistry that camouflaged Greece’s debt, pushed it onto the backs of their children, got them into the EU and enabled them to continue to feed their habit.

A “fix” by any other name…

In short, Goldman converted ten billion dollars of Greek debt that had been purchased with U.S. dollars and Japanese yen into debt that could be repaid in Euros. However, in creating this “currency swap”, they used a fictitious value for the Euros which lowered the reported amount of Greek debt by billions.

The structure enabled Greece to owe billions to Goldman in a currency deal without having to report it to the European Union as a loan, which is clearly what it was. Turns out using the Alice in Wonderland value for the Euro wasn’t illegal, just deceptive as hell.

Having cut the deal, Goldman’s covert loan needed to be paid. Greed never sleeps. And since the faux currency swap was not officially a loan, Goldman had to have some way to get repaid other than “loan payments”. To wit, the pirates of pinstripe go on a Hellenic treasure hunt and wind up commandeering the rights to a few of the country’s income-producing crown jewels — airport fees, the national lottery and toll road income.

Pericles, where are you?

Securing the rights to the tax revenues, they wrap the repayment into an interest rate swap. (Don’t go to sleep on me now, I’ll explain).

Greece had previously issued some bonds and had to pay the bond holders a fixed rate of interest of 4%. So, as their part of the swap, Goldman agreed to pay Greece a fixed rate of 4%. In return, the government of Greece agreed to pay Goldman a floating rate.

The exact amount Greece had to pay Goldman is not known. However, what is reported is that Goldman received a rate in excess of LIBOR (the rate set in the UK that banks charge each other for short term loans) + 6.6%.

The rate was floating, not fixed, but note that even if LIBOR was zero – 0% – (which it wasn’t) Goldman would be paying Greece 4% but would be receiving 6.6%. The absolute worst they could get, then, was an annual profit of 2.6% on a deal for $10 billion in bonds ($260,000,000).

But that’s not really enough to push those year-ending Goldman bonus babies to the Hamptons. Oh no, not by a long shot, because Goldman also picked up a fee to arrange this charade of about $300,000,000.

In summary, Goldman arranges what appears to be a currency swap for Greece, which is really a loan that doesn’t have to be reported to the EU as such.

In so doing, Greece pushes its existing debt back to the future, is accepted into the European Union, gets yet another loan, and still has access to the debt needle.

Goldman gets a fee of $300,000,000 for setting the deal up and ongoing revenue from an interest rate swap estimated at $260,000,000 a year from government owned assets.

Yeah, Baby!

Of course, the story doesn’t end there. But then you knew that, didn’t you?

ENTER THE NATIONAL BANK OF GREECE

In 2005, Goldman apparently, and we say, “apparently” as all of these figures are a matter of news reports, not official Goldman records, having received their eye-watering fee and having recouped about a billion dollars from the interest rate swap (which is what they were reportedly out-of-pocket on the deal), sold the balance of the deal to the National Bank of Greece.

At this point, Goldman is out of it; Greece has joined the European Union and it now owes the balance of the off-balance-sheet loan of about $9 billion to their homies at the National Bank of Greece.

All is well…well, that is until 2008 and the eruption of the Global Financial Crisis.

THE HELLENIC SWAP

As the planet’s financial system started to go into the DTs, the European Central Bank did what all central banks do at such times, they went to print mode. They structured a program designed to pour billions of Euros into the European banking system.

The National Bank of Greece wanted some of that cheap coin. They could borrow it from the European Central Bank (ECB) and lend it out at handsomely higher rates. Yum, yum. But to get it, they had to pledge some collateral to the ECB, collateral they didn’t have.

What they did have was the income stream from the government tax revenues that they had purchased from Goldman three years earlier. There was just one problem, the European Central Bank would not lend to them on that deal. They needed to pledge some bonds.

It’s midnight in Athens. From the roof of the headquarters office of the National Bank of Greece we see a gigantic spot light beaming an enormous image of a dollar sign into the Mediterranean sky, a la the Bat Signal.

The next morning, the Humvee is back with Julia, baldy and their Blackberries. Goldman goes into closed-door session with representatives of the National Bank of Greece and the Treasury officials of the Hellenic Republic. At this point, the Greek government owes the National Bank of Greece about seven billion dollars.

Goldman channels Houdini yet again. They create and execute what has come to be called “The Hellenic Swap.” And if you want to see some sleight of hand on the stage of international finance, watch this, because this kind of fiscal alchemy is going on 24/7 around the planet with governments large and small.

In December, 2008, Goldman arranges an interest rate swap between the Greek government and the National Bank of Greece (The Hellenic Swap).

THE HELLENIC SWAP

Under the terms of this arrangement, the Greek Government (the Hellenic Republic) is to receive fixed-interest payments from the National Bank of Greece of 4.5 % on $6.96 billion dollars.

In return, Greece agrees to pay the National Bank of Greece an interest rate of LIBOR + 6.6% on that amount of money. LIBOR was .8% at the time, making the Greece’s interest rate 7.4%. This rate could fluctuate but could never go below 6.6%.

As can be seen, the National Bank of Greece makes a profit of 2.9% on this swap (about $201,000,000 a year). Nice.

Except the National Bank of Greece doesn’t keep the swap. Not exactly.

Shortly after setting up the interest rate swap between the government and the bank, Goldman sets up an entity in London called Titlos, PLC. The name isn’t important, but what they do is. Titlos is what is called a “Special Purpose Vehicle (SPV).” That means it is a legal entity that was set up for the sole purpose of conducting a financial transaction.

Titlos issues $6.96 billion worth of notes on which interest is payable.

Titlos then trades the notes to the National Bank of Greece in exchange for their rights to the Hellenic Swap. It so happens that the notes issued by Titlos are the same amount as the balance of the loan that Greece owed the bank ($6.96 billion).

Greece now owes Titlos the $6.96 billion and is paying the Goldman created shell the 7.4% interest while receiving a fixed rate of 4.5%.

Titlos receives money, takes an administrative fee and the 4.5% that it must pay Greece, and pays the balance to the National Bank of Greece which services the interest due on the notes.

And Shazam! The National Bank of Greece now has bonds that it can pledge to the European Central Bank so they can borrow some of that cheap money and lend it dear. In essence, Goldman has become a Central Bank creating money out of thin air.

We love you, Goldman.

(Two years later, when the country is on the verge of financial collapse, Goldman issues a statement downgrading the National Bank of Greece saying, “Greece faces both a liquidity and, potentially, a solvency problem. While we believe that, individually, Greek banks tend to be well-run, the problems they face are outside their operational control.”)

Isn’t that sweet?

THE GREEK BANKRUPTCY

Meanwhile, the Athenian addiction continued.

The country finally hit the wall about a year ago, at which point there was a real potential that the nation of Pericles was going to declare bankruptcy.

What does this mean? It means that Greece had reached the point that they could no longer pay the interest on their debt – their bonds.

Markets roiled as Greece went cap in hand to their brethren in the European Union, “Buddy, can you spare a billion?” The Eurozone countries bitched, protested and criticized, and in the end, along with help from the IMF, coughed up $146 billion.

It wasn’t altruism, mind you. No, no. This was pure self-interest. The situation in Greece had helped to drive the value of the Euro down 15% during the first six months of the year. (George Soros, the Dorian Gray of international finance, must have been orgasmic.) The bailout halted the fall.

If Greece had gone bankrupt, the Euro would have become a doormat on international currency markets and Eurozone economies would have descended into some kind of fiscal horror show.

But it wasn’t just the sky-diving currency that got them to pony up: European banks including those in France, Germany and Switzerland held over $200 billion dollar’s worth of Greek debt. Just like their good ole’ Uncle Sam, with banks at risk, Greece became “too big to fail.”

THE GREEK TRAGEDY GOES GLOBAL

The deeper problem is this: it isn’t just Greece. In what can only be described as one of the world’s more disgusting acronyms, Spain, Ireland and Portugal have now been included in the fraternity of the financially fallen, which is referred to in the financial press as the PIGS (Portugal, Ireland, Greece and Spain). Italy is often included which expands it into PIIGS. Some include Great Britain, which makes it PIIGGS. Still, a pig by any other name….

The following lead from the May 6, 2010 issue of World Politics Review is one of countless articles exposing the fact that the deficit ridden PIIGS could bring down the economies of Europe.

With last year’s swine flu scare already a distant memory, the risk of a new epidemic is spreading across Europe. This time the fears have to do not with the H1N1 virus, but with the debt contagion facing Europe’s PIIGS: Portugal, Ireland, Italy, Greece and Spain. With each of these countries carrying high debt-to-GDP ratios, financial markets are growing increasingly skeptical that Greece’s debt crisis will be successfully quarantined within its borders.

No surprise really when one considers that 15 of the 16 zone members have used swaps to “manage” their debt.

A UPI story of November 13, 2010 states,

“The BBC said Irish officials were holding preliminary discussions with the EU about getting assistance from the European Financial Stability Fund. Officials estimated the country would need a bailout of $82 billion to $110 billion.”

Irish officials denied that they were seeking a bailout until the EU agreed to cough up $115 billion on November 29th so that Ireland could follow in the footsteps of their Hellenic brethren – the debt needle inserted deeply in the fiscal vein while the country goes slowly unconscious.

IMF, drug dealers to the world.

The point here is not Ireland, or Greece, for that matter.

Greece was representative of a larger problem in the PIIGGS. But the problem in the PIIGGS is representative of the entire planet – a world mired in a vast interconnected Ponzi scheme of more than a $1.1 Quadrillion dollars of derivatives, $600 trillion of which are interest rate swaps – a scheme that is so vast, even the people who built it have lost control.

American banking is not immune. U.S. banks have $216 trillion in derivatives: JPMorgan, $81 trillion, Bank of America, $38 trillion, Citibank, $29 trillion, Goldman Sachs, $39 trillion, HSBC North America, $3.4 trillion, Wells Fargo, $1.8 trillion; this according to the Office of the Controller of Currency’s quarterly report for the first quarter of 2010 and the March 30, 2009 article Geithner’s Dirty Little Secret by William Engdahl. Historically, 60% of derivatives are interest rate swaps. Do the math.

(Note: the derivatives market consists, to large degree, of bets on other people’s bets. A swap is made [which is really a bet on which way interest rates will go, or whether a country’s bonds will be repaid, etc.] and then other people and institutions bet on which way the swap will go, and then others bet on that bet and others bet on…. In short, it’s a colossal Ponzi scheme operating as a global casino, built on hot air and greed. So, lots of people are betting a derivative will go one way and a corresponding number are betting the opposite. If all of these bets were called at the same time, many would cancel each other out. If all of the bets on bets are washed out, the actual money at risk is about 20% of the face value of the derivatives market. Still, we are talking about trillions.)

Which brings us back to what is truly driving the actions of the Fed, the International Monetary Fund and the Bank for International Settlements.

Perhaps you have noticed that the Federal Reserve (which we remind you, is owned by the major New York banks, not the U.S. government) has kept interest rates at zero for the last two years.

What happened to the banks who bet on low interest rates using interest rate swaps? They made billions in profit. Why? Because they arranged to receive fixed rates from borrowers (cities, states, universities) in exchange for floating rates. The floating rates were tied to the Federal Reserve’s Fed Funds rate, which was lowered to zero due to the “financial crisis.”

Consider the fact that the financial crisis seems to have missed JPMorgan, who made about $5 billion in profit on interest rate swaps during the first 9 months of 2008, the very heart of the crisis.

Goldman Sachs made similar profits on these swaps as did Wells Fargo, to name a few. Of course, the cities, counties and states that took the other side of these bets on the advice of investment bankers to protect their bonds, got slaughtered. But let’s not be too harsh on them. According to Goldman Sachs’ CEO, Lloyd Blankfein, following his testimony before Congress, he’s just a banker “doing God’s work.”

We love you, Lloyd.

But here’s the problem.

The majority of the more than a half quadrillion dollars in interest rate swaps are held mainly by banks.

Stay with me here.

With rates at zero, what’s the only way they can go?

That’s right, up.

And what will happen to those banks with trillions of dollars of interest rate swaps in their portfolios when rates start to climb?

The planet is drowning in a multi-trillion dollar game of banker baccarat, whose players will suffer massive losses when rates reverse.

Will the Fed warn Goldman and JPMorgan about a coming increase in rates so that they can dump their swaps on some other drunk in the casino? Perhaps, but to whom do you sell trillions of dollars of hot air after someone has stuck a pin in the balloon?

And at this point, this isn’t entirely up to Bennie and the Jets. The U.S. Government went $1.4 trillion in debt last year and recorded a $1.3 trillion deficit this year.

Which means?

Which means that for China, Japan or the tooth fairy to buy our Treasury Bills now, rates will have to rise. China is not drinking Tim Geithner’s Kool Aid. And the U.S. government will have to raise rates at some point to entice others to buy our fiscal waste. If we don’t raise them, the market will force them up.

Not, says Ben, on my watch. The Bald One just announced he was going to buy $600 billion dollar’s worth of U.S. government debt starting immediately. Ben calls the Alice in Wonderland money injection, “Quantitative Easing.” This is the second round of quantitative easing- the first one was an unqualified disaster – so this one is now referred to as QE2.

Sounds like a Steven Spielberg-created alien robot.

Ben is nothing if not brilliant. If he takes to the presses and buys Timmy Geithner’s debt he doesn’t have to rely on his comrades in the People’s Republic of China to buy it. Rates will stay low. And the trillions of dollars of interest rate swaps – which are owned by the same people who own his bank – will be safe.

Ben could be up for a Nobel Prize.

Except that’s not what happened. Finance ministers from around world issued statements implying that Ben was smoking something. And as noted by Mike Larson, of Money and Markets, some of the key U.S. government bond yields not only didn’t go down, they soared.

And what did our bankers, the Chinese, do? The Chinese credit rating agency, Dagong Global, downgraded the debt of the United States citing, “…the detrimental effects of the QE2 plan and the U.S.’s sizable debt load.”

Oops.

A final thought.

What if, just what if, monetary systems were based strictly on products and real estate values.

Currency would not be paper, based on government dictate, and it wouldn’t be based on gold (though a gold-based currency would be better than fiat, the price of gold can be manipulated.)

The money in circulation would represent the goods and services available to be purchased. There would be sufficient money to buy what was available to be bought. The more productive a country, the more money it would have.

You couldn’t pull a Federal Reserve prank and inflate the currency or deflate it for that matter, which is what causes roller-coastering economies.

There are details to work out: It would take an annual survey of actual GDP, and the currency in circulation would have to be adjusted annually to correspond with actual products. But think about it: a monetary system based on actual products.

Meanwhile, keep your powder dry.

John Truman Wolfe

Copyright ©2010. John Truman Wolfe. All Rights Reserved.

References:
Revealed: Goldman Sachs’ mega-deal for Greece
http://www.risk.net/risk-magazine/feature/1498135/revealed-goldman-sachs-mega-deal-greece

Is Titlos PLC (Special Purpose Vehicle) The Downgrade Catalyst Trigger Which Will Destroy Greece? http://www.zerohedge.com/article/titlos-llc-special-purpose-vehicle-downgrade-catalyst-trigger-which-will-destroy-greece

Eight Financial Fault Lines Appear In The Euro Experiment!
http://www.marketoracle.co.uk/Article17332.html

Sultans of Swap – Explaining $605 Trillion of Derivatives!
http://www.safehaven.com/article/15906/sultans-of-swap-explaining-605-trillion-of-derivatives

Goldman, Greece and a Troubling Tango
http://www.nickdunbar.net/?page_id=298

London firm was created to route cash by Carrick Mollenkamp http://online.wsj.com/article/SB10001424052748703791504575079903903971986.html

Goldman Sachs Transactions with Greece

http://www2.goldmansachs.com/our-firm/on-the-issues/viewpoint/viewpoint-articles/greece.html

Eurozone approves massive Greece bail-out
http://news.bbc.co.uk/2/hi/8656649.stm

Ireland’s Fate Tied to Doomed Banks by Charles Forelle and David Enrich http://online.wsj.com/article/SB10001424052748704506404575592360334457040.html

Wall Street Collects $4 Billion From Taxpayers as Swaps Backfire
http://www.bloomberg.com/news/2010-11-10/wall-street-collects-4-billion-from-taxpayers-as-swaps-backfire.html

The ideas and suggestions contained in this article are not intended as a substitute for consulting with your financial adviser. Always check with your own legal, financial or investment adviser before making investment decisions.
Neither the author nor the publisher shall be liable or responsible for any loss, injury or damage allegedly arising from any information or suggestion in this article. The opinions expressed in this article represent the personalviews of the author. Past performance is no guarantee of future results and no guarantees are made – experessed or implied.

That happened yesterday – June 29, 2012.

What follows is the introductory pages to the article and then a summary and link to the take over of the finances of all Eurozone countries by the European Central Bank, which is now the Fed of Europe.

A staggering, and predictable development.

THE FINANCIAL CRISIS: ACT THREE

It would have been Shakespeare’s greatest tragedy…and farce…and drama.

It is a play of such power that it brings sovereign nations to their knees and sends Presidents and Prime Ministers to the dustbin of history.

But Willie Shakespeare didn’t write this play. It was penned by bankers of Mordor, better known as the Bank for International Settlements.

It was they who took quill in hand to script this drama. They also Executive Produced the play and brought in the bad boy of international finance – the International Monetary Fund (IMF) – to direct.

Headquarters of the Bank for International Settlements in Basel, Switzerland

Entitled “The Global Financial Crisis,” Act I opened on Wall Street with a 778 point drop in the Dow in September of 2008 and was followed by a command performance in the U.S. Congress shortly thereafter. I examined Act I in great detail in Crisis by Design The Untold Story of the Global Financial Coup (www.crisisbydesign.net).

Act II, sub-titled The European Financial Crisis, is currently being performed daily in the streets of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) for standing room only audiences in the respective parliaments (see my essay, A Greek Tragedy: Pulling Back the Curtain on Bankers Gone Wild, http://johntrumanwolfe.com/products-page/).

There is a theme to this play – a message really. The message, subtle at first, now roars from the pages of the financial press like a raging forest fire demanding solutions that have, in fact, been long since preordained: the crisis is too overwhelming for any one country to deal with; sovereign nations can no longer manage their own financial affairs -international financial organizations – the IMF – must act to save these economies.

If society is going to be saved from a caldron of financial chaos, loans must be made to the governments affected by the crisis as well as to the banks in their countries that are too big to fail. (It is these very banks, of course, that buy the government debt and thereby keep the fiscal needle in the arm of those in power).

These people have the IQ of roadkill – the countries are in financial crisis because they borrowed too much. The IMF’s solution is to lend them more money.

Hellooo?

But they are not really “stupid” in that sense. Oh no. They know exactly what they are doing. The junkie is hooked.

The banker keeps the needle in the vein, because without it… society goes into withdrawal. And like the agony and convulsions of a body coming off of smack, countries with dependent populations that are forced to live within their means, experience civil unrest, riots and political chaos.

Withdrawal by any other name….

Politician become nauseous, and retch endlessly behind closed doors considering such things.

They posture for the press, and speak of national sovereignty and fiscal austerity; but in the dark paneled rooms where they once held power, they beg for bail-outs in disgustingly propitious tones.

The money comes… as long as the government signs the loan agreement that comes with it, giving de facto control of their financial, and other governmental, affairs to the IMF, who, in turn, serve the poppy growers in Basel.

_________

I wrote this article a few months ago.

On June 29, 2012 The London Telegraph published the story of Germany caving in to EU demands to bail out Italian and Spanish Banks and to have the European Central Bank take over the finances of EU countries.

This is summarized in G. Edward Griffin’s weekly newsletter http://www.realityzone.com/currentperiod.html

A threat by Italy and Spain to ‘block everything’ at an EU summit meeting causes Germany to agree to an EU bailout of those countries to the tune of $126 billion. Also agreed upon is the creation of a new, centralized financial authority that will control the monetary policy of EU countries.

My emphasis.

The JP Morgan losses resulted from derivatives called Credit Default Swaps.

But the danger to the global economy isn’t Credit Default Swaps, it is a world mired in a vast interconnected Ponzi scheme of more than a $1.1 Quadrillion dollars of derivatives, more than half of which are bets on the direction of interest rates. These are called interest rate swaps.

In fact, an estimated six hundred trillion dollars of these derivatives are interest rate swaps – a casino that is so vast, even the people who built it have lost control.

Interest rate swaps are bets on whether interest will rise or fall. An investment bank thinks rates will go up. Another bank thinks they will go down.

And they bet.

Here’s an example: the City of Houston raises $100,000,000 by selling municipal bonds to build a new sports stadium.

The bonds are sold with a floating interest rate, which is tied to a rate controlled by the Fed called the federal funds rate (FFR) – say, FFR + 2% – and is at the closing of the bond issue, let’s say, 4%.

But the city’s budget is extraordinarily upside down and if rates go up, they’ll never be able to handle the interest payments. What to do?

In the distance we hear a bugle signaling a cavalry charge. This is followed by the sound of screeching tires as a Humvee stretch-limo the size of the Hindenburg squeals around the corner, roars up the street and pulls to a stop in front of the mayor’s office.

The chauffeur exits the driver’s side and walks briskly around the car and opens the rear door. The first person out is a Julia Roberts look-alike in a Valentino pantsuit. She is wearing designer shades and is carrying a Prada briefcase. She is followed by an unusually tall man wearing a midnight blue Armani suit with teal pinstripes. He is ostrich egg bald, is wearing granny glasses and has a Tumi laptop bag slung over his shoulder. He is furiously working the keys of a Blackberry while talking on a Bluetooth headset.

Goldman Sachs has arrived.

The City of Houston and Goldman strike a deal.

The City will pay Goldman a fixed rate of 4% so their interest expense is guaranteed not to rise. Goldman, in turn will pay the city the floating rate – the fed funds rate +2%, so they can pay their bondholders per the terms of the bond purchases.

That is an interest rate swap: the city “swaps” its floating rate for a fixed rate. If the Fed Funds Rate goes up, Goldman loses; if it goes down, they win.

But that transaction doesn’t end there. There are bets on this swap and bets on those bets and then bets on the bets of the bets and… stay with me …a $600,000,000,000 – six hundred TRILLION house of cards.

This is a colossal global casino, built on hot air and greed.

Which brings us back to what is truly driving the actions of the Fed, the International Monetary Fund and the Bank for International Settlements.

Goldman Sachs Tower at 30 Hudson Street, in Jersey City

Perhaps you have noticed that the Federal Reserve (which we remind you, is owned by Goldman Sachs and other major New York banks, not the U.S. government) has kept interest rates at zero for the last three and a half years.

What happened to the banks that bet on low interest rates using interest rate swaps? They made billions in profit. Why? Because they arranged to receive fixed rates from borrowers (cities, states, universities) in exchange for floating rates. The floating rates were tied to the Federal Reserve’s Fed Funds rate, which was lowered to zero during to the “financial crisis” by Helicopter Ben and have remained there.

Consider the fact that the financial crisis seems to have missed JPMorgan, who made about $5 billion in profit on interest rate swaps during the first 9 months of 2008, the very heart of the crisis.

Goldman Sachs made similar profits on these swaps, as did Wells Fargo, to name a few. Of course, the cities, counties and states that took the other side of these bets on the advice of investment bankers to protect their bonds, got slaughtered. But let’s not be too harsh on them. According to Goldman Sachs’ CEO, Lloyd Blankfein, following his testimony before Congress, he’s just a banker “doing God’s work.”

We love you, Lloyd.

But here’s the problem.

The majority of the more than a half quadrillion dollars in interest rate swaps are held mainly by banks. As we documented above, the 9 biggest U.S. banks hold a quarter of a quadrillion in derivatives. An estimated $136 trillion are interest rate swaps (the U.S. Gross Domestic Product, basically the value of our annual production of goods and services is $15 trillion).

Stay with me here.

With rates at zero, what’s the only way they can go?

That’s right, up.

And what will happen to those banks with trillions of dollars of interest rate swaps in their portfolios when rates start to climb?

The planet is drowning in a multi-trillion dollar game of interest rate roulette, whose players will suffer massive losses when rates reverse.

And at this point, this isn’t entirely up to Bennie and the Jets. The U.S. Government went $1.4 trillion in debt last year and recorded a $1.3 trillion deficit this year.

Which means?

Which means that, at some point for China, Japan or the tooth fairy to buy our Treasury Bills, rates will have to rise. China is not drinking Tim Geithner’s Kool Aid. And the U.S. government will have to raise rates at some point to entice others to buy our fiscal waste. If we don’t raise them, the market will force them up.

Not, says Helicopter Ben, on my watch. The Bald One bought $600 billion dollar’s worth of U.S. Treasury last year. Ben calls the Alice in Wonderland money injection, “Quantitative Easing.” That was the second round of quantitative easing – the first one was an unqualified disaster – this one has been the same. According to reports, QE 3 is being discussed.

Ben is nothing if not brilliant. If he takes to the presses and buys Timmy Geithner’s debt he doesn’t have to rely on his comrades in the People’s Republic of China to buy it. Rates will stay low. And the trillions of dollars of interest rate swaps – which are owned by the same people who own his bank – will be safe.

Ben could be up for a Nobel Prize.

Except that’s not what happen as a result of QE 2. Finance ministers from around world issued statements implying that Ben was smoking something. And as noted by Mike Larson, of Money and Markets, some of the key U.S. government bond yields not only didn’t go down, they soared.

And what did our lenders, the Chinese, do? The Chinese credit rating agency, Dagong Global, downgraded the debt of the United States citing, “…the detrimental effects of the QE2 plan and the U.S.’s sizable debt load.”

Oops.

What will happen when someone sticks a pin in the derivatives balloon? Not a $2-$9 billion dollar JP Morgan sneeze. No, not even the flu. It will be double bronchial pneumonia.

What would you rather be holding when that happens, pieces of paper or gold and silver?

Fasten your seat belts, it might get bumpy.

http://www.dailymail.co.uk/news/article-2153324/Markets-facing-rerun-Great-Panic-2008-Head-World-Bank-warns-Europe-heading-danger-zone-bleakest-day-global-economy-year.html

I don’t like the word ‘globalization.’

I don’t like the way it sounds.

I don’t like the way it tastes, or feels or smells.

It evokes a world of human misery ruled by some unseen Orwellian tyrant that promotes the glories of “The State” and an obligatory global authority that is, “For the Good of All.”

But that doesn’t mean that globalization of the planet’s economy is some kind of media fiction. It is not.

As a new financial crisis roils through the PIIGS (Portugal, Ireland, Italy, Greece and Spain), the perilous ramifications for U.S. investors are disturbingly real.

Many look at the riots currently sweeping Greece (and soon to be visiting the rest of the pig farm) and think it has little or nothing to do with Joe the Plumber. But the global economy originated on our shores and we could no more prevent its reciprocal flows than the city of New Orleans could have stopped Hurricane Katrina.

The Rockefeller-Rothschild banking cartels of the 18th and 19th centuries sank their fangs into the financial juggler veins of Western Europe and then, in the early 20th century, America. These countries now find themselves piteously buried in debt from which the banking Cosa Nostra exacts trillions in interest, and exercises political control of most of the governments of earth.

One need only look at the Faustian drama now playing across the American media, which is centered on America’s $14 trillion debt. Both sides readily agree: “The debt limit must be raised.”  They are only arguing now on the terms to do so.

So immersed is America in the grip of federal dependency, that the government cannot even bring itself to stop borrowing.

The play is actually a tragedy, not a drama, since the interests of America are subjugated to the lenders.  If America were a corporation, the bondholders would take a haircut and learn not to lend to a government addicted to the power to spend, or it would declare bankruptcy and “reorganize.”

The Global Financial Crisis of 2008-09, which was targeted at the United States, was a stunning success from the viewpoint of those that caused it (see www.crisisbydesign.net), and it is, of course, still very much with us.

The second act of this play is now being played out in the PIIGS – those countries most buried in debt.

The leading glutton, the country now sucking France and Germany into a plan to handle their fiscal insanity, is Greece, though they are not alone.

The financial crisis in Greece, and her sisters of the fiscal swine, affect American investors in the following way:

The big banks in Europe have purchased debt from the PIIGS.

That means that Portugal, Ireland, Italy, Greece and Spain have spent far beyond their income and, in order to cover the shortfall, have issued government bonds to cover the soaring deficits.

The banks in the healthier European countries have purchased well over a trillion dollars worth of these bonds: French banks have $385 billion worth of government debt from the PIIGS; British banks have $349 billion worth of this debt. The Netherlands has $184 billion worth of it, Belgium has $135 billion and Germany a cool $524 billion.

All tolled, banks in the healthier European countries own roughly $1.5 trillion worth of government bonds from the PIIGS.

“So what?” says Joe. “Those banks want to buy that junk, that’s their problem.”

Not really.

If globalization has a focus, it is international finance. And here is how the oh so pathetic bonds from the PIIGS wind their way into the portfolios of American investors

Money market mutual funds are investment vehicles where many U.S. citizens park their cash. These funds buy the debt of governments and corporations. They collect interest on these bonds and other IOUs, take a fee, and pay their investors some interest. These days those rates are pitiful at best.

But here’s the “smoking gun.” In order to increase the rates that these money market mutual funds pay their investors, many of them have been buying the commercial paper (corporate IOUs) from the banks of Western Europe.

Oops.

In fact, according to Grants Interest Rate Observer the five largest U.S. money market mutual funds have about 41% of their assets in banks of Western Europe.

Just to be sure the connection is clear, the scenario is as follows:

European banks are loaded with roughly $1½ trillion dollars worth of government debt from the pig farm.

The five top US money market mutual funds have roughly 41% of their assets tied up in the commercial paper of European banks.

Bottom line: Money in these money market mutual funds could be at risk.

An important note: money market mutual funds are not the same as the money market accounts that you open at your bank. While the names of these investment vehicles sound similar, and they operate similarly, this study was done on the money market mutual funds, not the bank money market accounts.

The FDIC insures money market accounts that investors open in banks, not funds in money market mutual funds.

If you like the convenience of a money market account and have such an account with a mutual fund, I would suggest moving it to a money market account at an FDIC insured bank.

Not rocket science.

Keep your powder dry.

John

Since the beginning of the Global Financial Crisis, I have had several requests to do reviews of the financial strength of several banks. In the course of some of these assessments, I have found that the bank I was examining was in trouble, or heading for trouble and I recommended another.

During the last few years the condition of the banking industry in this country has continued to deteriorate. You can imagine this graph in your head:

2006, 0 bank failures;

2007, 3 bank failures;

2008, 25 bank failures;

2009, 140 bank failures;

2010, 157 bank failures;

2011 is doing better so far with only 48 bank failures to date.

However, the number of institutions on the FDIC’s problem bank list is the highest as far back as my records go (1990) at 888. This means 11.7% of the country’s banks are on the problem list. And banks have been falling like flies. There are only about half the number of banks in the United States today (7,574) as there were in 1990 (15,158).

As you can see, the industry has also been consolidating. In fact, just four banks now control about a third of the deposits in the U.S. The Big Four are Bank of America, Wells Fargo, JP Morgan Chase and Citibank.

In years gone by, I have, on occasion, recommended Wells Fargo or JP Morgan Chase. But these banks no longer warrant positive ratings.

In fact, the most current analysis reveals that Bank of America, JP Morgan Chase, and Wells Fargo are all rated D+ or worse by Weiss Rating, one of the premier bank rating firms. These banks are specifically labeled “Weak” by Weiss, meaning the “…weakness could negatively impact depositors or creditors.”

And Citibank is only one step up at C, meaning “fair.”

What can be done about this?

1. What difference does it make, you ask? The government will cover me. Well, okay, but did you know the FDIC is currently broke – they are show a deficit of $1 billion as of March, 31, 2011. They do have a $500 billion dollar credit line with the Treasury but their fund is upside down.

Also, these are the size of banks that during the financial crisis, were said to be too big to fail. Would that happen again if the financial crisis returns? Perhaps, but perhaps not.

2. If you bank with these – or any – banks, keep your deposits below the ensured amount ($250,000 per account holder.)

3. If you need a major, multi-branch bank, use Citibank.

4. If you want to check out your bank, you can go to www.bankrate.com or www.weissratings.com

These sites rate by a star rating system (1-5) at bankrate, or a letter grade at Weiss. This will give you a general indication. These ratings are helpful, but they are, for the most part, snap shots of a particular point in time – they don’t consider long term trend. Bank rate costs nothing, Weiss does not charge for the grade, but charges a modest fee for a more detailed analysis.

5. If you want a professional analysis of your bank’s financial strength and a recommendation for a new one if yours is “weak”, let me know. I charge for this service (the analysis takes time and I have to pay for data base research). Fees are $250 for an analysis of your bank and another $100 to research and recommend a new bank (if this is needed).

Keep your powder dry.

John Truman Wolfe

Scott Rasmussen is one of the country’s foremost pollsters. In my opinion he is the best.

Rasmussen is smart: he surveys “likely voters,” as opposed to just those of voting age. He conducts a daily presidential tracking poll in which he tracks the approval and disapproval – essentially the popularity – of President Obama.

He conducts this poll every single day.

The President’s poll numbers and popularity have essentially been falling almost from the day he took office. However towards the end of last year, when Obama agreed to extend the Bush tax cuts, his poll numbers started to improve. This lasted a couple of months and then they slowly turned against him again.

His popularity got an expected spike when Bin Laden was killed. But this did not last long as the President could not keep from talking about himself as part of the operation. Folks  got fed up with the litiany of “Me”s and “I”s in his telling of the story. The American public does not like braggarts.

Subsequently, his poll numbers were just kind of hanging out – not good, but not terrible either. Then Obama’s unpopularity worsened rather dramatically last week, and has continued to do so for the last week, approaching his lowest ratings ever.

At first, I thought it was Weinergate, that disgust at the Congressman’s bent proclivities had spilled over onto the public’s opinion of Democratic Party and up the food chain to the Chairman of the Party himself, namely BHO.

But the Weinergate timeline and the increase in Obama’s unpopularity don’t coincide exactly. The Weiner show started towards the end of May and was essentially over by the time Obama’s unpopularity started spiking.

So what was the cause of this rather dramatic increase in the President’s unpopularity over the last week or so? It wasn’t good to start with, but if this trend continues – stick a fork in him, he’s done.

There are what appear to be easily understood reasons for this: Despite the pathetic attempts by the White House to spin the economic news of the day as a recovering economy, America is in a wrenching economic downturn that could turn ugly at the drop of a hat, or the downgrade of US debt (which should, in fact, already have happened).

It was just announced that the real estate market has now declined more deeply than it did during the Great depression. This has affected every homeowner in the nation.

The unemployment rate ratcheted higher last month despite the government having spent $109 billion dollars over the last two and one half years paying people not to work.

Let’s just say there are several in Congress that are several electrons short of a molecule.

Memo to the House of Representatives and the United States Senate: you get what you incentivize.

My gas bill last month was higher than the national debt of Guatemala. Okay, not quite, but it was higher than the mortgage payments on my first home.  We have two cars. It now costs about $65 to fill each – $130 a week – $520 a month. For gasoline!

Our Nobel Peace Prize winning President is now fighting 4 – count ‘em, 4 – wars. U.S. troops are still dying in Iraq, the Afghan War is now the longest in American history. It has cost hundreds of billions of dollars and, much more importantly, the lives of 1623 Americans. Meanwhile, we are bombing Moammar Gadhafi back to the Stone Age because…because…he’s an evil bastard. And the Obama Administration is conducting a secret, illegal war in Yemen. The President apparently received his Nobel Peace Prize for bowing to the King of Saudi Arabia and giving a speech in Cairo.

Well, the guy can give a speech, I’ll give him that. But as my brother, Dick, says, “Talk’s cheap, action’s my game.” And the light is dawning on the American public that Barack Hussein Obama comes up wanting on the action side of the ledger.

Even helicopter Ben Bernanke’s suppressing interest rates to zero and pumping hundreds of billions of dollars into the economy like some demented Johnny Appleseed, has not turned things around.

Meanwhile, the man plays golf; his wife wears designer clothes and travels to Europe at taxpayer expense. They host lavish parties at the White House where artists gush and sing their praises. All of this is in the context of millions of Americans desperately looking for work and struggling to keep their homes out of foreclosure.

One gets a sense of The Beverly Hillbillies meet Marie Antoinette.

Still, I can’t tell which specific act spiked Obama’s unpopularity to new heights. Much of this has been going on for some time, so why the sudden spike?

One intelligent political observer with whom I am in touch has ventured the assessment that it is a combination of these things. That these factors have now coalesced like some political perfect storm and have turned on Obama like with the Wrath of Kahn. That may be, but that doesn’t account for the spike in unpopularity on June 10th.

So, if you have an opinion, let ‘er rip.

Keep your powder dry.

John Truman Wolfe

A Credit Default Swap (CDS) is a fancy name for a financial instrument that is really nothing more than a bet on whether a loan will be repaid or not. They are wagers placed by bankers and other pinstriped bookies made in an enormous floating casino with virtual crap tables in the U.S., Europe, Asia, and the Middle East.

In the simplest terms, credit default swaps are wagers as to whether or not some entity – a government or a corporation – will repay a loan in the manner in which they have agreed.

Governments and corporations borrow money by issuing bonds, which are promises to pay – IOUs.

Here is a simple example of how a CDS might work: The country of Greece (like virtually all governments on this debt ridden planet) spends more than it rakes in in tax revenues. To cover the short fall, it borrows. It does this by selling government bonds of one kind or another.

These bonds are backed by the “good faith and credit” of the government. The good faith and credit of the government rests on its ability to tax its citizens.

To make the purchase of the bonds a more secure investment, an investor is likely to purchase a credit default swap, which guarantees the repayment of the bonds from the seller of the swap, should the government default.

The investor pays a fee to the issuer of the swap, much like an insurance premium.

While it acts like insurance, a credit default swap isn’t an insurance policy – not technically. It is an agreement, a guarantee, issued, for example, by a bank or an insurance company, to pay the amount due to the investor if Greece defaults. Kind of like a co-signer. This transfers (swaps) the risk from the government to the entity issuing the guarantee. (Thus the name, Credit Default Swap).

But the betting doesn’t stop there. Oh no.

New bets are now made by others on the original swap. In other words, bets are made on the bets. And then bets are made on those bets and… it is a towering pyramid of wagers on whether or not some debt will be repaid.

Goldman Sachs, the unethical, but obscenely profitable New York investment bank, decides to place a bet that the Greek government will have a hard time repaying its bonds and, in fact, won’t repay them as promised.

Another bank, let’s say Deutsche Bank, the German financial giant, takes Goldman’s bet. A credit default swap is born. Goldman may have some Greek bonds to protect, or maybe it’s pure speculation.

(Would Goldman leak information to the financial press that the Greek economy is actually in worse shape than it appears so they can win the bet and pocket a few billion? Nah.)

Still others can place bets on the Goldman / Deutsch Bank swap. Bets like these, where the gamblers have no interest in the underlying security, are called “Naked Swaps.”

This market is a ginormous, pyramiding Ponzi scheme. The face value of outstanding credit default swaps globally is currently about $30 trillion. That’s trillion with a “T.”

A major market for credit default swaps in recent months has been the PIIGS – Portugal, Ireland, Italy, Greece and Spain. These are the hobos of Europe hanging out in the back streets of Frankfurt with their tin cups extended to the European Central Bank. The cost of default swaps in these countries has skyrocketed recently.

As Bloomberg noted on November 29, 2010:

“The cost of insuring against default on Portuguese and Spanish government debt soared to record-high levels as an aid package for Ireland failed to reassure investors the region’s debt crisis will be contained.”

As the full extent of their fiscal insolvency comes to light,  the premium on the credit default swaps of the respective countries climbs. In other words, the cost of “insurance” to protect an investor from one of these governments defaulting increases as country’s solvency decreases.

All of which brings us to this statement issued by The Committee for a Responsible Federal Budget on May 27, 2011:

Trading of credit default swaps (CDS) insuring U.S. treasuries has doubled in the last year in response to fears over our inability to deal with our debt and deficit problems in addition to fears about lawmakers not raising the statutory debt ceiling to avoid a U.S. default.

….

Increased trading suggests a higher level of fear over U.S. default on its debt obligations….Average daily trading just jumped to $490 million last week from $10 million the week prior, putting the U.S. at fourth most traded among those tracked by DTCC — up from 633rd!

This is a staggering turn of events – a further indication of the country’s fiscal free-basing. You can see the increase in the cost of credit default swaps on U.S. debt (Unheard of!) on the chart below.

(The chart was published at www.Clusterstock.com, but was created by Markit, www.markit.com – the definitive source of information on credit default swaps.)

What does this mean to you and me?

It means interest rates must rise. I say this knowing that helicopter Ben Bernanke, is doing everything he can with the awesome power of the U.S. Federal Reserve bank to keep rates down. Congress keeps spending money it doesn’t have. The Treasury turns around and borrows the money to cover the spending.

And who is buying Uncle Sam’s IOUs? Benny and the Feds. The Fed is feasting on federal debt like a pack of hyenas on the fiscal carcass of the American Republic.

Meanwhile, the Chinese, with $3 trillion in reserves, have been dumping U.S. debt like a bad habit. This will spread as time goes on, and Benny and the Feds will not be able to stem the tide of rising rates.

Unless or until, the United States Congress can get its financial house in order, America’s position as the world’s leading economic power will continue to erode.

This is so obvious a five year old can see it. Yet there are those in Congress who actually believe that it is the government’s job to “take care of people”: to feed them, house them, to look after their mental health and to provide them money when they don’t work. They hold this frightening concept of government without any regard for the solvency of the entity that is supposed to pay for it all.

It is economic Seppuku, but they are apparently oblivious to the knife that they are sliding into the body of the nation.

To say that America is at her seminal crossroads is now a hackneyed cliché. Yet, nothing could be truer.

If your elected officials don’t understand this, you should burn the phone and fax lines until they do.

Meanwhile, in the not too distant future, I expect interest rates to rise; I expect precious metals to resume their bull market trend, and I expect that Congress (the Senate, really) will kick the budget ball down the road for others to confront unless we can change their collectivist minds.

Keep your powder dry.

John Truman Wolfe