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For the gold bugs: from a friend.

From http://www.lemetropolecafe.com

To all; holy cow Batman! Lehman dies, Merrill collapses into the arms of Bank of America, AIG stock gets cut in half again and requests a $40 Billion loan from the government, other than that just another Monday morning. This is a systemic margin call that will create an even larger margin call once the jet fueled derivatives are called upon to perform. This is a massive failure of proportions never seen before in all of history.

I had thought Lehman would be bailed out to avoid or postpone this scenario. I believe the decision was made that the financial tsunami is just too big to be held back anymore. The Fed knows that half of their balance sheet has already been used and the Treasury has doubled its domestic debt overnight. This while the credit crunch is still in it's early innings. Since this can be looked at as a change of policy, we can expect a seachange in psychology. No longer can firms and investors think in the back of their minds that Uncle Sam will backstop everything. The government apparently has done the math and realized there was just too much weight to lift. The fuse is now lit. Even without derivatives the fuse would be lit, now we enter the next phase.

This next phase is akin to a witch hunt. Lehman's failure also includes failure to perform on their derivative contracts. Nobody knows who did derivative business with Lehman and or how much. I imagine it would even take Lehman quite a while to produce a list of counterparties, asset classes and amounts, and they were the ones doing the business. Trust will break down. When you enter into a contract, one of the most important factors in your decision is whether or not you "trust" the other party. After today, who do you trust? Does Goldman Sachs get thrown offsides because they had a "big win" with Lehman and now don't get paid? What about JP Morgan, Morgan Stanley, Citigroup, GE, The Hartford, and on and on?

This is not just confined to financial firms, derivatives have been written on all kinds of things, weather, air quality, soybeans, water, oil, etc. etc.. What happens when AIG the largest insurer goes down? And WAMU, GM, Ford etc. etc.? I wrote a year ago "if you don't know what derivatives are now, you soon will". Now I will say if you haven't heard the term "counterparty risk" you soon will. This already is, but will soon be seen as "the six degrees of Kevin Bacon". When all is said and done, if you have done "paper" business anywhere, you have been infected. Infected by counterpary risk. All banks, all insurance companies, all brokers, all mortgage companies are inter related through past transactions. There are no clean bills of health.

Lehman has a balance sheet of $600 Billion, these assets will now be sold into the market. These assets will have publicly available sales prices, no longer will firms be able to say they can't "mark to market" their portfolios because prices are not available. Wall Street is having their collective pants pulled down in public, it will not be a pretty sight. Today will be seen as the shot heard round the world, it's not that many shots have not been fired before today but now the government is saying "sink or swim". The grand charade is over. The thought process that "it can never happen here, the government won't allow it" is OVER! As Jim Sinclair says, "this is it, and it is now".

I do know of one asset class that is "infection proof". Precious metals. They have value because the "are". They can get pushed around, massaged, and beaten by the paper traders. They can NEVER get infected. They cannot have counterparty risk. They are monies because mother nature says they do. The government can tell you they are not money, it does not matter, mother nature matters. The government could have passed a law last week that Hurricane Ike "shall not be allowed to make landfall". Would that have mattered?

Regards, Bill H.



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