The Report of the US Comptroller of the Currency, Administrator of National Banks in Washington provides data that needs to be studied and explained by independent and objective experts. What I see here is that the financial system is built upon a base of $160 trillion in credit derivative contracts that are not recorded on the balance sheets of banks because of a principle called “bilateral netting”.

As I understand it, however, bilateral netting only works as long as the credit ring remains unbroken. But it happens to be breaking up, ie, one financial company may not be able to pay another, which leads to others in a mushrooming process. What then?

Two years ago we should have been thinking what happens if the credit ring is deliberately broken, for example when Party A creates a $1 million mortgage on a property worth $200,000, then sells it to an accomplice Party B who puts up no capital, and who walks away from the deal, causing Party C (the mortgage holder) to sell it to Party D (SIV Fund). Party D soon discovers they are bankrupt so they go to the swap market to lay it off to Party E, who in turn does it to Party F, and on and on. Hello Ponzi.

A $200,000 value btw is one where, as an investor, you can find a renter to pay at least $1300/month plus taxes plus maintenance costs plus all utilities. $2500/month ought to cover you. If you can’t easily find a renter to pay you at least $2500/month, net of real estate fees and ignoring taxes, then your million dollar investment is worth $200,000 tops, in economic terms. Anything above that is inflation and/or speculation driven.

In the summer of 2005, at the peak of the real estate market, I warned everybody about real estate markets about to crash, fraud about to be discovered, the credit ring about to blow up and the VIX showing me that nobody was aware of the problem. Some people said I was ranting. They should have been listening. Re-read one of those articles.

So where we are today is that Party E and Party D have discovered they can no longer contain the damage or hide the fact they were defrauded, but went along with it, possibly for a while at least, unwittingly, for the sake of the humungous fees involved.

As I wrote in the Saturday Review, I will simplify my concern here. The total Credit Derivative Swap Market is about $160 trillion, give or take some trillions. A trillion btw is a thousand billions. Even I don’t know the name of a four-digit trillion, but 160 seems to be getting close.

There are just three players who hold over 90 pct or about $145 trillion of these contracts. All three, the history will show, have had previous brushes with insolvency, and have needed bail-outs.

But, the last time I looked, JP Morgan Chase et al (JPM) were not good for $80 trillion, which is its total derivatives contract obligation. And I suspect Citigroup (C), having to reach out to Abu Dhabi last week for an emergency handout of $7.5 billion isn’t good for $35 trillion. Moreover, I don’t think anybody should be holding their breath for Bank of America (BAC) to stand behind its $30 trillion.

The Big three are the ones who tried and failed to raise $100 billion in a so-called SIV Super-Fund, and so HB&B has turned to something called a MLEC --Master Liquidity Enhancement Conduit and BlackRock is the anointed savior.

A Bloomberg article states:

Citigroup (C.N: Quote, Profile, Research), which created special investment vehicles (SIVs) in the 1980s, Bank of America (BAC.N: Quote, Profile, Research) and J.P. Morgan Chase (JPM.N: Quote, Profile, Research) are heading the large-scale effort that is supposed to help SIVs sell hard-to-value paper without further unnerving jittery credit markets. As manager of the fund, BlackRock will be in charge of deciding what to do with the assets sold into the portfolio.

Unfortunately, as the world witnessed by the dog and pony show at the White House, the Bush/Paulson Mortgage Relief (HOPE) Plan is their scheme to get us to pay for it. They called it a 100 pct private sector deal, but the plan was unveiled by 100 pct politicians and zero pct bankers (if you no longer call Henry Paulson the most powerful banker in the world). As the call went out by the President for Congress to get onboard, I wondered why given he and his Treasury Secretary were telling us this is a 100-pct private sector deal.

The bottom line is that the global financial system is hanging on a thread. That thread by the way is now held by a company called BlackRock, which is a name most of you don’t recognize.

According to wiki, the BlackRock founder was the person who initiated these mortgage-backed securities, which are at the heart of the problem.

Throughout the piece, Goldman Sachs (Paulson)/Merrill Lynch (BlackRock/Goldman) is clearly in the middle of it all.

It seems to me to be 12 people sitting around a boardroom table scheming ways to get themselves out of bankruptcy and us to pay for it. I can only conclude that Financial Armageddon has started, and that the Goldman Sachs call for $600 gold was a fraud, and that we need to be jumping aboard the yellow brick road, which we can do by buying gold physicals (bullion and coins) and the shares of the goldminers and prospectors that hold proven and probable in situ gold reserves that are highly leveraged to higher gold prices.

When the price of gold is going to rise sharply will be the day that the White House and Fed decide to stop selling whatever gold is remaining in Ft. Knox, unencumbered that is. But if they continue to sell it, my guess is that HB&B, the buyer, still needs more to cover themselves for the MLEC work-out to come from BlackRock.

What ticks me in all this is that all of us have been forced by HB&B to be daytraders, which is playing in their court, where they hold all the advantages in a one-sided game. I’d much rather be writing about corporate fundamentals and quant stats, stock price analysis and economics, in other words all the stuff that should matter.

Politics and the plight of HB&B cannot be ignored because the shocking truth is they are about to pull off by far the biggest transference of wealth in world history. Those who hold the gold will be on the winning side.