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.


Everything that has happened since 2007, every Central Bank move, ever major political decision regarding the big banks, every trend, have all been focused solely on one issue.


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


One of the mysteries surrounding Larry Ellison is how he can afford so many mansions, islands, yachts and planes, all while retaining his shares in his company.


Yes, the Oracle CEO is one of the richest men in the world, worth over $30 billion. Yet he sells only small amounts of stock under a schedule stock-sale plan. And last I checked, yacht builders don’t take Oracle stock for payment.


Now we have some clues as to how Ellison funds his acquisitive lifestyle.


According to Oracle’s proxy, filed this month, Ellison has pledged 139 million shares “as collateral to secure certain personal indebtedness, including various lines of credit.” In other words, he’s got over $4.2 billion worth of stock pledged for personal loans.


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.


Modern financial theory dictates that sovereign bonds are the most “risk free” assets in the financial system (equity, municipal bond, corporate bonds, and the like are all below sovereign bonds in terms of risk profile). The reason for this is because it is far more likely for a company to go belly up than a country.


Because of this, the entire Western financial system has sovereign bonds (US Treasuries, German Bunds, Japanese sovereign bonds, etc) as the senior most asset pledged as collateral for hundreds of trillions of Dollars worth of trades.


The “hundreds” of trillions of Dollars of trades stems from a 2004 SEC ruling in which the SEC ruled that broker-dealers with capital bases above $5 billion (think Goldman, JP Morgan, etc) could increase their leverage above previously required levels while also abandoning market to market valuation methods (a methodology through which a security was priced at the value that a market participant would pay for it).


So, after the 2004 ruling, large broker dealers were permitted to increase their leverage levels dramatically. And because they could value their trades at whatever price their in-house models chose (what are the odds that these models were conservative?), the broker-dealers and large Wall Street banks are now sitting on over $700 trillion worth of derivatives trades.


Now, every large bank/ broker dealer knows that the other banks/dealers are overstating the value of their securities. As a result, these derivatives trades, like all financial instruments, require collateral to be pledged to insure that if the trades blow up, the other party has access to some asset to compensate it for the loss.


As a result, the ultimate backstop for the $700+ trillion derivatives market today is sovereign bonds.


When you realize this, the entire picture for the Central Banks’ actions over the last five years becomes clear: every move has been about accomplishing one of two things:


  1. Giving the over-leveraged banks access to cash for immediate funding needs (QE 1, QE 2, LTRO 1, LTRO 2, etc)
  2. Giving the banks a chance to swap out low grade collateral (Mortgage Backed Securities and other crap debts) for cash that they could use to purchase higher grade collateral (QE 1’s MBS component, Operation Twist 2 which lets bank their long-term Treasuries and buy short-term Treasuries, QE 3, etc).


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


Lost amidst the hub-bub about austerity measures and Debt to GDP ratio for Greece is the real issue that concerns the EU banks and the EU regulators: what happens to the trades that are backstopped by Greece sovereign bonds?




  1. Before the second Greek bailout, the ECB swapped out all of its Greek sovereign bonds for new bonds that would not take a haircut.
  2. Some 80% of the bailout money went to EU banks that were Greek bondholders, not the Greek economy.


Regarding #1, the ECB had just permitted EU nations to dump over €1 trillion worth of sovereign bonds onto its balance sheet in exchange for immediate financing needs via its LTRO 1 and LTRO 2 schemes dated December 2011 and February 2012.


So, when the ECB swapped out its Greek bonds for new bonds that would not take a haircut during the second bailout, the ECB was making sure that the Greek bonds on its balance sheet remained untouchable and as a result could still stand as high grade collateral for the banks that had lent them to the ECB.


So the ECB effectively allowed those banks that had dumped Greek sovereign bonds onto its balance sheet to avoid taking a loss… and not having to put up new collateral on their trade portfolios.


Which brings us to the other issue surrounding the second Greek bailout: the fact that 80% of the money went to EU banks that were Greek bondholders instead of the Greek economy.


Here again, the issue was about giving money to the banks that were using Greek bonds as collateral, to insure that they had enough capital on hand.


Piecing this together, it’s clear that the Greek situation actually had nothing to do with helping Greece. Forget about Greece’s debt issues, or protests, or even the political decisions… the real story was that the bailouts were all about insuring that the EU banks that were using Greek bonds as collateral were kept whole by any means possible.


Now, Greece was always the small player in this mess. It’s entire sovereign bond market is a mere €300 billion.


Spain and Italy, by comparison, have €1.78 trillion and €1.87 trillion in external debt respectively.


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.


Using this as a ballpark estimate for derivatives leverage, it is very possible that Spain and Italy’s sovereign bonds are pledged as collateral for well over $100 trillion worth of derivatives trades ($1.78 trillion X 31 + $1.87 trillion X 31).


This is why Spain is dragging its feet about asking for a bailout: the mess of trying to sort out the collateral issues for €1.78 trillion in collateral that is backstopping what is likely tens of TRILLIONS of Euros’ worth of trades is capable of causing systemic failure.


Again, and I cannot stress this enough: when Spain defaults (and it will) the system will experience a collateral crunch that will be exponentially higher than that which occurred following the Lehman bankruptcy.


This is why I’ve been warning that the 2008 was just a warm-up. It’s why the Powers That Be in Europe are absolutely terrified of what’s happening there. And it’s why those investors who do not prepare in advance for what’s coming will lose everything.


If you do not want to be one of them, you need to get moving.


We have produced a FREE Special Report available to all investors titled What Europe’s Collapse Means For You and Your Savings.


This report features ten pages of material outlining our independent analysis real debt situation in Europe (numbers far worse than is publicly admitted), the true nature of the EU banking system, and the systemic risks Europe poses to investors around the world.


It also outlines a number of investments to profit from this; investments that anyone can use to take advantage of the European Debt Crisis.


Best of all, this report is 100% FREE. You can pick up a copy today at:


Best Regards,


Graham Summers


PS. We also offer a FREE Special Report detailing the threat of inflation as well as two investments that will explode higher as it seeps throughout the financial system. You can pick up a copy of this report at:



Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Radical Marijuana's picture

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

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.

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!

BraveSirRobin's picture

Best of all, this advice is 100% free.

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.

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. 

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

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?!!


michael_engineer's picture

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

silverserfer's picture

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

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...

exartizo's picture

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

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


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?


common_sense's picture

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


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.

Bicycle Repairman'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?

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.


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%?)

sosoome's picture

So no one ever "defaults". Problem solved.

sosoome's picture

reality will prevail

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


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...

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.

Metalredneck's picture

Well, THAT was a let-down.

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.

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?

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.

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.

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.

Bullionaire's picture



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




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