Gonzalo Lira: A Run On The Global Banking System – How Close Are We?

• I have been advising people to accumulate physical gold/silver instead of fiat currencies. Keep the minimum amount of fiat currencies needed in your bank account. I am not a buyer or holder of shares, even gold/silver mining shares. I am a little conflicted when it comes to these mining shares. Historically, they outperform physical bullion in the crisis we are heading into.
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• But having said that, with the rampant theft by the banksters in the MF Global collapse, I am not entirely sure they won’t rob you even if the shares are in a private account in your own name. It’s like your retirement savings, 401K … How do you know the US government won’t pull a shenanigan and ‘help’ keep your money ‘safe’ in US treasuries? Speaking for myself I am only in physical bullion. (emphasis mine)
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  A Run On The Global Banking System—How Close Are We? 
  by Gonzalo Lira, http://gonzalolira.blogspot.com/ 
  Nine weeks after its bankruptcy, the general public still hasn’t quite realized the implications of the MF Global scandal.
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  My own sense is, this is the first tremor of the earthquake that’s coming to the global financial system. And how the central banks and financial regulators treated the “Systemically Important Financial Institutions” that had exposure to MF Global—to the detriment of the ordinary, blameless customer who got royally ripped off in its bankruptcy—is both the template of how the next financial crisis will be handled, and an accelerator that will make the next crisis happen that much sooner.
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  So first off, what happened with MF Global?
  Simple: It went bankrupt—because it made bad bets on European sovereign debt, by way of leveraging positions 100-to-1. Yeah, I know: Stupid. Anyway, they went bankrupt—which in and of itself is no big deal. It’s not as if it’s the first time in history that a brokerage firm has gone bust. But to me, the big deal in this case was the way the bankruptcy was handled.
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  Now there are several extremely serious aspects to the MF Global case: Specifically, how their customers were shut out of their brokerage accounts for over a week following the bankruptcy, which made it impossible for those customers to sell out of their positions, and thus caused them to lose serious money; and of course how MF Global was more adept than Mandrake the Magician at making money disappear—about $1 billion, in fact, which still hasn’t turned up. These are quite serious issues which merit prolonged discussion, investigation, prosecution, and ultimately jailtime.
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  But for now, I want to discuss one narrow aspect of the MF Global bankruptcy: How authorities (mis)handled the bankruptcy—either willfully or out of incompetence—which allowed customer’s money to be stolen so as to make JPMorgan whole.
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  From this one issue, it seems clear to me that we can infer what will happen when the next financial crisis hits in the near term future.
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  … when MF Global went bankrupt, these segregated accounts—that is, the content of those safe deposit boxes—were taken away from their rightful owners—that is, MF Global’s customers—and then used to pay off other creditors: That is, JPMorgan.
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  In the case of MF Global, what should have happened was for all the customers to get their money first. Then everyone else—including JPMorgan—would have picked over the remaining scraps. And the monies MF Global had already pledged to JPMorgan? They call it clawback for a reason.
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  The Chicago Mercantile Exchange, which handled the bankruptcy, should have done this—but instead, the Merc was more concerned with making JPMorgan whole than with protecting the money that rightfully belonged to MF Global’s 40,000 customers.
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  Thus these 40,000 MF Global customers had their money stolen—there’s no polite way to characterize what happened. And this theft was not carried out by MF Global—it was carried out by the authorities who were charged with handling the firm’s bankruptcy.
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  —in short, ordinary investors. Ordinary people—and they got screwed by the regulators, for the sake of protecting JPMorgan and other big fry who had exposure to MF Global.
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  That, in a nutshell, is what happened. Now, what does this mean?
  It means that nobody’s money is safe. It means that regulators care more about protecting the so-called “Systemically Important Financial Institutions” than about protecting Ordinary Joe investors. It means that, when crunchtime comes, central banks and government regulators will allow SIFI’s to get better, and let the Ordinary Joes get f#####.
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  So far, so evil—but here comes the really troubling part: It is an open secret that there are more paper-assets than there are actual assets. The markets are essentially playing musical chairs—and praying that the music never stops. Because if it ever does—that is, if there is ever a panic, where everyone decides that they want their actual asset instead of just a slip of paper—the system would crash.
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  And unlike with fiat currency, where a central bank can print all the liquidity it wants, you can’t print up gold bullion. You can’t print up a silo of grain. You can’t print up a tankerful of oil.
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  Now, question: When is there ever a panic? When is there ever a run on a financial system?
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  Answer: When enough participants no longer trust the system. It is the classic definition of a tipping point. It’s not that all of the participants lose faith in the system or institution. It’s not even when most of the participants lose faith: Rather, it’s when a mere some of the participants decide they no longer trust the system that a run is triggered.
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  As I write this, a lot of investors whom I know personally—who are sophisticated, wealthy, and not at all the paranoid type—are quietly pulling their money out of all brokerage firms, all banks, all equity firms. They are quietly trading out of their paper assets and going into the actual, physical asset. Note that they’re not trading into the asset—they’re simply exchanging their paper-asset for the real thing.
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  “The MF Global scandal has made it clear that the integrity of the system has disappeared,” said a good friend of mine, Tuur Demeester, who runs Macrotrends, a Dutch-language newsletter out of Brugge. “The banks are insolvent, the governments are insolvent, and all that’s left is for the people to realize what’s going on—and that will start a panic.”
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  He hit it on the head: Some of the more sophisticated people—like Tuur, like some of my acquaintances, (like myself, frankly)—have realized that the MF Global scandal means that there is no safety for any paper investment: The integrity of the systems has been completely shattered. If in the face of one medium-sized brokerage firm going under, the regulators will openly allow ordinary people to be ripped off for the sake of protecting the so-called “Systemically Important Financial Institutions”—in this case JPMorgan—what will happen if there is a system-wide run? What if two or three MF Globals happen simultaneously?
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  I think we know the answer. And I think we all know the answer to the question of whether there will be crisis flashpoint in the near-term future: After all, as Demeester pointed out, all the banks and all the governments are broke. Thus it’s only a matter of time before they come for your money.
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  Now, because of this open kleptocracy and cronyism being shown by the financial authorities in the wake of the MF Global bankruptcy, we’ve been obliged to put together a new Scenario, devoted exclusively to preparing for a run on the markets: What to do in order to protect your assets from regulatory malfeasance, if there is a system-wide MF Global-type breakdown and a subsequent run on the entire financial system.
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  And there will be such a run on the system: It’s only a matter of time. In fact, the handling of the MF Global affair has sped up the timeframe for this run on the system, because the forward-edge players—such as Demeester, myself, and my other acquaintances who understand the implications of the bankruptcy—realize that the regulators will side with the banksters, and not the ordinary investors: So we are preparing accordingly.
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  Once there is a full-on panic, anyone with money in the system will lose at least a big chunk of it, in one of two ways, or a combination thereof….. … once the general public catches on to what we already know . . . oh boy.

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