U.S. Sanctions Threatening Your Portfolio!

You may not have gotten a private briefing about the risks that the U.S. sanctions on Russia could have to your portfolio. But some hedge fund and mutual fund managers did. They received private briefings from the Treasury and the National Security Council.

It’s probably safe to assume they have a better idea than others what could happen next in the imbroglio over Ukraine, and they have adjusted their risk accordingly.

Here’s the way Bloomberg reported the story:

“Officials from the Treasury Department and the National Security Council met in Washington with mutual-fund and hedge-fund managers, according to a person who attended. Their comments sent a message that more sanctions are on the way and that investors, if they were concerned about the impact, should manage that risk, said the person, who asked not to be identified because the discussions weren’t public.”

We all know there is a very real risk of these sanctions being ratcheted up. There is no need for private briefings to tell us that. There is no need for the National Security Council to participate unless the briefing goes deeper than what we all know.

Washington officials recently gave big-money managers a private briefing on the risks of U.S sanctions.

I find this disturbing. If the government is sharpening the knives of policy options, every market participant should know it, without prejudice or favoritism. Or those options should be private.

Isn’t that what insider trading laws are all about?

Let me give you another example of a private briefing we know about because of a participant who similarly asked not to be identified.

In July 2008, with the mortgage market crumbling, Treasury Secretary Hank Paulson was assuring both the public and Congress that government intervention in Fannie Mae and Freddie Mac was unlikely. The New York Times wrote that on July 21, Paulson told its editors and reporters that he expected that the results of an ongoing inspection of Fannie and Freddie would reassure investors.

That was in public.

In private it was a different story.

Bloomberg reported that the same day, July 21, in a private meeting with Wall Street heavies and hedge fund managers, including some of his former Goldman Sachs colleagues, Paulson discussed a Treasury Department plan to place Fannie and Freddie in conservatorship, a plan that would wipe out common and preferred shareholders.

Talk about a profit opportunity. It was material information and it was non-public. By any reasonable definition, that would constitute inside information.

Two weeks later, the conservatorship was a fact and share prices of both dropped below $1.

In the Ukraine face-off, we are left to wonder on our own just how high the stakes will be. The Geneva agreement, fashioned last week, is apparently crumbling. The U.S. ambassador to Ukraine, Gregory Pyatt, says Russia has “days, not weeks,” to abide by the accord. And a second U.S. warship has been dispatched to the Black Sea.

For its part, Russia calls actions of Ukrainian leaders and fighters “absolutely unacceptable,” and demands the U.S. take “responsibility for those whom they brought to power and whom they are trying to shield.”

Now, let me close the circle.

I haven’t just dropped the story of Paulson’s provision of inside information to cronies because I think we should all know about it — although we should — but because another event at the same time sheds light on how today’s sanctions can blow up in our financial face.

In the fall of 2008, China held $1.2 trillion of Freddie and Fannie mortgage bonds. The BBC’s economics editor, Robert Peston, says that Paulson told him that he learned that Russia had approached China about the countries jointly selling their U.S. mortgage securities. Paulson certainly understood the vulnerability of the U.S. to such a coordinated act and the deep economic chaos that America would suffer from it.

It is an awareness not widely shared.

In talking with Ron Paul about the risks of escalation of the Ukraine sanctions this week, Dr. Paul wondered aloud if all the Nulands and Kerrys and McCains of Washington have any real comprehension of just how precarious our own situation is.

Probably not.

For the rest of us, it is sufficient to recall the narrative that it only took the failure of one institution in 2008, Lehman Brothers, to trigger the chain reaction of the crashing stock market, home foreclosures, unemployment, and the economic consequences that continue playing out today.

Princeton professor Harold James was cited in a recent Telegraph column, putting the failure of that single investment bank into perspective. “Lehman was a small institution compared with the Austrian, French and German banks that have become highly exposed to Russia’s financial system. A Russian asset freeze could be catastrophic for European — indeed, global — financial markets.”

The events in Ukraine are racing toward next month’s presidential election. It is not likely to be a peaceful affair. Even without the benefit of a private briefing from the NSC, it is clear that reactions to these fissionable events can make gold a critical part of your investment portfolio.

Best wishes,

Charles

P.S. For the real story on the Washington political scene and economic climate, as well as timely suggestions to protect your wealth and restore your prosperity, give my Freedom & Prosperity Letter a try.