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The "C" Word No On in the Mainstream Financial Media Will Touch

Phoenix Capital Research's picture



The following is an exerpt from a recent client letter.




That issue is collateral.


What is collateral?


Collateral is an underlying asset that is pledged when a party enters into a financial arrangement.  It is essentially a promise that should things go awry, you have some “thing” that is of value, which the other party can get access to in order to compensate them for their losses.


You no doubt are familiar with this concept on a personal level: any time you take out a bank loan the bank wants something pledged as collateral should you fail to pay the money back. In the case of property, the property itself is usually the collateral posted on the mortgage. So if you fail to pay your mortage, the bank can seize the home and sell it to recoup the losses on the mortgage loan (at least in theory).


In this sense, collateral is a kind of “insurance” for any financial transaction; it is a way that the parties involved mitigate the risk of their deal not working out. 


As many of you know, our entire global financial system is based on leverage or borrowed money. Collateral is what allows this to work. Without collateral, there is no borrowed money. And without borrowed money, money does not enter the financial system.


In this sense, collateral is the “reality” underlying the “imaginary” or “borrowed” component of leverage: the asset is real and can be used to back-stop a proposed deal/ trade that has yet to come to fruition.


On a consumer level, our bank deposits (cash), homes, and other assets are the collateral pledged when we borrow money from a bank to finance something. This applies to everyone in the US all the way up to the multi-billionaire bracket.


How Larry Ellison Actually Funds His Lavish Lifestyle










On a corporate level, companies pledge various assets as collateral for their corporate loans. For manufacturing firms, this might be the actual steel inventory they own. For property companies, it’s portions of their real estate portfolios.


And for finacial firms, at the top of the corporate food chain, it’s sovereign bonds.


















By way of example, let’s first consider Greece.
























I do not have an exact figure for how much of the derivatives market uses Spanish and Italian sovereign bonds as collateral, but I can create an estimate using the US bank data I have available.


In the US, we know that the top four banks have over $222 trillion in derivatives exposure with just $7 trillion in total assets. So the leverage here is roughly 31 to 1.




















Best Regards,


Graham Summers






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Fri, 11/16/2012 - 21:01 | 2990306 Radical Marijuana
Radical Marijuana's picture

This is the same story, with a little more added, as was already posted before on Zero Hedge here:


Yeah, many of those who read Zero Hedge know that, but most of the public appears to be clueless. It should be basic common sense, but rather, the REALITY is so far away from from common sense, that most people do not begin to understand it.

During my political activities, I have discussed these matters with thousands and thousands of people, from all walks of life, over the course of a few decades. In the end, I have practically give up doing that, because all that does is prove, over and over again, the degree to which the vast majority of people continue to be adamant Zombie Sheeple!

Zero Hedge has previously linked this video, as one of the better ones:

97% Owned - Monetary Reform documentary

A couple hour long documentary, focusing on UK.

I liked the points where it explains how and why most average people became so totally clueless, and profoundly unable to understand their reality! During the first half hour, or so, various speakers mention their personal experiences with regard to their attempts to explain money systems to ordinary people.


After decades of my efforts to explain the CANADIAN political contribution tax credit to tens of thousands of various people, I know very well how hopeless it actually IS to "educate" most people! They do not WANT to understand that the money system IS the triumph of organized crime. (And equally, most monetary reformers seem unable to accept that!) Ordinary people can not accept the idea that "money" is made out of nothing, because "money" is based on robbery, backed by murder. (And, most monetary "reformers" are similarly delusional that money could ever be anything else!)

Some superficial explanation that 99% of the people are "stupid" is WRONG. The full story is much more complicated, since there was a long history which gradually made people adapt to living inside of a fundamentally fraudulent financial accounting system. The runaway INSANITY of having a privatized fiat money supply, made out of nothing but debts, (backed by collateral, which now is not in the same order of magnitude as the amount of leveraged money made out of nothing) IS REAL, but, at the same time, so totally flabbergastingly bizarre and surreal, that the vast majority of people REFUSE to understand, because they do not WANT to understand that!

The flip side of a tiny elite enjoying the privilege of legally counterfeiting everyone else's money supply is that almost everyone else does NOT WANT TO UNDERSTAND THAT! The way that they do not WANT to understand is much harder to understand, and to do anything about, than the relatively easy to understand basic privated fiat money-as-debt system, where collateral has gradually became merely a fig leaf, to cover the runaway fraud! The cliches about people tending to fight over money and sex, and that sex is a taboo topic, which people are titillated about, are true. However, the degree to which there are social taboos about money, which people are titillated about, actually are orders of magnitude more than those with respect to sex! 

“The process by which banks create money is so simple, that the mind is repelled.”

-- John Kenneth Galbraith

The degree to which the minds of the vast majority of ordinary people are repelled from understanding money is ASTONISHING! That astoundingly deliberate ignorance is amplified even more when one looks at the issue of SOVEREIGN MONEY SUPPLY AND SOVEREIGN DEBT.

Almost every country in the world, on paper has a theoretical system where there is some kind of "democracy" where the people, as citizens, have the right to control their country's money supply. Generally speaking there tends to be nothing wrong with their constitutional framework, nor even with their legislative platform, that is theoretically supposed to control their country's money supply and financial system.


Obviously, those monetary systems are not impossible to understand. The problem appears to be that the vast majority do not want to understand those systems. IF, IF, IF, anybody has realistic and practical solutions to that problem, then they should get the political miracle Nobel Prize in Economics. They should get the Nobel Peace Prize too, since that would do more to stop the coming wars and martial law, that will happen when the current runaway financial insanity finally collapses into chaos.

One of the reasons why I pass the time by posting on Zero Hedge is that there is a small group of people that read stuff here that may understand what I write. I KNOW from working on these issues for several decades (and continuing to do that, as much as I can) that 99% of the public does NOT WANT to understand. Therefore, I am not aware of any possible ways to better present the information about the financial system, which could overcome that central social fact, of this Janus-headed problem, that 1% take as much advantage of the fraudulent financial system as they can, while 99% do not want to understand that system!

Consequently, the real system is a runaway, where the sovereign debts are INSANE, because the vast majority of the people are INSANE, while a very small minority is working as hard as they can to take advantage of that INSANITY, and try to make sure that the vast majority continue to NOT WANT to understand, and therefore, do NOT DO anything about that!

Fri, 11/16/2012 - 17:03 | 2989604 BraveSirRobin
BraveSirRobin's picture

Best of all, this advice is 100% free.

Fri, 11/16/2012 - 16:57 | 2989574 Anglo Hondo
Anglo Hondo's picture

" ... the Powers That Be in Europe are absolutely terrified of what’s happening there ... ".


The 'Powers that be' have not a single clue on how bad it really is.  They know it is 'well, not good', but 'we must continue the 'project' whatever the cost'.


They are very dangerous people.

Fri, 11/16/2012 - 16:56 | 2989569 Kickaha
Kickaha's picture

You might conclude that at one time in the ancient past, the amount of money created by lending might have had a restraint attached to it in the form of existing wealth that could be pledged as collateral.  Obviously, those silly ancients did not understand the benefits of extreme leverage and the need to print infinite amounts of money unrestricted by any collateral requirement. 

Fri, 11/16/2012 - 19:38 | 2990004 Zero Govt
Zero Govt's picture

actually the history books show "ancient" Govts were also very well adept at printing the fuck out of the currency or in times of coinage replacing the value of Gold or Silver for lesser metals which is effectively the same thing as over-printing, debasing the currency to prop-up a crumbling elite

the greedy parasites of Rome did it over and over again 2,000 years ago for much the same reason as today, wracking up huge spending bills on pensions and welfare, primarily to their soldiers

History repeats because Govt never learns from the history of Govt

We never learn because Govt keeps erasing this history out of the history books (the State much prefers to shove historical garbage down our kids throats)

Connect the dots, the lying nation-wrecking criminals are not so hard to find in any generation of the past 3,000 years

Fri, 11/16/2012 - 16:48 | 2989535 Zero Govt
Zero Govt's picture

"As a result, the ultimate backstop for the $700+ trillion derivatives market today is sovereign bonds.  When you realize this...

When you realize this your eye sockets bleed and your head explodes.


. . . . . now where's my friggin eyeballs and brain gone?!!


Fri, 11/16/2012 - 16:37 | 2989474 michael_engineer
michael_engineer's picture

I thought the C word the media wouldn't touch was "Contraction". They are allergic to it too.

Fri, 11/16/2012 - 18:50 | 2989932 Half_A_Billion_...
Half_A_Billion_Hollow_Points's picture


Fri, 11/16/2012 - 16:03 | 2989264 silverserfer
silverserfer's picture

I diddnt read the article.  Was the C word "Cornholed"?

Fri, 11/16/2012 - 15:51 | 2989194 XtraBullish
XtraBullish's picture

No - it is not "market to market" - the correct term is "MARKED to market".


Graham is the Master of the Obvious but you really should subscribe to his newsletter. It is beautifully, redundantly chic...

Fri, 11/16/2012 - 15:25 | 2989080 exartizo
exartizo's picture

by the way... it's "mark to market" not "market to market".

Fri, 11/16/2012 - 17:27 | 2989597 Zero Govt
Zero Govt's picture

no not anymore 

we wouldn't want the retail banks on market pricing when the politicians and central bankers are already away with the fairies and jack-booting any market they don't like the price of or interest rate on

we're living in a micro-meddled political-banker LaLa Land of fraudulent numbers with the accountancy and regulatory professions rating the fraud as "looks just great to me" sound finance 

but you can't hide from capitalisms Grim Reaper (liquidator) behind fantasy figures though boy are these clowns trying their damnest to

Judgement Day Cometh to all those who fuck with the figures


Fri, 11/16/2012 - 15:23 | 2989067 rlouis
rlouis's picture

I was reviewing the FOMC minutes from Ocotber 23-24 the other day and converting the meeting of the 64 people in attendance to:

Central Planning, Division of Monetary Policy

Section: Federal Reserve

I was considering how the monetary policy mechanism operates for the implementation of REAL strategy and concluded that political policy is more significant in creating shifts, i.e. creation of the Fed, repeal of Glasss Stegal, etc. however, the collateral leverage, mark to myth are important mechanisms in the grand illusion.  Unfortunately, when the Fed spends a great deal of time considering using CPI or the unemployment indexes as the signal for when interest rates will rise or monetary policy will shift one can only conclude that these people are insane.  Who would consider the use of artificially manipulated indexes as as a signal, when plain bull sh** is perfectly acceptable to the market?


Fri, 11/16/2012 - 15:00 | 2988985 common_sense
common_sense's picture

                   buy gold and some food... gold has not good taste...!!!


Fri, 11/16/2012 - 15:00 | 2988984 Random_Robert
Random_Robert's picture

So, what barberous relic has served mankind as the ultimate form of collateral for over 5000 years...?


Oh yes, that's right:   US Treasury Bonds.

Fri, 11/16/2012 - 14:49 | 2988939 Bicycle Repairman
Bicycle Repairman's picture


Collateral is so 20th century.  That promise has been replaced by the promise that the central bank will print and make you whole.  So who needs collateral?

Fri, 11/16/2012 - 16:22 | 2989396 DosZap
DosZap's picture

[Collateral] is essentially a promise that should things go awry, you have some “thing” that is of value, which the other party can get access to in order to compensate them for their losses. Collateral is so 20th century. That promise has been replaced by the promise that the central bank will print and make you whole. So who needs collateral?


Appears to me Mr.Ellison is a damned smart cookie..............4 billion on the books,as collateral, at WHAT stock cost(fixed/floating?).

Me thinks fixed,(or the 4Bil would fluctuate w/mkt dips/rises) and when/if the balloon pops, all that Oracle stock will be worth maybe 25% of that 4 Billion, Win/Win...........

Ellison,he is covering his ass BOTH ways.


Fri, 11/16/2012 - 14:46 | 2988923 Overflow-admin
Overflow-admin's picture

"collateral is a kind of “insurance” for any financial transaction"

It's not an "insurance". It's an obligation for good accounting practice; without collateral you can't meet reserve ratios in case someone defaults (same goes for the mark-to-market rule). WITHOUT IT YOU CAN'T SUSTAIN FRACTIONAL RESERVE BANKING!


Oh, did I mention the part where you can almost count the worldwide number of banks still following strict accounting methods on your fingertips? (That's an exaggeration, but what about <1%?)

Fri, 11/16/2012 - 15:09 | 2989018 sosoome
sosoome's picture

So no one ever "defaults". Problem solved.

Fri, 11/16/2012 - 14:32 | 2988834 sosoome
sosoome's picture

reality will prevail

Fri, 11/16/2012 - 14:16 | 2988750 Unwashed
Unwashed's picture

One sidebar: By using stock as collateral to secure loans,

mega-wealthy like Larry Ellison can get the cash equivalent of selling stock

without triggering a taxable event.

$4 billion tax-free


Fri, 11/16/2012 - 14:12 | 2988717 NEOSERF
NEOSERF's picture

Actually it is probably less the C word and more the L word...Leverage...with every mark down of $1 on the collateral, it causes a 40x ripple across the markets...expect no mark downs and now actually we are experiencing mark ups in that any garbage collateral can be sprayed with gold spraypaint and be accepted by the ECB as "valuable".  These are the things that happen in the end of a cycle...

Fri, 11/16/2012 - 14:11 | 2988713 TahoeBilly2012
TahoeBilly2012's picture

Seems to me as long as the wheels turn, the counter party goes easy on actually worrying about collateral. It's a massive psycological game. So what you are talking about is an actual run on collateral, when counter parties finally sense they need to "foreclose" to have anything left. That may be a long ways off, who knows.

Fri, 11/16/2012 - 14:10 | 2988705 Metalredneck
Metalredneck's picture

Well, THAT was a let-down.

Fri, 11/16/2012 - 13:58 | 2988657 SheepDog-One
SheepDog-One's picture

'Collateral' for at least the last couple years has been old candy bar wrappers, everyone knows that theres no 'backing' for $1.2 quadrillion in paper floating around out there.

Fri, 11/16/2012 - 15:45 | 2989160 SafelyGraze
SafelyGraze's picture

where does collateral come from?

great question.

an Internets search is all that's required to find real live collateral creation [warning: click-bait image of copralateral] in progress. a natural process that occurs all around us every single day.

next week: where does the two-party system come from?

Fri, 11/16/2012 - 13:34 | 2988524 lasvegaspersona
lasvegaspersona's picture

JP Morgan said loans were based on CHARACTER. So the thing that makes the world keep going is the promises of worthy individuals to produce in the future. Would someone tell Ben about this. He is making a lot of such promises without consulting the folks who will be asked to perform.

Fri, 11/16/2012 - 13:25 | 2988479 AT
AT's picture


Fri, 11/16/2012 - 13:17 | 2988435 Tinky
Tinky's picture

Whatever useful insights Graham is able to offer, this type of fear-mongering:

"...those investors who do not prepare in advance for what’s coming will lose everything."

used shamelessly in an effort to sell his 'premium' product, undermines them.

Fri, 11/16/2012 - 13:51 | 2988611 digitlman
digitlman's picture

Where have you been?  Every fucking post from this asshole is to peddle his newsletter.


Which, apparently, is just another "buy physical gold" pitch.

Fri, 11/16/2012 - 14:26 | 2988806 Bullionaire
Bullionaire's picture



Yup.  Seriously, the consensus is in.  Let's have no more of Graham, please.




Fri, 11/16/2012 - 18:44 | 2989862 Zero Govt
Zero Govt's picture

I'll get junked (ooh the pain!) but here goes anyways..

Journalism has always been and always will be biased or about selling something, like Graham here or Reggie plugging his subscription service

Any owner of any media channel/newspaper in history does it for the purpose of putting their spin (opinion) on things to influence society. His journalists who say cover politics must pony up to politicians to become 'trusted' and get exclusive info or interviews. Health journalists get all their info from the industry, they plug whatever the industry wants to plug etc

Or like Graham he's not writing articles to pontificate on the economy in general, nor is Gentleman Jim Sinclair for that matter, he's a Gold Miner now

so know and understand your 'enemy' and don't expect unbiased articles, you'll be waiting an eternity as all journalism is biased, has always been and will always be, it's a commercial entity afterall

to my mind the danger is not bias, we know Graham for what he's selling... the real danger are the creeps that pretend they have no bias and are "fiercely independent", the ones who pretend they are not biased, the 'jounlaists' who claim they are "fair and balanced"

nobody is, we all know the MSM is protecting the order, we all have our own vested interests too so we too are biased, so let's get over it

Graham is selling his newsletters and subscriptions, like Reggie. You know the angle, you can deal with it coz you know the bias and can account for it.

the ones to watch are those who pretend otherwise, they're lying ...which is why I want the propagandist garbage institution, the 'public service' that does not serve the public, BBC shuttered
