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China's "Evaporated" Collateral Scandal Spreads To Second Port

Tyler Durden's picture


Starting back in May of 2013, we first predicted that China's "Lehman event", even more troubling than the recent advent of Chinese corporate bankruptcies and perhaps even its housing crisis, namely the "discovery" that behind China's virtually-infinite rehypothecation machine - the backbone of its shadow funding markets - the amount of actual physical commodities is severely limited and misrepresented, meaning that for every paper claim on an underlying "funding" metal, there are pennies on the dollar, or renminbi as the case may be, of actual underlying collateral. Or, as MF Global's Jon Corzine may say, "it evaporated." A year later, this too prediction has come true, and overnight none other than Goldman laid out a checklist of just how the recent revelation that not all bonded warehouses at the port of Qingdao, China's third largest, will become the catalyst to further CCFD unwinding.

And while this story is very slow to gain prominent media coverage for obvious reasons, the few outlets that have been keeping up, continue to disclose ever more troubling details, of which the latest and greatest one is not that China's key bank, state-owned Citic Resources has moved to secure the metals (it hopes) it has possession of at Qingdao: this was perfectly expected and the only question was who would be the first counterparty to admit there is a massive rehypothecation problem, and will be the second leg in the crisis, as one claimant after another rushed for their physical only to find that it has been pledged a countless number of times to other counterparties.

No, the biggest news was that the troubles at Qingdao, which as noted is merely the 3rd largest Chinese port, have now spread to a second Chinese port: Penglai, which is also located in the Shandong province. Putting some size numbers for context: Qingdao's copper inventory is about 50,000 tons, compared to 800,000 tons in Shanghai, analysts say. There's "little evidence" for now that traders in Shanghai fraudulently have pledged collateral to banks, said Sijin Cheng, an analyst with Barclays Research in Singapore. Little evidence will become "lots" in the coming days when we expect more "discoveries" at all other bonded warehouses as the relentless inflow of commodities finally reverses and the beneficiaries finally demand possession. As everyone who has followed even the simplest Ponzi schemes knows, this is the part of the lifecycle when many tears are shed by most.

Here is what else the WSJ had to say on this topic:

The trading firms hold the deed to the metal, which can be used to secure financing, but the metal stays in a warehouse. Banks fear a private Chinese company may have used the metal as collateral to get multiple loans, potentially defrauding the lenders and trading firms.


These banks have not been able to get access to the collateral, stored at Qingdao Port, which administers the warehouses.


In an announcement to the Hong Kong stock exchange, Citic Resources said it has applied to courts in Qingdao for "sequestration orders in respect of the Group's alumina and copper." It said it owns alumina and copper stored in bonded warehouses at the port.


A number of Western and Chinese banks have sought similar court orders in an effort to secure their collateral, according to one person familiar with the matter. But the court orders won't alleviate the problem of multiple lenders claiming the same piece of collateral that had been promised to them by the borrower, this person said.

Meanwhile, the infinite rehypothecation bug has gone airborne:

Western lenders are also concerned that the potential fraud may also have occurred at Penglai port, located about 150 miles south of Qingdao, according to people familiar with the matter. Inspectors have been unable to again access to collateral stored at Penglai port, one of the people said.


One executive at a Western bank said the development is a worrying signal that the possible fraud first uncovered at Qingdao may be more widespread than anticipated.

The banks involved:

The Western lenders involved include Citigroup Inc., Standard Chartered PLC, Standard Bank PLC, ABN Amro Bank NV, BNP Paribas SA and Natixis.

Not surprisingly, Citic, which as noted above was the first bank to defect from the group of ostriches with their heads in the sand is quiet about what it finds: the last thing it wants is other banks to scramble and obtain their collateral at a time when Citic is doing the same. Good luck getting your copper, aluminum... or gold... after the first one or two banks have recovered their deliverables: there will be nothing left for anyone.

Citic said the status of the investigation by authorities is "unknown" to the company and that it cannot provide further information on the effect of the investigation on its alumina and copper assets.


For about a decade, Chinese and Western banks have facilitated the flow of capital into China backed by imported commodities. More recently there has been concern that Chinese merchants were carrying out an arbitrage by borrowing against the commodity in dollars at low offshore rates and investing onshore at a higher interest rate. The merchant later pays back the dollar loan.


Chinese authorities have allowed this to happen as a way of boosting credit-driven economic growth. But they have become more worried in recent months that some metals merchants have been pledging the same commodities to multiple banks, causing systemic risk in the financial system.

That's great. The problem is that as we showed recently, in a country in which $1 trillion in debt is added per quarter to a total debt load which is 150% of US (not China) GDP...

... China needs every possible source of credit funding. And as the funding deal pathway - which is a major part of China's shadow credit creation pipeline - unravels and is magnified, the economic shock will be severe.

Finally, since commodity funding deals, the transactions at the basis of the broken Chinese repo/rehypothecation pathway will become a prominent feature of the mainstream media circuit as soon as journos figure out what they are, here is a reminder of the key basics involved , as we posted over a year ago.

An example of a typical, simplified, CCFD

In this section we present an example of how a typical Chinese Copper Financing Deal (CCFD) works, and then discuss how the various parties involved are affected if the deals are forced to unwind. Exhibit 3 is a ‘simplified’ example of a CCFD, including specific reference to how the process places upward pressure on the RMB/USD. We believe this is the predominant structure of CCFDs, with other forms of Chinese copper financing deals much less profitable and likely only a small proportion of total deal volumes.

A typical CCFD involves 4 parties and 4 steps:

  • Party A – Typically an offshore trading house
  • Party B – Typically an onshore trading house, consumers
  • Party C – Typically offshore subsidiary of B
  • Party D – Onshore or offshore banks registered onshore serving B as a client

Step 1) offshore trader A sells warrant of bonded copper (copper in China’s bonded warehouse that is exempted from VAT payment before customs declaration) or inbound copper (i.e. copper on ship in transit to bonded) to onshore party B at price X (i.e. B imports copper from A), and A is paid USD LC, issued by onshore bank D. The LC issuance is a key step that SAFE’s new policies target.

Step 2) onshore entity B sells and re-exports the copper by sending the warrant documentation (not the physical copper which stays in bonded warehouse ‘offshore’) to the offshore subsidiary C (N.B. B owns C), and C pays B USD or CNH cash (CNH = offshore CNY). Using the cash from C, B gets bank D to convert the USD or CNH into onshore CNY, and trader B can then use CNY as it sees fit. 

The conversion of the USD or CNH into onshore CNY is another key step that SAFE’s new policies target. This conversion was previously allowed by SAFE because it was expected that the re-export process was a trade-related activity through China’s current account. Now that it has become apparent that CCFDs and other similar deals do not involve actual shipments of physical material, SAFE appears to be moving to halt them. 

Step 3) Offshore subsidiary C sells the warrant back to A (again, no move in physical copper which stays in bonded warehouse ‘offshore’), and A pays C USD or CNH cash with a price of X minus $10-20/t, i.e. a discount to the price sold by A to B in Step 1. 

Step 4) Repeat Step 1-Step 3 as many times as possible, during the period of LC (usually 6 months, with range of 3-12 months). This could be 10-30 times over the course of the 6 month LC, with the limitation being the amount of time it takes to clear the paperwork. In this way, the total notional LCs issued over a particular tonne of bonded or inbound copper over the course of a year would be 10-30 times the value of the physical copper involved, depending on the LC duration. 

Copper ownership and hedging: Through the whole process each tonne of copper involved in CCFDs is hedged by selling futures on LME futures curve (deals typically involve a long physical position and short futures position over the life of the CCFDs, unless the owner of the copper wants to speculate on the price).

Though typically owned and hedged by Party A, the hedger can be Party A, B, C and D, depending on the ownership of the copper warrant.

* * *

Please note the bolded, underlined text above. That's more or less the whole story here.

* * *

How an unwind may impact each CCFD participant

As we discussed on pages 4 and 5, SAFE’s new regulations target both banks’ LC issuance (first measure) and ‘trade firms’ trade activities (second measure). Here we discuss how the different entities (A, B, C, D) would likely adjust their portfolios to meet the new regulations (i.e. what happens in a complete unwind scenario).

Party A: Party A, without the prospect of $10-20/t profit per Step 1-3 iteration, is likely to find it hard to justify having bonded copper sitting on its balance sheet (the current LME contango is not sufficient to offset the rent and interest costs). As a result, Party A’s physical bonded copper would likely become ‘available’, and Party A would likely unwind its LME short futures hedge.

Party B, C: To avoid being categorized as a B-list firm by SAFE, Party B and C may reduce their USD LC liabilities by: 1) selling liquid assets to fund the USD LC liabilities, and/or 2) borrowing USD offshore and rolling LC liabilities to offshore USD liabilities. The broad impact of this is to reduce outstanding LCs, and CCFDs will likely be affected by this. It is not yet clear what happens to the B-list firms in detail once they are categorized as such. However, if B-list firms were prohibited from rolling their LC liabilities this would increase the pace of the CCFDs unwind. In this scenario, these trade firms would have to sell their liquid assets (copper included) to fund their LC liabilities accumulated through previous CCFDs.

Party D: To meet SAFE’s regulations, Party D will likely adjust their portfolios by reducing LC issuance and/or increasing FX (mainly USD) net long positions, which would directly reduce the total scale of CCFDs and/or raise the LC financing cost, respectively.

* * *

Finally, how much leverage, and risk in general, is involved with the unwinding of CFDs?

Leverage in CCFDs

Below is a demonstration of the LC issuance process in a typical CCFD. Assuming an LC with a duration of 6 months, and 10 circuit completions (of Step 1-3) during that time (i.e. one CCFD takes 18 days to complete), Party D is able to issue 10 times the copper value equivalent in the form of LCs during the first 6 month LC (as shown from period t1 to t10 in Exhibit 10). In the proceeding 6 months (and beyond), the total notional value of the LCs remains the same, everything else equal, since each new LC issued is offset by the expiration of an old one (as shown from period t11 to t20).

In this example, total notional amount of LC during the life of the LC = LC duration / days of one CCFD completion* copper value = 10. In this example, the total notional amount of LC issued by Party D, total FX inflow through Party D from party A, and total CNY assets accumulated by party B (and C) are all 10 times the copper value (per tonne).

To raise the total notional value of LCs, participants could:

  • Extend the LC duration (for example, if LC duration in our model is 12 months, the notional LC could be 20 times copper value)
  • Raise the no. of circuits by reducing the amount of time it takes to clear the paperwork
  • Lock in more copper

Risk exposures of parties to CCFDs

Theoretically, Party B risk exposure > Party D risk exposure > Party A risk exposure

  • Party B’s risks are duration mismatch (LC against CNY assets) and credit default of their CNY assets;
  • Party D’s risks are the possibility that party B has severe financial difficulties. (they manage this risk by controlling the total CNY and FX credit quota to individual party B based on party B’s historical revenue, hard assets, margin and government guarantee) (Party D has the right to claim against party B (onshore entity), because party B owes party D short term FX debt (LC)). If party B were to have financial difficulties, party D can liquidate Party B’s assets.
  • Party A’s risk is mainly that party D (China’s banks) have severe financial difficulties (Party A has the right to claim against party D (onshore banks), because Party A (or Party A’s offshore banks) holds an LC issued by party D). In the case of financial difficulties for Party B, and even in case Party D has difficulties, Party A can still get theoretically get paid by party D (assuming Party D can borrow money from China’s PBoC).

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Tue, 06/10/2014 - 08:23 | 4839939 Cognitive Dissonance
Cognitive Dissonance's picture

The straw that breaks the Chinese camel's back?

Tue, 06/10/2014 - 08:26 | 4839947 Headbanger
Headbanger's picture

Or is this the Black Swan that breaks the entire global financial system?

Tue, 06/10/2014 - 08:28 | 4839949 Cognitive Dissonance
Cognitive Dissonance's picture

So much for 'bonded' warehouses. I bet you the banks that issued the bonds also issued the sixty loans on each pile of copper.

Tue, 06/10/2014 - 08:29 | 4839955 negative rates
negative rates's picture

I think it was a weed stem that did it.

Tue, 06/10/2014 - 08:37 | 4839982 Badabing
Badabing's picture

It’s so easy to point the finger, but us ZHrs know that it’s not just China.

It doesn’t matter what commodity or what warehouse the paper game is too easy to cheat at.

Fractional reserve banking has been around for a long time, and basically this is a note for goods.

Nothing new under the sun, this world wide rehypothedecated fiasco will come crashing down, human greed will assure that!  

Tue, 06/10/2014 - 08:40 | 4839992 COSMOS
COSMOS's picture

Bullish for copper and other metals.  Peru should do well right Dochen?

Australia also.  Hey how does Australia rate with you guys as far as a SHTF country to go to scenario?

Tue, 06/10/2014 - 08:44 | 4840010 Cognitive Dissonance
Cognitive Dissonance's picture

I hear the Outback is pretty this time of year. Might want to bring a few extra bottles of water though.

Tue, 06/10/2014 - 08:52 | 4840031 COSMOS
COSMOS's picture

Yeah I know its dry but drought has been a problem in quite a few places.  And down south along the coast they do quite well with rain.  Also Tasmania is nice and wet.  But I was thinking of the beaches mostly along the gold coast.  Would be a nice place to sit on the beach and watch the rest of the world melt down.  Also English is spoken there so fitting in would be easy. NZ is not too far if one wanted some good skiing.

Dochen I pick Australia for my choice of country to go to.  Now I just have to figure out how to get them to let me move down there.

Also I was thinking most of the nuclear blasts will happen in the Northern hemisphere and the jet stream will pretty much ensure total coverage of that half of the Earth.  I figure less stuff will get bombed in the Southern Hemisphere.

Tue, 06/10/2014 - 08:59 | 4840072 Government need...
Government needs you to pay taxes's picture

Better have a fast-firing rifle for your day at the beach.  Rumor has it the PRC likes to accumulate precious metals, and they are itching to use their shiny new blue water navy!

Tue, 06/10/2014 - 09:14 | 4840123 y3maxx
y3maxx's picture

""The Western lenders involved include Citigroup Inc., Standard Chartered PLC, Standard Bank PLC, ABN Amro Bank NV, BNP Paribas SA and Natixis""

....But where is Goldman(USSA Government) Sachs?


Goldman(USSA Government) Sachs set this all up.

Tue, 06/10/2014 - 09:24 | 4840158 Cognitive Dissonance
Cognitive Dissonance's picture

Kind of convenient they previously sold their commodities units.

Must just be a coincidence.

Tue, 06/10/2014 - 09:57 | 4840289 disabledvet
disabledvet's picture

Goldman didn't. They're up to their eyeballs in long copper.

Elon Musk could bring one chunk from outer space and the entire market would collapse.

That includes the refining space.

It's probably already even done/down actually.

Goes a long way towards explaining why trying to trade long gold, silver, palladium, etc has been a total widow maker even as the equity space "moon shots."

Tue, 06/10/2014 - 10:21 | 4840415 Four chan
Four chan's picture

maybe the term "being shanghaied" will come back into the vogue.

Tue, 06/10/2014 - 10:32 | 4840470 Cognitive Dissonance
Cognitive Dissonance's picture

GS sold their commodities trading and warehousing units. I didn't say they sold their commodities.

Tue, 06/10/2014 - 10:45 | 4840514 CrazyCooter
CrazyCooter's picture

After all, collateral is soooo last century.




Tue, 06/10/2014 - 11:49 | 4840756 CheapBastard
CheapBastard's picture

"Last bamboo shoot break Panda back."


~ Old Chineee proverb

Tue, 06/10/2014 - 12:44 | 4840985 Fish Gone Bad
Fish Gone Bad's picture

Anyone remember the melamine poisonings?  This is was really foreseeable now wasn't it.

Tue, 06/10/2014 - 08:49 | 4840034 dontgoforit
dontgoforit's picture

Every country's got their own Wise Guys.

Tue, 06/10/2014 - 08:52 | 4840051 Bro of the Sorr...
Bro of the Sorrowful Figure's picture

id take my chances with australia over the US. sparsely populated and if the statists ever come for you at least you can laugh at their silly accent.

Tue, 06/10/2014 - 10:47 | 4840520 CrazyCooter
CrazyCooter's picture

I picked Alaska, but hey, that is just me.



Tue, 06/10/2014 - 11:00 | 4840556 DoChenRollingBearing
DoChenRollingBearing's picture

I`d bet the weather is getting rather nice up there now, C.C.  Enjoy your summer!  

Regards back at you!

Tue, 06/10/2014 - 10:56 | 4840543 DoChenRollingBearing
DoChenRollingBearing's picture

Statists appear to be as much of a problem (or more) in Australia as in the USA.  I`d pick the USA over Oz, but that`s just me.  We have found, much to our regret, that statists in Peru (tax authorities) can be as picky here as anywhere else.  Must be their job or something...

S Hemisphere does offer more protection if Fukushima goes wild, but since it has not in two years, well, it probably won`t.  If it does, we will react quckly and G.O.O.D. really fast, even if it means first class...

Peru will suffer if China buys less copper, Peru *may* have entered a slowdown, after almost 10 straight years of impressive growth.  But, if much of the copper in China is indeed GONE, and China DOES keep its growth going (somehow), then Peru will benefit as then they will have to buy actual...copper!

But, trees do not grow to the sky.

Tue, 06/10/2014 - 12:13 | 4840849 Carpenter1
Carpenter1's picture

This has already got the full attention of all banks involved.

Tue, 06/10/2014 - 09:34 | 4840189 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

It’s so easy to point the finger, but us ZHrs know that it’s not just China.

This statement is true. It is just China is more efficient in most manufacturing including Ponziomics!

Tue, 06/10/2014 - 11:48 | 4840752 teslaberry
teslaberry's picture

a financial crisis in china results in massive flood back to u.s. treasuries and could be the event that helps mop up the 3 trillion balance sheet at the fed ( allowing interest rates to rise slowly while not breaking the back of the treasury )

Tue, 06/10/2014 - 14:08 | 4841329 ozman
ozman's picture

Finally someone saw this and connect the dots. All ponzis continue until someone stops the music. Japan back in the 80s marches on until the Plaza accord called in by the US which led to the changing of the Basel rules that hurt Japan, they have not been back as Japan unlike China is a saptrap unable to stand up to the US.  They could have liquidated their Treasury holdings and stop the game but they didnt instead continued the printing game resulting to lost decades.

China on the other hand march with a different drum.  They knew what is going on, they knew the people who did this scam have already fled to the US, Canada, Australia, New Zealand and Europe, the purpose for this is to create a crisis that could be an excuse to recapitalize their banking system by unloading treasuries, muni bonds, MBS and other paper assets from the western nations.  These paper assets will flood back to these countries.  However in contrast to your theory, the fed and ecb are stuck in zirp/nirp.  The fed and ECB will purchase all these assets through moar printing in order keep rates low or else the derivatives such as IRS and FRA will pop causing more problems.  If you add the de-dollarization process, these new printed cash will not find much places to go as most nations will not want them and when China starts unloading, the stampede to the exit will get bigger, moar printing will be required.  The rejection of these assets first from China through liquidation of these collateralized contracts and write off/recapitalization of banking assets will lead to also dumping of the dollar with other nations also following suit.  The years of exported inflation will finally catch up to these western nations in at least 2 years time when the unwind began by that point it will be very, very difficult to stop labelling the phenomenon occuring in the US, Canada, Australia, New Zealand and Europe as hyperinflation.  At this point the banking system will be forced to choose the hard pill let rates rise and sour the derivatives resulting to the dreaded bail in or let hyperinflation continue until the people bring in the guillotine (of course they have to beat the police/dhs first or convince these folks to join them when these enforces find the paychecks paid by the state is not worth a thing).  

As for China catching these wise guys who have most likely fled, they don't need to punish them, the result will punish them indirectly.  The crisis will result into problems in western banks causing bail-ins of these people's assets.  The rise of populism in these western nation societies ensures that these people will end up internment camps, assets seized and maybe even lynched in race riots that will ensue.  At that point, China's government will not provide asylum to these folks as they all know they have bounty (firing squads awaiting) on their heads going home.  It is a lose-lose situation for these scamers, the wise guys aint so wise after all.  


Tue, 06/10/2014 - 08:40 | 4839991 PT
PT's picture

Never mind that!  It can wait till tomorrow!  There's important news out there!  Rik Mayall has died!  Oh, the tragedy!  Rik is ded.  First Chrissie Amphlett, then Doc Neeson, now Rik Mayall, my world is crashing down around me.

Good thing I can't make it to the funeral.  No way would I be able to keep a straight face.  Sincere condolences to his friends and family, but I'm so glad I can't make it to the funeral.  I'd spend the whole time thinking of things like this:

Again, condolences to friends and family, RIP and farewell Rik.

... and for those of you who never knew The Young Ones, today is the day you should find out.

We will now observe a respectful one minute of mayhem.



Back to your regular program ...

Tue, 06/10/2014 - 09:40 | 4840216 TheFourthStooge-ing
TheFourthStooge-ing's picture

...A Fistful of Travellers Cheques

Tue, 06/10/2014 - 10:25 | 4840434 PT
PT's picture

and Five Go Mad At Dorset.

Tue, 06/10/2014 - 10:27 | 4840444 PT
PT's picture

... " and all the children will be crying, and the adults will ask, 'Why are all the children crying?', and someone will say ..."

Thu, 06/12/2014 - 08:12 | 4847855 PT
PT's picture

And now it is the day after tomorrow and the earth is still turning and China's Evaporated Collateral Scandal is still at the second port.  See!  I told you the news could wait!  But Rik is still ded!   Waaaaaaaahhhhh!  Oh Rik!  Oh Rik!  If only ... you liked gardening!

You see, we sow the seed, and nature grows the seed ...

Tue, 06/10/2014 - 08:40 | 4839995 BobPaulson
BobPaulson's picture

The weird thing is how much I keep on hoping that finally we get a big toppling of the house of cards, regardless of how painful it will be, just to end the game...but will it just be followed by another game?

Tue, 06/10/2014 - 08:45 | 4840017 Cognitive Dissonance
Cognitive Dissonance's picture


Never let a crisis go to waste.....especially a manufactured one.

Tue, 06/10/2014 - 08:52 | 4840046 falak pema
falak pema's picture

that's what those Korean mammys are now saying as they go on a sex for money spree to old men with manufactured blue pills. 

Tue, 06/10/2014 - 08:53 | 4840049 CPL
CPL's picture

One thing anyone should plan for short term or long term in any manufacturing process is disaster recovery; this is not limited to or including the following:

  1. the loss of all their architects, excom staff, directorship board
  2. loss of all facilities due to natural disaster
  3. destruction of data
  4. decontamination procedures
    1. nuclear (war or disaster)
    2. chemical (war or disaster)
    3. sewage
    4. viral/disease
  5. theft

There are so many moving parts to it that 'it' could just about break anywhere.  First you give the benefit of the doubt, if not...well other people's pride comes before the fall.  Weird how things work out like that.  My guess however is when this Humpty falls off a wall, there will be no king's ever again

Tue, 06/10/2014 - 11:03 | 4840569 DoChenRollingBearing
DoChenRollingBearing's picture

And yet so few do.  Long-term thinking is hard to find.

Tue, 06/10/2014 - 10:12 | 4840339 HardlyZero
HardlyZero's picture

String together all these Chinese shipping ports in a (infinite) loop, and it looks like the Escher sketch of the stairs.

Everyone has 1/10th of the assets walking around, but when you are on the bottom walking up (upside down) everything gets divided and you 'show' 10x assets.


Finance at its best (worst).

Who's on first ?

Don't even try to figure out if the ports are incoming or outgoing tangibles, from who, when, mixed pallets ?

One day this will happen to all tangibles, including precious.

Tue, 06/10/2014 - 08:44 | 4840011 Occident Mortal
Occident Mortal's picture

Quick, devalue everybodies savings to recapitalise these poor fraudsters.

Tue, 06/10/2014 - 10:00 | 4840308 disabledvet
disabledvet's picture

Quick...go on a production spree that causes banks to start paying ten percent interest to savers.

Tue, 06/10/2014 - 08:46 | 4840022 AR
AR's picture

Hey CD:   Loing time no chat...  Congratulations on the success of your new site.  I hope you and the family are doing great.  I saw you posted and thought I'd drop you a note to say hello.  You take care and keep up BOTH your spirits, and great work.

Sincerely,  AR

Tue, 06/10/2014 - 09:03 | 4840085 Cognitive Dissonance
Cognitive Dissonance's picture

Wow, a blast from the past.

Nice to see you haunting the ZH threads AR. :)

Tue, 06/10/2014 - 09:05 | 4840099 COSMOS
COSMOS's picture

What site are we talking about?  Lets put up a link


Tue, 06/10/2014 - 09:13 | 4840116 Cognitive Dissonance
Cognitive Dissonance's picture

Sorry! You do not qualify.


You must be this tall to ride.------------------------------------------>








Tue, 06/10/2014 - 10:16 | 4840375 decon
decon's picture

Pups :)

Tue, 06/10/2014 - 16:11 | 4841810 Mesquite
Mesquite's picture

More future organ doners...

Tue, 06/10/2014 - 08:29 | 4839956 Mark Urbo
Mark Urbo's picture

There is a Black Swan around the corner...


..what will it be ???

Tue, 06/10/2014 - 08:39 | 4839990 Seasmoke
Seasmoke's picture

I keep having a dream that's it's a bunch of bridges collapsing at once. I no longer like driving over bridges. 

Tue, 06/10/2014 - 08:51 | 4840044 dontgoforit
dontgoforit's picture

Asteroid on Wall St., or hemoroid on Main?

Tue, 06/10/2014 - 09:05 | 4840092 exartizo
exartizo's picture

...this is a Tempest In A Teapot, at best.

Governments simply Print and Bail.

The only Black Swan events of consequence are unpredicted war.

Tue, 06/10/2014 - 10:43 | 4840462 e_goldstein
e_goldstein's picture

Or is this the Black Swan that breaks the entire global financial system?

Technically, a Black Swan is something that no one sees coming. Tyler called this over a year ago; but yeah, the potential is there to break the system, and when it happens, that will be an interesting day.

Tue, 06/10/2014 - 15:03 | 4841597 headhunt
headhunt's picture

VIX nice and calm, waiting for the SLAM!

Tue, 06/10/2014 - 11:31 | 4840682 nightshiftsucks
nightshiftsucks's picture

Can't be a black swan,ZH has been talking about this shit for years.

Tue, 06/10/2014 - 08:37 | 4839978 Bernoulli
Bernoulli's picture

wouldn't call that a "straw". That's a big fucking double T beam....

And it will nicely break the poor camel in two.

Tue, 06/10/2014 - 08:40 | 4839996 chapaev's ghost
chapaev's ghost's picture

"... the possible fraud first uncovered at Qingdao may be more widespread than anticipated."


Damn, I love understatement.

Tue, 06/10/2014 - 10:27 | 4840446 HardlyZero
HardlyZero's picture

Fiat + Finance + Fraud...the bad banker's triptych.

Tue, 06/10/2014 - 09:25 | 4840156 post turtle saver
post turtle saver's picture

I'm gonna keep this simple for the quants on this board...

all the charts & math in the world around this simply don't matter... value is a belief system, period...

all of the financial instruments around raw materials will work as long as people believe the raw materials are ultimately there to be exchanged for...

things break down when someone does an audit and finds out that the stuff simply isn't there, and things really go to hell when they start to wonder if it was ever there to begin with...

since it isn't in _anyone's_ interest in China that people start learning that the collateral isn't there, and may not ever have been there, you have to wonder... why are audits even being allowed to happen, and who ultimately gains from breaking the belief system / chain of trust with audit activity in China?

it's certainly food for thought... if someone wanted to "keep the Ponzi going" the last thing they would want to happen is an actual audit & inventory...

Tue, 06/10/2014 - 10:02 | 4840319 disabledvet
disabledvet's picture's called trust you moron. Like "the Lehmans" of "the Goldmans" or "the Bloombergs" you cannot do business with these people.

They steal everything.

Tue, 06/10/2014 - 13:53 | 4841271 post turtle saver
post turtle saver's picture

trust is key, that is true... did not downvote you btw

Tue, 06/10/2014 - 11:29 | 4840662 Soul Glow
Soul Glow's picture

Entropy, bitchez.

Tue, 06/10/2014 - 08:24 | 4839940 Joe Davola
Joe Davola's picture

Was this story translated to Russian, just to make sure Putin got the message before committing to more direct deals without the dollar intermediary.

Tue, 06/10/2014 - 08:41 | 4840001 COSMOS
COSMOS's picture

I am sure the dollar is worse.  I mean come now how much gold do you think is really in those vaults backing all those gold certificates flying around.  And dont forget the fine job done by Corzine.

Tue, 06/10/2014 - 09:32 | 4840174 post turtle saver
post turtle saver's picture

... and this is based on the premise that the dollar is backed by gold in vaults and the gold certificates that go with them... since it isn't, your statement is invalid

the Fed Reserve notes in my pocket are ultimately backed by the full faith & credit of the USA, not by gold... you can make of that what you will, I'm not here to argue the good or bad around that, just what simply is

Tue, 06/10/2014 - 08:44 | 4840012 BobPaulson
BobPaulson's picture

Cause dollars are rock solid.

Tue, 06/10/2014 - 09:33 | 4840179 post turtle saver
post turtle saver's picture

compared to everyone else, yes, yes they are

Tue, 06/10/2014 - 11:30 | 4840677 Soul Glow
Soul Glow's picture

Dollars?  Oh those evaporated.

- Jon Corzine, Fed Chair, 2018

Tue, 06/10/2014 - 09:05 | 4840095 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

See Iran for plan B.

Tue, 06/10/2014 - 08:24 | 4839941 AlaricBalth
AlaricBalth's picture

When will the people start asking about the rehypothocated gold at the NY Fed?

Tue, 06/10/2014 - 08:31 | 4839962 Cognitive Dissonance
Cognitive Dissonance's picture

Silly rabbit. Gold is just a barbarous relic and of little intrinsic value. Who would possibly rehypothocate a relic?


Tue, 06/10/2014 - 08:37 | 4839981 Grande Tetons
Grande Tetons's picture

I net about 5 percent or less of Americans could accurately define the word rehypothocate.  Ithink I am being generous with my figure. 

Tue, 06/10/2014 - 08:42 | 4840004 Rainman
Rainman's picture

by about 4.98% !!

Tue, 06/10/2014 - 11:32 | 4840687 Soul Glow
Soul Glow's picture

I'm willing to bet you could walk up to 100 people on the street and none of them would know what rehypthecation means.

Tue, 06/10/2014 - 13:52 | 4841219 hobopants
hobopants's picture

Re-hippo-cation? waz dat?

Tue, 06/10/2014 - 08:43 | 4840008 quasimodo
quasimodo's picture

Very generous indeed, more along the lines of .25%

Now, ask most about who won Idol last season or how many times a Cardashien has been in the news........

Tue, 06/10/2014 - 08:45 | 4840016 chapaev's ghost
chapaev's ghost's picture

Mugger: "I'm rehypothecatin' your wallet, bitch!"

Tue, 06/10/2014 - 09:05 | 4840097 headhunt
headhunt's picture

It would go more like this;

Mugger: "I'm rehypothecatin' your wallet, bitch!"

Muggee: "Can i buy my wallet back?"

Mugger: "Sure - gimmee $50"

Muggee: "Can I borrow $50?"

Mugger: "Sure - but I want 10% vig"

Muggee: "OK - here's the $50"

Mugger: "I'm rehypothecatin' your wallet, bitch!"

Tue, 06/10/2014 - 08:46 | 4840020 Winston Churchill
Winston Churchill's picture

And 90% of that 5% are bankers.

Tue, 06/10/2014 - 11:33 | 4840693 Soul Glow
Soul Glow's picture

I bet the bankers don't even fucking know.

Tue, 06/10/2014 - 08:49 | 4840037 TheGermanGuy
TheGermanGuy's picture

Or spell "rehypothecate" correctly

Tue, 06/10/2014 - 09:00 | 4840073 Zadok
Zadok's picture

Extremely generous...

Tue, 06/10/2014 - 09:05 | 4840098 semperfi
semperfi's picture

more like 0.05%

Tue, 06/10/2014 - 09:25 | 4840159 The Blank Stare
The Blank Stare's picture

So......I'm finally part of the 0.01%?

I thought it meant when an overdosed loser needs a double hypo in the chest.

Tue, 06/10/2014 - 10:52 | 4840534 Uchtdorf
Uchtdorf's picture

It's interesting that in Spanish, la hipoteca, is "the mortgage."

Tue, 06/10/2014 - 08:44 | 4840007 chapaev's ghost
chapaev's ghost's picture

Silly Rabbit! Gold is for bankers!

Tue, 06/10/2014 - 09:05 | 4840090 Cognitive Dissonance
Cognitive Dissonance's picture

Central bankers.

Fixed it for you.  :)

Tue, 06/10/2014 - 09:04 | 4840087 semperfi
semperfi's picture

just a worthless rock

Tue, 06/10/2014 - 09:39 | 4840212 Andre
Andre's picture

Would you like to buy a piece of the True Cross?


Tue, 06/10/2014 - 14:57 | 4841572 11b40
11b40's picture

That's what the German's want to know, Cog Dis ;-)

Tue, 06/10/2014 - 08:34 | 4839973 NoWayJose
NoWayJose's picture

I am waiting for the day when Merkel pulls up in front of the NY Fed with a fleet of trucks full of Aryan strongmen and says -- "We are here for our gold".

Tue, 06/10/2014 - 08:40 | 4839993 Bernoulli
Bernoulli's picture

Veee Vont Ze Golt!! Giff it beck!!

Wott? Ju heff no Golt?!?

Tue, 06/10/2014 - 09:03 | 4840084 semperfi
semperfi's picture

you mean Merkel's replacement - Merkel is part of the Cabal

Tue, 06/10/2014 - 08:41 | 4840000 Bastiat
Bastiat's picture

How about the rehypothecation of UST paper?

Tue, 06/10/2014 - 08:58 | 4840067 Two Theives and...
Two Theives and a Liar's picture

US Toilet Paper? It will revert to it's true value...

Tue, 06/10/2014 - 09:03 | 4840083 Government need...
Government needs you to pay taxes's picture

I hear the gold at the NY Fed went missing when David Copperfield successfully disappeared it on TV!

Tue, 06/10/2014 - 08:25 | 4839943 Impoverished Ps...
Impoverished Psychologist's picture

Why not stack your copper ingots at home, they can be arranged to form a tasteful and hard wearing range of home furnishings.

Becuase - if you don't hold it you don't own it.

Has someone not said that before?



Tue, 06/10/2014 - 08:48 | 4840029 Cognitive Dissonance
Cognitive Dissonance's picture

Like an electric chair? Just askin'

<Now where is that outlet?>

Tue, 06/10/2014 - 09:31 | 4840173 edotabin
edotabin's picture

Jenga: The Copper, Silver, Gold Edition.

Tue, 06/10/2014 - 08:28 | 4839951 Devotional
Devotional's picture

are there contagion concerns?

Tue, 06/10/2014 - 08:29 | 4839952 BennyBoy
BennyBoy's picture

Party B risk exposure > Party D risk exposure > Taxpayer risk exposure

Tue, 06/10/2014 - 08:29 | 4839953 NoWayJose
NoWayJose's picture

What's the problem? Everyone will still 'own' a piece of paper that says they 'own' something real...

Tue, 06/10/2014 - 08:30 | 4839964 negative rates
negative rates's picture

And in their mind they believe it is real, until proved otherwise.

Tue, 06/10/2014 - 08:50 | 4840039 Cognitive Dissonance
Cognitive Dissonance's picture

A belief is as solid as a diamond....but shatters easily when hit on just the right spot.

Tue, 06/10/2014 - 08:55 | 4840055 dontgoforit
dontgoforit's picture

Yeah, but we've got Gorilla Glue!  Ain't givin' up easy on that rehypocathing thingy; got glue.

Tue, 06/10/2014 - 09:43 | 4840229 Cognitive Dissonance
Cognitive Dissonance's picture

It's a Humpty Dumpty kind of thingy. :)

Tue, 06/10/2014 - 08:30 | 4839957 OceanX
OceanX's picture

Will there be trials?

Tue, 06/10/2014 - 08:48 | 4840032 Tabarnaque
Tabarnaque's picture

They do hang corrupted banksters from time to time in China. A good tradition that we should adopt in the Western World...

Tue, 06/10/2014 - 08:49 | 4840033 Winston Churchill
Winston Churchill's picture

This where it gets interesting.Its not only game theory but law that says the first out, gets out

best.The first claim takes priority,then the second etc.,

Tue, 06/10/2014 - 08:30 | 4839959 Fix It Again Timmy
Fix It Again Timmy's picture

Why am I not surprised over all this?...

Tue, 06/10/2014 - 08:30 | 4839963 prains
prains's picture

The problem with having a problem with this problem is that it becomes a problem.....and that pretty much explains rehyperderf'cation

Tue, 06/10/2014 - 08:32 | 4839965 Professor Fate
Professor Fate's picture

The only paper having less intrinsic value than a Chinese Warehouse Receipt is a Fed "Greenback" Receipt.  Either one should be valued by its utility and ability to cleanly wipe an ass.

Fate the Magnificent
"Push the Button, Max" 

Tue, 06/10/2014 - 08:32 | 4839968 jubber
jubber's picture

Gold popping anything to do with this?

Tue, 06/10/2014 - 08:33 | 4839971 Doubleguns
Doubleguns's picture

I guess we can all tell where Corzine is working now. 

Tue, 06/10/2014 - 08:33 | 4839972 Stonedog
Stonedog's picture

Infinity plus ungood!

Tue, 06/10/2014 - 08:35 | 4839975 youngman
youngman's picture

I would think some heads will roll in China over this...the ruling party does not like to lose money...especially when they are cheated out of will see some arrests and long  long jail terms for this..never mess with the Communist party....

Tue, 06/10/2014 - 08:44 | 4840013 COSMOS
COSMOS's picture

Unless those mofos are already clear out of the country with second citizenships and assets overseas.  I can easily see that the US and Canada and Australia are enabling this kind of fraud in China by laundering the money.  It destabilizes China.  Same deal with the Russians and London.

Tue, 06/10/2014 - 08:49 | 4840036 Bernanke'sDaddy
Bernanke&#039;sDaddy's picture

Yep. Betcha a lot of those scumbags are proud new owners of SF Bay Area housing.



Tue, 06/10/2014 - 08:57 | 4840065 headhunt
headhunt's picture

Communists scamming communists.

Tue, 06/10/2014 - 09:53 | 4840274 Salah
Salah's picture


Tue, 06/10/2014 - 11:56 | 4840791 MsCreant
MsCreant's picture

I think the ruling party knows, just fine. They have made sure when the music stops that they will have seats.

Tue, 06/10/2014 - 14:20 | 4841397 hootowl
hootowl's picture

Maybe a little bit of Chinese justice should trickle across the Pacific and land on Wall Street.

Tue, 06/10/2014 - 08:36 | 4839976 Seasmoke
Seasmoke's picture

I've been to a real live ponzi event.  With thousands of people. I was in awe. They called up 10 or so people , and handed them envelopes of cash for getting to top of pyramid. The crowd was in a frenzy to give their money to someone above them , so they could get on the pyramid. I still remember that day clearly, even though I felt like I Was dreaming. My friend wanted in, I told him run the other way ....3 weeks later it was collapsed and OVER. 

Tue, 06/10/2014 - 09:13 | 4840119 swmnguy
swmnguy's picture

I know what you're talking about.  I coordinate live corporate events/meetings.  I've worked a couple of these crazy-ass Ponzi things.  It's completely insane. Really, the only times I've felt bad about cashing a paycheck.  I used to think vampires were just folklore, but watching those people thrive from eating other people's emotional energy like that convinced me.  Thank your lucky stars you saw through it.  And your friend is fortunate it collapsed so soon after.  Limited his losses.

Tue, 06/10/2014 - 08:38 | 4839977 Quinvarius
Quinvarius's picture

Goldman assures us that while they execute frauds in China with a firing squad, there will be no demand in the copper market to replace this missing copper.  Meanwhile GS says they have a giant warehouse full of copper but the waiting time to get anything out of it is about 6 months.  I smell smoke.  But seriously.  I am about 5% certain Goldman has that copper and they just run that warehouse like they run the rest of their operation.

Tue, 06/10/2014 - 08:47 | 4840025 AdvancingTime
AdvancingTime's picture

I suspect that what is missing still exist it is just in a different place and has been ripped off.

Tue, 06/10/2014 - 09:06 | 4840101 Government need...
Government needs you to pay taxes's picture

I bet the Chinese government would appreciate knowing where the Goldman Sachs copper warehouse is.  Bros before hoes!

Tue, 06/10/2014 - 09:49 | 4840254 Wild Theories
Wild Theories's picture

Remembering the older articles, I think the original idea GS had for the unwind was to short the copper and pick up the physical as they become released. But that was Plan A from last year(and based on real copper back then).

Then the loaners one-upped the game and simply came up with 'imaginary' copper to keep the deals going.

I'm not sure if GS anticipated the possible scale of the imaginary copper, if they did, they should still make out with plan A ok. If the proportion of imaginary copper is bigger and the actual physical pile is smaller than first thought, it will mean the amount of physical released on the unwind will also be much much smaller.


Just my wild theories.

Tue, 06/10/2014 - 08:37 | 4839983 valley chick
valley chick's picture

First running for the door makes out the best! RUN YOU FUKKERS!

Tue, 06/10/2014 - 08:40 | 4839994 Seasmoke
Seasmoke's picture

Not If they shoot you in the back. And then hang your children. 

Tue, 06/10/2014 - 08:43 | 4839987 LawsofPhysics
LawsofPhysics's picture

Time for everyone to re-learn what is really meant by the term counterparty risk...


stupid fucks.

Tue, 06/10/2014 - 08:59 | 4840070 semperfi
semperfi's picture

but you can't cure stupid

Tue, 06/10/2014 - 08:41 | 4839999 Madcow
Madcow's picture

If 100 people think they own the same inventory - the price of that inventory would logically go way up not down. ???

"Sorry - but you folks got tricked fair And square and now it'd time to move on "

Tue, 06/10/2014 - 09:34 | 4840042 Bastiat
Bastiat's picture

Demand based on a financing scam goes away with the scam. Did any of the metal in this scam flow to meet industrial demand?  The rehypo also reduces the scale of the purely financial demand-in other words if I can leverage it 10X I need half the copper the copper that I would need if I could only leverage it 5X, other things being equal. 

Tue, 06/10/2014 - 09:16 | 4840110 Dr. Engali
Dr. Engali's picture

No this is a deflationary event because the party involved has defaulted and therefore does not have the "money" to go out and buy the physical copper to satisfy the demands.  In your scenario 100 paper claims just went worthless.

Tue, 06/10/2014 - 09:37 | 4840202 Madcow
Madcow's picture

I see. Thanks for the clarification.

All those "derivatives" of metal are worthless. I hope no one was counting on those "assets". But it might be a good lesson for investors in the future. If you've got the asset in your physical possession you own it. If your "ownership" is dependent upon accountants and lawyers and a third party exit - well good luck to you !!

Tue, 06/10/2014 - 09:50 | 4840257 XitSam
XitSam's picture

"Deflation doubleplusungood! Set the liquidity injectors to gigabux now!" -- Central Banks

Tue, 06/10/2014 - 09:53 | 4840273 waterwitch
waterwitch's picture

Kinda like what happened after Lehman Brothers? And the 700B bailout?

Tue, 06/10/2014 - 08:42 | 4840003 ParkAveFlasher
ParkAveFlasher's picture

Nothing to see here.  No relly.

Tue, 06/10/2014 - 08:45 | 4840014 AdvancingTime
AdvancingTime's picture

Corruption is thriving in China, this tends to weaken transparency and bring into question how much faith you should have in its government. In Shanghai and Beijing, where big corruption scandals involving top officials have been exposed in recent months, new cases of alleged high-level wrongdoing are still coming to light. Mor on this subject in the article below.

Tue, 06/10/2014 - 10:55 | 4840542 Zeta Reticuli
Zeta Reticuli's picture

Why is Bruce Wilds so viruntly anti-China? Did he get raped by a Chinese delivery boy. Is he allergic to MSG? What is the connection between a guy living in the middle of the US and his diatribes against a country he has probably never visited?

Tue, 06/10/2014 - 08:48 | 4840026 falak pema
falak pema's picture

China's evaporated collateral in commodities stock is a bit like Cameron's collateral in his cabal againt Eurozone federation threat from Juncker; its all going up in Mutti smoke and mirrors.

One word now hits the press : Spitzenkandidaten.

And Mutti has said to the Northern alliance within EZ : don't spit on spitzenkandidaten ! 

Tue, 06/10/2014 - 09:25 | 4840052 headhunt
headhunt's picture

HA! - and Russia is threatening to trade in RMB, oil for RMB

"meaning that for every paper claim on an underlying "funding" metal, there are pennies on the dollar,"; That sounds like the US Fed and banking system - I think the banks call it derivatives.

Tue, 06/10/2014 - 08:58 | 4840066 semperfi
semperfi's picture

wonder who madoff with that copper? 

Tue, 06/10/2014 - 09:05 | 4840078 AbbeBrel
AbbeBrel's picture

Australian, as Chinese characters don't work in a comment)

Ya know, mate, we are shocked, SHOCKED that this pile-o-copper could have been used as collateral for more than one loan!

Green can thanks mate!

Tue, 06/10/2014 - 09:04 | 4840091 Calculus99
Calculus99's picture

Aliens in Area 51 I believe.

Elvis perhaps alive and living in Reno I believe.

Chinese + fraud, NEVER!

Tue, 06/10/2014 - 09:20 | 4840145 ms8172
ms8172's picture


Tue, 06/10/2014 - 09:33 | 4840181 Typing Typer
Typing Typer's picture

Well I'm not a real whiz at math, but the Goldman article said there could be 800k tons of copper in Shanghai rehypothecated 30x.

One Internet search put the value of 1 tn copper at $6800/tn.

At that price 800k tons copper is about $5.4 bl.

But at 30x the price it is about $163bl.

A very minor discrepancy of just $157.6 bl!

Still, China has $3 tr or $4 tr in reserves, this rehypothecated amount seems to be just a rounding error by comparison. China can easily step in an underwrite it all if they have to. Not sure what effect that would have on inflation and credit and all, but it looks like China can handle this without much effort.

Tue, 06/10/2014 - 10:24 | 4840432 RadioactiveRant
RadioactiveRant's picture

If you're doing worst case scenario according to Reuters China was hoping to have State stockpiles of 15mt of copper by the end of this year, so you can double your figure then do the math for iron, aluminium, lead, molybdenum, nickel, steel billet, tin and zinc.


Interesting that Goldman tried to get out of the commodity storage business Metro International Trade Services just 3 weeks ago, I wonder if this has caught them by suprise?



Tue, 06/10/2014 - 10:41 | 4840493 Typing Typer
Typing Typer's picture

Ok, doubling the above copper estimate brings it to a $314 bl discrepancy. Since I don't have the data or resources to calculate all those other metals, we might just roughly assume the amounts are similar to copper, and then multiply the copper estimate by each of the other metals, which at 8 metals listed would be very roughly $314bl * 8 = $2.5 tr.

Now that is significant, half of China's reserves gone in a poof of air, not to mention the chaos of collapsing firms all over the place, funding, finance, employment, inflation, interest rates, etc.

Does seem rather serious in that light.

Tue, 06/10/2014 - 11:14 | 4840604 RadioactiveRant
RadioactiveRant's picture

I dont think anyone knows how big this is yet; it might be nothing, or it could be everything. Thus far, I understand its two ports and two metals, there are scores more ports and likely lots of inland bonded warehouses that this could spread to. Even the n0,000t of gold they think they have as part of their reserves might have been sold to them multiple times. Banking is based on trust and if the people see the Yellow Emperor has been duped, will they maintain confidence in the local bank manager?

Tue, 06/10/2014 - 09:34 | 4840185 Walt D.
Walt D.'s picture


What is the Chinese word for Corzined?

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