Buried in Bloomberg last Friday, was an article published which quietly reminded the markets a clearinghouse system collapse is still a possibility. It was interesting that the article was published just before the holiday retreat and no doubt attracted very little attention.

In the article, former banking executive Satyajit Das breaks down just how easily a clearinghouse system collapse could occur. It could be as simple as a single trader loading up on too many futures contracts, and in a collapsing market, failing to meet a margin call:

“Das sketched a scenario where a large trader fails to make a margin call. This kindles rumors that a bank handling the trader’s transactions — a clearing member — is short on cash.

Remaining clients rush to pull their trading accounts and cash, forcing the lender into bankruptcy. Questions begin to swirl about whether the remaining clearing members can absorb billions in losses, spurring more runs.

“Bank customers panic, and they start to withdraw money,” he said. “The amount of money needed starts to become problematic. None of this is quantifiable in advance.” 

The translation of that simply means: The layers of leverage in the system are so great, that a single customer default can lead to a bank default, which can lead to a clearinghouse default, which can lead to a financial system default.

The article goes on to quote a former futures trader and now college finance professor in saying, “Clearinghouses have been oversold as a way of preventing Armageddon…I just don’t think that realistically you can exclude the possibility that taxpayers could be at risk.”

Lastly, the most interesting comment of all, was that of Lloyd Blankfein, when following the signing of the Frank-Dodd bill (which was designed to reduce financial system risks) he said, “We have to make sure that something that we do to reduce the risk in a once-in-a-20-year storm doesn’t increase the risk in a once-in-a-50-year storm…The regulatory push might make clearinghouses ‘the biggest systemic risk in the world.’”

Reading Between The Lines

In being street smart and understanding the real story is always telegraphed between the lines rather than on them, we must conclude that financial survival in today’s day and age requires real things and real assets. Real assets are gold, silver, farms, commodity production, real estate and more.

Additionally, for those seeking inflation protection through gold and silver mining stocks, a review of “direct registration” and “paper share certification” may be a key to your financial survival. Corporations and hedge funds are already using these methods, and details on them can be found in my recent report entitled, “BulletProof Shares – How To Protect Your Stock Investments From Broker Bankruptcy & Theft”As I’ve written about previously,800 accounts at MF Global were holding stocks of individual companies, and those account holders were wiped out with everyone else.

All the best in the days ahead,
Tekoa Da Silva
Bull Market Thinking