Paper Money

Gold: No Counterparty Risk

Last year, James Turk wrote an article about Gold and Counterparty Risk. The message stuck with me as an important one, and not everyone is aware of it. I’m sharing it here, hoping that you’ll find it as usefull as I did. If you do, share it with others you care about.

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As Financial Tremors Reverberate, Focus on Counterparty Risk

A new but inevitable twist has emerged in the escalating subprime woes.  Bank solvency is now being called into question. 

As a rescue package was being put together for a failed German lender, that country’s central bank denied that it was holding emergency talks to discuss problems at West LB, a big government-controlled bank rumored to be holding large amounts of US subprime paper.  Then after BNP, a leading French bank, yesterday announced that it was suspending redemption of three of their so-called asset backed funds because the funds were unable to sell their US subprime paper to meet the demand of its investors wanting to cash-out, a ferocious storm hit global money markets. 

News accounts didn’t mention the word, but the BNP funds were in effect suffering a “run”, causing people everywhere to worry whether these events were the first steps of what could turn into a 1930’s-style domino collapse. 

Not unexpectedly, the ECB opened the money spigots.  According to London’s TimesOnline: “The European Central Bank was forced today to wade into the eurozone’s money markets and inject €94.8 billion of funds to stabilise overnight interest rates after a new bout of credit jitters saw these spike upwards.”  Meanwhile the Federal Reserve pumped $24 billion into US money markets, but were these amounts enough?  It seems to me that the value of subprime assets held by banks and funds is dropping faster than these additions, leaving liabilities to depositors and fund holders greater than the value of the now diminished subprime mortgage assets.

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