Dear Friends,

Where available, I believe you should give significant consideration to taking delivery of your investment shares.

Where not available, you might consider an alternative investment that does deliver shares. I can assure you from personal knowledge few people, even here, have exercised that right.

People simply will not make the small effort to protect themselves.

Where you own physical gold, please take delivery. This is in your best interest.

Regards,
Jim

Dear CIGAs,

You may remember that about a year and a half ago we began a campaign to inform our clients and readers of certain risks to their financial assets that exceed SIPC (Securities Investor Protection Corp.) insurance limits of $500,000 (up to $100,000 in cash is insured and up to $400,000 in securities is insured).

Many brokerage firms previously purchased insurance from major insurance companies to provide insurance for client accounts that exceed the SIPC limits.  However, earlier this decade, the major insurers stopped offering excess SIPC insurance to brokerage firms.  Apparently, the major insurers were prescient on the risks of brokerage firm solvency.

As a result of the loss of excess insurance for larger accounts, in 2003 many brokers banded together to form  a private insurance company called CAPCO (Customer Asset Protection Company) to insure their clients accounts above $500,000 .  In theory, the industry would self insure against the failure of one of its members.

Lehman was a member of the CAPCO consortium.  When Lehman went bankrupt in September 2008, many large investors lost money and assets that were deposited at Lehman.  CAPCO was supposed to insure the losses in excess of $500,000.  Not surprisingly, it appears that CAPCO was under funded and may not have the money to pay the creditors.

This following article explains why we have suggested that our clients and readers consider having their assets that exceed the SIPC and FDIC insurance limits held in custody accounts, preferably in the private banking division of a major bank.  We have looked for custodians whose legal documentation includes provisions describing the segregation of assets and audits to ensure that client assets are segregated from the assets of the institution itself and from the assets of every other client of the institution.

Please read the article below from the New York Times for a great deal more information.

Billions in Lehman Claims Could Bury an Elusive Insurer
By ZACHERY KOUWE, July 30, 2009

Next to a Chinese restaurant in Burlington, Vt., lurks a quiet guardian of Wall Street — an obscure insurance company that is supposed to protect big-money investors in the event of a catastrophic failure of a major brokerage firm.

A failure, for instance, like the one that brought down Lehman Brothers nearly 11 months ago. Now, after years in the shadows, the insurer, the Customer Asset Protection Company, could finally be put to the test, and questions are starting to swirl.

The worry is that the company, which has never paid out a claim, might be unable to cope with the Lehman bankruptcy.

If it were overwhelmed by claims, the banks and brokerage companies that own Capco, as it is known, could end up owing billions of dollars.

Capco representatives dismiss such concerns, but state insurance regulators are keeping an eye on the company. Officials at the New York State Insurance Department are concerned about the company’s ability to withstand the Lehman bankruptcy, the largest in history.

By some industry estimates reviewed by the insurance department, Capco could face nearly $11 billion in claims but has only about $150 million with which to meet them. The state is examining whether the company sold policies without the means to cover them, according to a person with direct knowledge of the inquiry who had signed confidentiality agreements.

The issue has even reached Washington, where a member of the Senate Finance Committee, Robert Menendez, has sounded an alarm. Mr. Menendez, Democrat of New Jersey, wrote the Treasury secretary, Timothy F. Geithner, in June to express his concern.

“It has become clear that this entity is thinly capitalized,” Mr. Menendez wrote in the letter. Capco, he said, potentially posed “systemic risk.” Capco was created in 2003 by Lehman and 13 other banks and brokerage companies as a kind of marketing tool. The pitch was that while Capco would not insure customers against investment losses, it would compensate them if the firms failed. Capco promises to provide virtually unlimited coverage above the $500,000 offered by the Securities Investors Protection Corporation and its equivalent in Britain.

Capco is virtually unknown even in financial circles, but it is being thrust into the spotlight by the events at Lehman. Creditors and former customers are battling over who will get what and when from the fallen bank, including more than $32 billion of assets that have been tied up in Lehman’s London prime brokerage unit. Untangling the mess could take years. Some former Lehman clients, which include big hedge funds, are looking to Capco for answers — and money.

Dewey & LeBoeuf, the law firm that represents Capco, said in a statement that Capco had no current policies outstanding and was “preserving all assets to address claims that might arise out of the insolvency of Lehman Brothers Inc. and Lehman Brothers International (Europe).”

The law firm called worries about Capco’s potential exposure to Lehman “speculation.”

Capco, which is private, is something of a financial mystery. Its members include Wall Street giants like Morgan Stanley and Goldman Sachs, banks like JPMorgan Chase and Wells Fargo, smaller brokerage firms like Robert W. Baird & Company and Edward Jones, and Fidelity, the mutual fund giant. Capco was initially registered in New York but later moved to Vermont, where state law enables it to operate without disclosing much about its finances.

Capco’s owners referred questions about the company’s liability to Dewey & LeBoeuf. Since it stopped writing policies on Feb. 16, most of Capco’s owners have purchased account protection for their clients through private insurance companies like Lloyd’s of London. Pershing, a unit of Bank of New York Mellon, told clients in a December notice that their Capco insurance would expire and that the firm had a new policy with Lloyd’s to “provide our customers and their investors with extra comfort that their assets are safe.”

It’s unclear who actually serves as the current president of Capco, and the company’s main phone number connects to a recording that tells callers they’ve reached a “nonworking number at Morgan Stanley.” A unit of Marsh & McLennan, the giant insurance services company, is listed as Capco’s administrator, but no contact information is listed on Capco’s Web site. The unit is based in the same Burlington building as Capco.

Brokerage companies used to buy account protection insurance from large insurance companies like Travelers and the American International Group. But in 2003, those insurance companies stopped offering such policies, saying it was impossible to calculate their liability. Enter Capco.

The Capco members played up their coverage when pitching their brokerage services to clients, especially large hedge fund customers who could lose billions of dollars if a firm went under. Although Capco’s finances were never disclosed publicly, the company was initially a given high rating by Standard & Poor’s.

That rating, however, was cut to junk status last December, and the ratings were withdrawn altogether in February. In its report, S.& P. said it was concerned about potential claims from customers of Lehman’s London unit, which “could create a liability for Capco that exceeds the insurer’s resources.” Charles Schwab, UBS and Merrill Lynch never opted for Capco, arguing that the arrangement seemed risky. Schwab requested the company’s financial statements from the insurance department through a Freedom of Information Act request in 2004, but was told the books were confidential.

The New York State Insurance Department later told Capco’s members that the company would eventually have to release the information. Before that happened, however, Capco relocated to Vermont, a haven for so-called captive insurance companies, whose owners are the ones buying the policies.

“Right away, the whole Capco thing just did not pass the smell test,” said Robert Meave, an outside consultant for Schwab at the time, who evaluated the insurance company.  “Schwab was not about to go to their clients and tell them we’re providing account protection and, oh by the way, they were owners of the insurance company.”

Firms who sought coverage elsewhere, mainly through Lloyd’s of London, could buy only up to $150 million of insurance per account and a maximum of $600 million for the entire firm. As a result, some customers moved their money to firms that offered Capco coverage.

“Let’s face it, none of us could have foreseen an event like Lehman, but we didn’t feel the capitalization of Capco as it seemed to be forming was going to be adequate in the extremely unlikely event that something happened,” Mr. Meave said.

Owners of the assets tied up in Lehman’s London unit, including pension funds and university endowments, believe they may have claims against Capco if all of their money is not returned by Lehman’s liquidator.

If Capco can’t pay out the claims and files for bankruptcy, several customers said they would bring lawsuits against the other brokerage houses.

“The bottom line is, this insurance should have never been sold to clients, and it just shows how Wall Street again miscalculated the risks involved with one of their own going under,” said an adviser working on the Lehman bankruptcy who was not authorized to speak for the company.

If you have accounts above $500,000 at brokerage firms and are interested in how we would protect those assets please do not hesitate to contact Aubrey Ford from our office at 310-826-8600.

Thank you for listening.

Monty Guild and Tony Danaher
www.GuildInvestment.com

 

Jim Sinclair’s Commentary

Here is an interesting review of the DTCC system that asks a most interesting question.

However if you believe in MOPE, why worry?

Who Really Owns Your Stocks? Hint: It’s Not You

So, do you think you own the stocks you’ve bought?

Think again.

For those of you who have not heard of the Depository Trust & Clearing Corp. (DTCC) and you own stocks … sit down.  This might change your your whole way of thinking.

Who is the DTCC and what does it do?  The DTCC actually provides clearing for 3.5 million securities from the United States and, get this, from 110 other countries and territories as well — all valued at roughly $28 trillion.  In 2008 alone, the DTCC settled more than $1.88 quadrillion in securities transactions.

The DTCC is also the registered owner and holder of your stock.

At present, the DTCC holds $23 trillion in assets.  It has a virtual monopoly on clearing.  In fact, 99% of all stocks in the USA are legally owned by it.

When Was the Last Time You Saw a Stock Certificate?

Remember the good old days when you bought a stock and received a certificate for it?  The SEC changed that law and went from stock certificates for individual investors to, well, your broker holding the certificate for you so that he or she will be able to legally trade it on your behalf.

The stock certificates were issued in the name of the brokerage … remember, just so they could trade them for you.  In reality, you became the beneficiary of the stocks you bought rather than the owner.

But the SEC, out of the goodness of its heart, changed the laws again, so that now the brokers can’t have the stocks in their name. Instead, the stocks must be placed in the name of "Cede & Co."

The excuse you’ll hear from your broker is that it is just a fictitious name used by the brokerage so it can trade your stocks for you because brokerages can’t, by law, put the stock certificates in their name any longer.

To Whom, Exactly, Have You ‘Ceded’ Your Stocks?

What we have now suddenly all come to find out is the Cede & Co is actually not a fictitious name, but a subsidiary company of DTCC.  In essence, DTCC owns probably 99% of all the stocks in the entire world.

This is how it works.  You buy some shares of stock at your brokerage.  Your broker tells you that, in order to do business on your behalf, you must give the brokerage power of attorney to buy and sell.

Therefore, your stock purchases are placed in a "street name" because, according to the SEC, no brokerage can place a stock in its own name.  The brokerage then notifies the DTCC of the transaction.

The DTCC is a banking trust company and, by SEC regulation, cannot own shares in its own name, either.  So it transfers the certificates to its subsidiary, Cede & Co.

What do you own?

How about nothing?

And now you are not even the beneficiary.  The brokerage is technically the beneficiary.  You are twice removed!

Guess Who’s Also Behind the Mortgage Mess

Recently, DTCC presented testimony before the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.  The hearing was on "Effective Regulation of the Over-the-Counter Derivatives Markets," just a couple of weeks ago, and the transcripts were just released.

The subcommittee is attempting to find out how mortgages could come to be packaged and then sold, and then re-packaged and resold many times over.  Since DTCC owns 99% of all derivatives, it seems only fair that it would be called to give testimony.

Larry Thompson, general counsel for DTCC, applauded the good works of the DTCC.  In his opening statement, he said, "Now, many of you may not have heard of DTCC before. That’s purposeful. We have traditionally kept a low profile, given the critical nature of the role we play in U.S. financial markets."   (Dah … who would have guessed?)

In truth, DTCC knew all about the Collateralized Debt Obligation (CDO) markets, who owned what, how often the same collateral was used and repackaged, etc.  Why?  Because they own it all.

DTCC created a massive computer warehouse and keeps records of all CDO trades, all stock transactions, all derivatives, etc.  It has a monopoly on clearing.  And to justify its great job, Thompson added to his testimony.

"I’d submit to you Mr. Chairman, and Members of the Subcommittee, that had DTCC not had the foresight to create this Trade Information Warehouse and load the Warehouse with all these records of CDS trades in 2007, we might still be sitting here today in 2009 trying to sort out the total exposure of trading obligations following the Lehman bankruptcy, i.e., who traded with whom, at what point in time and at what price?”

Next time you are in the market to buy stocks, trade futures.  You’re only in the trade for four minutes or less.  Not enough time for Cede & Co. to get their mitts on your money. …

Barbara Cohen
Contributing Editor
The Tycoon Report

 

A Lesson In Super Sovereign Currencies: An End To The MOPE and SPIN
Posted: Jul 11 2009     By: Jim Sinclair      Post Edited: July 11, 2009 at 4:52 pm
Filed under: General Editorial

Dear CIGAs,

Of course the world is not going to replace the dollar as a reserve currency immediately, or for that matter ever. What is going to happen is the IMF or an Asian entity will formulate a basket of currencies and possibly gold into a unit much like the USDX.

There will be an issuing agent and much like the SDR it will be an accounting unit representing the underlying bits and pieces.

It is from this base that Japan has proclaimed major nations should support the dollar. This is management of perspective economics and spin.

What is presently occurring and will accelerate over the coming weeks and months is DIVERSIFICATION out of dependence entirely on the US dollar and the adopting of other currency types even if it takes time to produce the super sovereign currency basket.

The risk the MOPErs take is that the longer the IMF waits due to the risk of dollar damage by issue of this SSCI (Super Sovereign Currency Basket Index), the greater the probability that another entity in the Asian trading block will design this simple entity themselves. An Asian entity would be based on the usual suspects plus their own currency like the Yuan and probably gold.

MOPErs are now caught between facing the fact that central banks outside of North American and Euroland are sharply decelerating their purchase of US Treasury instruments or are playing games for their hot air dollar support that results in the marketplace revealing the SSCI plan by sharp dollar depreciation into the final quarter of 2009.

If the dollar market makes the decision for the IMF then anticipate the last quarter of 2009 to the last quarter of 2010 as the year of dollar hell. The dollar market making the decision for the IMF means the bottom drops out of the dollar rather than the exercising of MOPE’s "Strong Dollar Policy" which is defined as the dollar dropping slowly, rather than catastrophically.

MOPErs have not distinguished themselves by preventing the problem before it has occurred or fixing the real problem. The economic school of MOPErs simply issues more paper to attempt to fix the problem via more MOPE.

You see, the MOPErs are primarily Yalees from one fraternity that control Wall Street which has captured Washington, installing their school of economics of which Greenspan is a major practitioner. When you MOPE you produce nothing but paper bubbles, not sustainable economic gains. You must recall his speeches on market perceptions creating economic occurrences.

You see, one day the MOPErs paper planet melts down. Of course they save themselves by issuing more paper – this time dollars to themselves and they truly don’t give a rat’s ass what happens after that.

So the lesson you need to learn is that all things economic are processes. The dollar is losing its position first as the universal reserve currency, now as the major constituent of international central bank reserves and finally as just another part, not necessarily the majority part, of a new SSCI (Super Sovereign Currency Index) used then as the universal reserve currency.

This make the school of the "dollar will always be a reserve currency" right and wrong. It is right in that it will always be a PART of the reserve basket but WRONG in the implication that this lasting presence means anything bullish whatsoever for the dollar.

Those that hold, like I do, that the value of the US dollar has a long way to go on the downside are right on price, but if they then conclude it is no longer any part of the reserve system they are stone wrong!

Quiz:

1. Does the statement that major government will support the dollar as a reserve currency mean it should rise in price?
2. Will the US dollar always be part of the reserves of central banks?
3. If the US dollar is always part of the reserve of central banks should that be bullish for the US dollar?
4. Why is buying momentum so important to the value of the US dollar now?
5. Why would increased interest rates on 30 year US Treasuries be bearish for the US dollar?

If you can answer these five questions with certainty then you understand what a SSCI is and why MOPE will be useless in 125 days.

Answers:

1. No
2. Yes
3. No
4. A decline in the momentum of buying, even without central bank selling, would hold the most bearish implications for the US dollar.
5. Because that would occur as non-USA buyers of long US paper exited the market as buyers.

Jim,

Gold, silver and dollar contracts certainly suggest that they have been caught flat-footed. I expect another line in the sand to be drawn at 1200-1300 now. It is a dangerous, dangerous game for traders here.

CIGA Eric