good afternoon and welcome to capital account i'm lauren lyster here in washington d.c. the german government has begun to prepare for a possible bailout of its second largest bank by assets its commerzbank meanwhile depositors in the u.s. have been pulling their money out of foreign owned banks operating here and what some call a flight to safety as a result these banks have seen the largest six month fall in their deposits on record are these all signs that a bank run is currently under way meanwhile show me the money that's what lawmakers and customers have been telling m.f. global executives pretty much to no avail well now regulators report they have

found the missing money and we heard one top regulator alleged chorus line new customer money was dipped into but the big question will customers actually get it back and as gold plunges to a five month low are we seeing the end to investors saying this dynamic. or does the broader collapse in commodity prices signal investors are running to cash selling anything they can get their hands on could this be the excuse the federal reserve needs for q e three and will that even be enough to stop the crash this time around let's figure it out let's get to today's capital account.

and we all know him by now he's the former c.e.o. of the bankrupt m.f. global he was back on the hill again today and oh how things have changed over the course of a week from when we first heard him testified before lawmakers regulators now say they know where the missing money went ok that's a huge change we know of course the trustee said up to one point two billion dollars of customer money could be missing so of course out the back story behind this all now we've heard this c.m.e. m.f. global's front line regulator they've said m.f. global misused customer money flat out and the head of the c.m.e. has now testifies saying john kors i knew of the firm used customer money and today now we see john corps i'm back on the hill he has a new defense he said the back office staff explicitly informed him that funds

transferred before the company filed for bankruptcy were legal here's excuse the back office in chicago explicitly confirmed to me that the funds were properly transferred and i understood that j.p. morgan chase was satisfied since they executed billions of trades billions of dollars with m.f. global. so more and more is coming out and how much has changed from a week ago when john kors i was basically pleading the fifth without pleading the fifth listen to this i simply do not know where the money is or why the accounts it's not been reconciled today. so so much more has come out but the big question of course actually several of them will customers get their money back how did this happen and what does this say about how safe money is in accounts that are supposed to be sacrosanct and accounts in trades that are overseen by

regulators as these were well karl denninger of the market ticker dot com and author of this book leverage how cheap money will destroy the world is here to help us try and get to the bottom of this because there's a lot at stake for everyone a lot more than just the m.f. global customers that are asking if they're going to get their money back mr denninger it's nice to see you of course we have john corps i'm back on the hill today and this is the first time we've had in your after the had the c.m.e. said john kors i knew customer money was used and now he's saying ok maybe i did but i was told that this was completely legal to transfer this money by my back office i guess the big question for you karl denninger how could this be legal. i don't know how it's legal. i'm not a securities attorney i'm just a trader writer and a journalist and what i do from what i understand it customer funds are just never

supposed to be co-mingled like this so how do we get from i don't know where the money went to i was told by the back office that this was a perfectly ok thing to do is beyond me but this appears to be where he's gone at this point i guess when you have somebody say i have someone on the record who says that you knew about it you've got to come up with something and that's what he's got that's what he's got but let's talk about what we think was really going on here so what it basically sounds like is that he had a trade that was that he wanted to keep open and so he was being asked to put up collateral or margin and so he said ok told his cat counter parties here is the money he took up from customer accounts and basically thought that that money would be put back in those accounts without customers ever seeing that it was missing and by then they would have made money on this trade is that kind of what you think was going on from from your expertise and so i think you have to assume was going through their head now who made the decision is of course the open question so then this brings up

a lot of other questions and i want to bring in our producer dimitri cafe in us with one take all of my questions through the exchanges so one of the major points of making these trades through an exchange is that it provides additional regulation oversight and it mitigates counterparty risk what does this do for investor conference in your view that that these tried trades might as well of happen over the counter and what's the difference really here this is a turbo problem for investor confidence and it's not so much as the factor for speculators i mean we all accept that something like this could happen if you're speculating the markets but for a farmer or an airline this is a huge issue because the reason you pay for the merchant and the reason you get involved in a regulated exchange is because you don't want the risk that the person on the other side can't perform and c.m.e. . he is supposed to be surveilling this well apparently they either didn't or were tricked we don't know which but whatever internal controls are supposed to be there broke down and as a result the money is now gone if this happens then you have

a situation where people in the market say well now wait a minute i was willing to take the risk that my crop wasn't going to be as good as i thought but i why would i do this kind of a thing to an exchange when i just get a hold of general mills and sold them forward on my crop and and deal with it that way i mean if i've got to take the risk of general mills going bankrupt or somebody like john course i'm doing something like this i think i'd rather deal with general mills you know you're making a really interesting point i kind of want to hammer it home are you kind of saying what is the point of having a segregated accounts and using exchanges if you're going to just of buyable to lose your money as you would be by doing something over the counter exactly i mean that the entire point of regulated exchanges is that you don't have counterparty risk because the exchange is supposed to stand between every buyer and every seller and make sure that the trades are good and part of that is guaranteeing that margin deposits are safe because when you sell fluid you're not allowed to use that money that's your guarantee that you're actually going to perform if that is gone then

for producers and consumers that used these markets every day to hedge i don't see how that market survives and so do you think it basically just to hammer this home does it wreck confidence in the financial system for people that are genuinely trying to headrest like farmers in airlines examples you brought up yes is terrible this is this kind of a hedging system has been around since a saucy trading company this is not a modern invention by any stretch of the imagination we had a lot of market crashes and we've had brokerages fail but this is the first time that i'm aware of that this particular problem has a risen and producers have literally had their money stolen yeah i mean and we've heard from some of them on the hill who were told literally that no one with their money in a segregated. counted ever lost a penny and then all of a sudden and the global goes belly up and they can't get their money it also brings interesting points up too as were of course dealing with regulations that are moving over the counter derivatives to exchanges that kind of calls into question

how much risk that will really avoid but i want to move on to the european sovereign crisis because of course this ties in with that to m.f. global had six billion dollars in bets on the european sovereign debt that went bad in the past few days we've seen a lot of action in foreign exchange markets we've seen the euro get crushed gold and other commodities have gotten crossed the u.s. dollar is strengthened is the market telling us something here well sure the market is telling you a deliberate just coming out a system on a forcible basis of this is one of the things that we saw in two thousand and seven and two thousand and eight when bear stearns went down it was bad enough but then lehmann confirm that there wasn't just one cockroach and you saw this you know what's at risk or what's really going on is everyone saying i'm not loaning any money we're dealing on a cherished basis or not at all and that's when you see all the risky assets anything that has leverage abetted in it just collapses in christ and one of the cusp of it happening again the problem at this point is that the european banks are

libert up turbot they have very little capital i mean their positions in a lot of what they are carrying in a lever position is sovereign debt so the risk is extremely high if for example italy or greece actually defaults greece may be small enough to do its disruption but does it destroy things if italy blows up or some other country it's an entirely different thing right and just going back into what you were saying about the leveraging like we saw in two thousand and eight do you think that we're seeing that going to be now more widespread this kind of deal leveraging where people are selling assets where banks are selling assets and best hours for cash i don't see any way that it stops until we get some truth that the probability to mentally is that we don't have truth the entire system rests on confidence the you know that when you write a check and you. send it to somebody that they're going to be able to cash it that you know that the bet that you put on is going to get paid we in the marketplace we book people writing insane amounts of protection on for example spanish and italian

debt if that's true then as an end of the world trade it's one of those deals where if you're right you make a lot of money and if you're wrong and a bad thing happens you can't pay so no one cares right now that's not something you want to see happen in and yet this is the sort of situation that we're in right now do you think we just have a minute left the onus falls on to restore confidence is this the role of markets is this the role of regulators is this the role of government more broadly. this is the role of markets but the government has to stop coddling people who put on bets and if they have taken on positions and debts they can't pay and that includes themselves there is a deadly embrace that goes on between the financial industry and the governments to get into this problem and the allowing banks for example to hold government debt with a capital behind it is a huge part of what's happened here holding government debt without a lot of capital behind it that's a really interesting point you bring up you know i want to actually keep this

conversation going with you mr denninger i just want to take a quick break and when we come back i want to get more into europe that was karl denninger author and blogger and marketing dot com. the first. and still ahead here on capital account we all know that sex sells but at what cost find out the secrets behind organic and fair trade cotton glad that after the break. we just put a picture of me when i was like nine years old and don't you tell the truth. i'm a confession i am a total ghetto princess i love driving hip hop is a planned trip. but it was kind of the jester day. i'm very proud of the world without you or has played.

guitar sometimes you see a story and it seems so. you think you understand it and then you glimpse something else you hear or see some other part of it and realize everything. you don't know i'm charged welcome to the big picture. what drives the world the fear mongering used by politicians who makes decisions to break through it's already been made who can you trust no one who is you view with a global missionary zeal where we had a state controlled capitalism is called sessions when nobody dares to

ask we do our tea question more. welcome back so before the break we were talking about m.f. global and of course they ran into trouble over their more than six billion dollar bet on european sovereign debt that went bad and certainly it doesn't seem like this will be the last as i was just talking about with our guest karl denninger there will certainly seem to be more crises of this euro zone crisis now more casualties of this euro zone crisis i really should say the german government for one has begun to prepare to possibly bail out its second largest bank by assets this is commerzbank the financial times reports a five billion euro capital gap has been identified by regulators and this is the problem in the u.s.

we see reactions to what's going on depositors in the us are reportedly pulling their money out of foreign owned banks so banks like deutsche bank barclays and the cash deposits have fallen twenty five percent from may to december this is from federal reserve data this is the most amount we've seen on record now head of the i.m.f. christine lagarde is out saying no country is immune from an escalation of the eurozone crisis that therefore everyone has to act meanwhile the market is reacting and we're kind of trying to figure out what it's telling us so let's bring karl denninger back in to try to sort this out he's author and blogger on the markets here dot com so mr denninger back to what we were talking about with all of this leverage and people being concerned then about lacking confidence and being able to get their money do you think that's why we're seeing u.s. depositors pull their money out of foreign owned banks because they're worried they're not going to get it back well sure i mean if you if you have a bank that is a huge amount of assets and those assets or or. there's no reserves just

doesn't hold against them in the way of capital if something goes wrong and you've got to leverage ratio of forty fifty maybe even sixty to one you're not going to get your money back and watch the government steps in and takes tax revenues and compensate you for that well when these banks. times the size of the government's budget and even the economy size that becomes rather impossible doesn't settle the best thing to do in that situation is run away before the happens yeah you don't want to be a turkey but moving on as of course the eurozone crisis has continued you just we heard christine legarde say that at this as late it affects everybody i mean who knows her motives behind making these big statements but do you not believe that the european central bank will eventually print money and monetize the debt in europe i don't think they will and even if they do it isn't going to help because if you print money on back in other words you just put more out there then all

you've done is devalue it so the price of things go up and the people in general have there are the dirt standard of living destroyed it's kind only robbing yourselves you can reach in your own back pocket take the twenty dollar bill put it from one pocket into another you haven't changed your financial situation want to iota which is a great point but at the same time we are living in a fee on money you know currency system and how can the e.c.b. really just allow governments to collapse i mean that would be pretty devastating i don't know what they're going to do i think that's part of why you're seeing the convulsions in the markets the market is trying to analyze what options are left we made a huge mistake after two thousand and eight in that we didn't force the banks to take capital in or sell off these assets and take that balance sheet leverage off and it was a mistake to allow them to do in the first place but it went out over the space of thirty years and now we're trying to say well look we know we've got a big problem here but how do you when taking any pain and the answer is you can't yeah you think you're going to have to face paying it some point whether you print

or not let's say the e.c.b. doesn't monetize the debt do you think that the federal reserve could possibly step in and this could be some other form of quantitative easing that we think. i don't believe so dodd frank foreclosed most of the means that the federal reserve had to legally do this whether they would try to do it to swap lines is an open question there is a problem with them doing that in it if they get heavily involved in it and then the european union falls apart the defender reserve would end up taking a monstrous loss that could literally lead to congress doing the fed so to speak put a stake in them and say ok that's enough we said no we did it anyway so you have to remember that congress does have the ability with the stroke of legislation to take the federal reserve out in literally shoot it if it wants to and then some people that we have on this show quite frequently wish that they would quite frankly but really quickly before we go we just have a minute left but and gold has been something that's taken

a beating i don't know if it as a result of all of this but we've certainly seen it happen um it's been at levels that we haven't seen in five months so my question to you is what's your outlook and do you think that gold has much further to go and what's a correction or do you think that this was the correction oh or the gold is much further to go i think all assets have much further to go if there were if the leverage comes out of the system you could see especially anything that trades with leverage and gold does even though it's something you can hold in your hand could lose ninety percent of its value in nominal terms. karl denninger that's an invariant arresting point to leave it on we're going to leave it there for today thank you so much for being on the show appreciate all your insights on m.f. global as well as europe how intertwined everything is and the rest of it all that was karl denninger he is author as well as a blogger on marketing or not on. all

right we have a reality check for you today because we have taken a lot of time on this show to question what price americans are really willing to pay what are they willing to sacrifice in order to change some of the economic problems that this country faces it's something that our viewers have often pointed out in the feedback to us for example when we were covering this on black friday when people talk about wanting more jobs and wanting jobs for millions of americans who are unemployed but then at the same time you hear people complain about manufacturing going overseas to china they want cheap goods made in china or made cheaply in other countries like that one example that we want to point out we want sexy for cheap victoria's secret of course it's known for its fashion show you're watching they're famous for all of those gorgeous models they're called angels this of course translates into victoria's secret as

a mall staples selling push up bras and larger a all over the country does about four billion dollars in sales a year and they have about a thousand stores and they do about a billion dollars a year in their direct business that's according to their website now it's sexy glamorous brand that you're buying into for is cheap is eight dollars and fifty cents for a pair of cotton undies certified as fair trade maybe you know in blazoned with some leopard print but reportedly they come at a higher price than that. there is no such thing as a free lunch and in this case it looks like that price is abusive child labor bloomberg spent more than six weeks in west africa documenting the exploitation of children laboring in a free and fair trade excuse me a fair trade farm fair trade ok a farm in burkina faso they found that the last season's crop was all bought by victoria's secret and the problem is much wider than that listen to this study done

in september two thousand and eight and that there was an average of one per household across the country with producers and you're getting. some of them were. some of the more malnourished. none of them were paid. none of them were paid they are allowed to go to school and it's all because of this according to bloomberg paying premiums for organic and fair trade cotton has created new incentives for exploitation ok fair trade is a growing business but farmers are saying that they cannot grow ethically source cotton without forcing children into their fields now i should mention that victoria's secret parent company is looking more into this report but it certainly makes you want to question anything that you see that is marked as organic and fairtrade.

all right we do not want to leave you on a somber note after all of the kind of the you know not so uplifting news that we've been talking about so let's talk about some lighter stuff and i want to bring in our producer dmitri kofi anna as well as shanna donahoe in the control room to help me out because as we know the u.s. is headed toward a possible government shutdown again lawmakers have trouble agreeing on anything. and what the debt of course is one of the huge problems there the fifteen trillion dollars is a staggering amount. one solution citizens have taken measures into their own hands a miami man will do his house worth a million dollars to the u.s. government to help eliminate the country's growing debt so he's doing his part

uncle sam put the house up for auction the winning bid was one point one seven million dollars the man also threw another million dollars to the government so is this really what this is come to that the government can't solve its own problems and now rich people are willing their houses to the government i feel that this story is true. it was reported i mean i feel by feel by i don't mean to be mean i feel bad for the guy who's kind of a sucker talk you have right like you got almost to the morley of the dead i don't i'm not here and i'm not saying i mean it like i honestly think if you're going to give your money to the government when the government stealing money on the other side of everything and you've got people who are stealing money and then going to government as we're bailouts and we're going to give them your house you could find something better than we the house give it to so even if you don't have a family someone you drank coffee with or you like just giving somebody else think of the government will because not only is one million dollars i mean pretty much nothing when it comes to the debt but i'm just really curious to know if actually this money goes to the debt or if it just you know goes to whatever random coffers or earmarks are even know if you're going to oversight is there on donations or so

security fund gets you know gets raided and it doesn't get used for were supposed to so why would you assume that giving money for government to go to. dan and what would be a better use for this guy's money and house i don't i mean i'm not sure if there's a honestly. if i had that much money and i donated to the government i don't want to have to do with it you have to be here again what are you going to do was going to you know if you would get if you don't have anybody if you don't have anyone to give your house to or to give this money to why don't you just get to the government because that you've lived in this country with your freedoms for however many years. i don't know i mean it was there and we're going to learn. i know you're going to sideswipe us with that i don't know i would rather see people give it to their cat like that rich person in italy that you like that story of the rich and not worry about the government. when i refer to you are i writ on let's stop hammering shannon. well we just know that breaking news just during our show

the defense authorization act did pass it was voted on by lawmakers today so maybe that means that more money and funds are going to go into things like this mysterious and large object that made its way across kansas on monday and caused quite a stir take a look my first thought was obviously a u.f.o. a huge thirty two foot craft of some sort wrapped in tarp and those mystere this is the transport company who called chair donna reed for help. told us that it was a an aircraft and that they had explored other ways to transport them but this was the best way for them to do it and asked us not to say a whole lot about it. ok so what was it was it a u.s. poet sure looked like one ok now it was a drone it was an export seven b. an unmanned drone made by northrop grumman that was heading from california to an

aircraft carrier in maryland so now we don't have u.f.o. sightings we have drone sightings and drones falling out of the sky and it looks like hey only more funding is going to be going their way now that this monstrous defense bill has been passed right. through your well and i mean the fact that these things are falling out of the sky now and it kind of makes you wonder you know how many of these things were actually. drones or whatever else of the pentagon a good point because look at this thing i mean that's scary i mean and this doesn't follow directions very well you said it was said don't talk a lot about it makes me want to call the news good they're doing their part shannon what do you think of the the u.f.o. drone first they were north dakota spying on people allegedly stealing cows now they're just dropping from the sky in kansas three million dollars if they keep on making drones that look like u.f.o.'s there are going to be so many more u.f.o. sightings just videos online shannon this is where your million dollar house is going we're going to start a defense contractor that developing drones to drop over your house and cans as

opposed to cost that much and i'll get my hammer any hurry get yours make that ready because we got to go that's all we have time for thanks so much for tuning in you can follow me on twitter at lauren lyster and check our youtube channel at youtube dot com slash capital account as for now we just have to tell you good night. wealthy british style sun. it's no time to. go to. market. why not a candle. find out what's really happening to the global economy with max cause or for a no holds barred look at the global financial headlines tune into kaiser report on

r g. p fifty if he feels the. need to meet. folks.