Always love your analysis. A friend shared with me one week of your short sellers journal and I was impressed. GLNG took an extra week after you published it but it did start dropping. I’m very experienced in options. Just ordered it for your short picks…I don’t really need the info of how to play options… just like your research and analysis. – “Colin” – SHORT SELLER’S JOURNAL (link)

All eyes are focused on Deutsche Bank. Rightly so, for the most part. “As you said, Deutsche Bank is blowing up” (Dr. Paul Craig Roberts in an email to me this morning). It was reported this morning that the bank’s CEO released a memo to employees in which he assured the “troops” that everything was fine. Most people do not remember this but I’ve been cursed with a great memory for certain details. Jimmy Kayne, the CEO of Bear Stearns, when Bear blew up gave the same type of pep talk to Bear employees shortly before Bear was flushed down the toilet. Reaching even further back in the annals of epic corporate fraud induced collapses, Ken Lay gave the exact same kind of pep talk to his people right before Enron collapsed.

As the adage goes, once a rumor is denied at least three times, the fact-basis of the rumor has been confirmed.

But it’s not just DB – it’s the entire western banking system. While DB stock was getting pummeled yesterday, it escaped everyone’s attention that Morgan Stanley stock was down over 7% as well. Bank of America stock was hit 5.4%. Goldman Sachs as drubbed nearly 6%. Today Credit Suisse stock is getting hit 7.7%. These banks all have one common denominator: an exceedingly high degree of exposure to Euro-debt credit default swap counterparty risk. Include RBS and Barclays on that list as well, both of which are headed for the credit default swap waste bin unless the Fed and the ECB decide to print enough digital money to keep them alive. The most stunning collapse in stock price is perhaps Credit Suisse (green line) which had been the best performing stock among the group until mid-July. Wonder what changed? Nearly as a notable as CS is Morgan Stanley (dark purple), which has managed to stay out of the media but it clearly exhibiting signs of extreme underlying financial distress. Most might not remember, but Morgan Stanley should have been one of the primary casualties of the 2008 de facto collapse but it was quietly re-monetized so that it could continue fleecing the public by raking in big fees from the huge volume of “Club Med” European credit default swaps that it sells.

It’s nearly impossible to identify the specific root cause of the obvious banking system melt-down that is occurring. By design the use of OTC derivatives by the banks has been completely obscured and hidden from sight. As was evident from Jamie Dimon’s admissions during the “London Whale” crisis at JPM, even the people running these banks do not have a full understanding of the magnitude and degree of risk buried in the big bank balance sheets. Since the Central Banks get their bank-specific information from the banks, it means that Central Banks therefore do not fully understand the scope and severity of the problem either.

That fact alone should be enough to frighten anyone paying attention out of the banking system and into the relative safety of precious metals.

I was chatting with a close friend of mine in NYC. He lived with me through the turbulence at Bankers Trust (Proctor and Gamble derivatives lawsuit, Long Term Capital exposure, etc). He stayed on and worked at Deutsche Bank and then at Lehman. He knows when something is irrevocably wrong at these banks. His comment to me this morning was that “something is blowing up behind the curtain in the banking system and it has to be the derivatives.”

Of course, the reason the derivatives are blowing up is because the underlying credit instruments from which they are “derived” are melting down as well. We know about energy, industrial commodities and high yield – all of which the banks above have heavy exposure – but I would also suggest that auto loans and mortgage paper (luxury housing bubble pops) are starting to crack hard too. Banco Santander has been one of the more aggressive auto finance lenders and its stock has is down 50% since April and down 38% since early October. Capitol One down 25% since early December.

The message is clear: the credit markets are beginning to accelerate in their collapse.

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