Jim Sinclair at his MineSet web site has a definition on non-recourse financing and how it involves derivatives.
(The way it works is that the production loans are secured by a sale of gold in over-the-counter derivatives either by the producer or by a third party on behalf of the loan with the short sales of gold built into the loan agreement and therefore secreted from general view.)
Gold mining companies raise money for mine or claim development by joint venture, banks loans, or sales of stock. Sinclair argues that non-recourse is sinister and gets a junior gold mining company into trouble and urges them to get rid of these type of loans.
Now why do I bring this up? Well, I see that Barrick and Placer Dome have been given the go-ahead for their merger. Both companies have used all the tricks to finance development and have used derivatives to hedge their production against price declines. The combined companies will have about 15% of the annual production presold at prices much lower than current market prices and have sold short 21,000,000 ounces of gold over the next ten years. A mark to the market on Barrick would show them to be $3 Billion off sides, meaning the asset has gone $3 Billion against them; their shareholders will never realize the benefits of rising gold prices on 21,000,000 ounces. That is 525 tons of gold. That 525 tons is how much Russia wants to add to their FOREX reserves and that is one fourth the amount that China wants to add to its reserves. Add to that, the central banks and bullion banks are short 12,000 to 16,000 tons and you have quite a bit of pent up demand!
Sinclair goes on to discuss Refco and he says still we have no reason for the sudden bankruptcy. After all, there was no money missing. Bennett, when it was foundt that he had been secretly juggling a personal debt to Refco of $425 Million, he paid the debt off. We are told it was a loss of confidence. Sinclair talks about derivatives and points out that when you have a buyer and a seller of derivatives and the price of the asset moves, then one side is an immediate winner and the other is an immediate and equal loser.
The greatest fear in this so called market for derivatives is the forced unlocking of the positions from total offset – one side a profit and the other a loss – to one account with the profit and another with the loss and both segmented from each other.That in bankruptcy would leave the loss totally exposed to someone and that someone need not be Refco. The reason for that is one account, maybe the house, held the profit and another cooperative party may have held the loss. If an account is frozen when called an asset the house is trying to protect itself for some complex reason. The OTC derivative game in both unregulated, non-transparent and down right dicey.
In a bankruptcy, the judge should secure all assets away from all liabilities which inherently means the disaster of all OTC derivative culprit’s worst nightmare.
From Reuters we learn that US Regulators are concerned that that the Refco Securities unit had recently stopped closing out customer accounts and returning property and assets.
Refco’s securities unit — in a filing that seeks court permission to amend the process for closing accounts — argued that the costs and expenses of a SIPC proceeding would be damaging and potentially hurt its debtors by eating into the existing net equity value in Refco Securities of more than $50 million.
This reads to me that Refco has some problems with derivatives and unprotected “losers” in those derivatives.
Refco derivatives Mover Mike