Notice the just over $1 trillion drop in notional interest rate swaps in the Citigroup 10K as compared to the 10q ending September 30th, 2007.

10K
http://www.sec.gov/Archives/edgar/data/831001/000119312508036445/d10k.htm

10Q
http://www.sec.gov/Archives/edgar/data/831001/000104746907008376/a2180583z10-q.htm

Then read it in conjunction with my hypothesis.

Gather round the campfire and roast some marshmallows we are going to tell some stories about Long Term Capital and the losses at Citigroup (C:US), UBS (UBS:US) and Merrill in 2007 (MER:US).

Stay with me.

At first I ran with Liechenstein tax evasion story. It was plausible. Published reports on the internet have tied the German firm Thyssen with Liechenstein and here in Canada that name keeps coming up in our infamous Schreiber/Mulroney scandal.

Then I remembered something. Do you remember when in Canada the RCMP said it had boxes of information on Bermuda accounts? Nothing came of that. It was a rouse designed to get you to capitulate. So I thought maybe it was going to be used as an excuse for banks to call debt.

Then I remembered something else. Liechenstein invested in Long Term Capital back in 2005. I don't have a link except to a Prudent Bear quick mention of an April 12th, 2005 Bloomberg story here by Samantha Lafferty. http://www.safehaven.com/showarticle.cfm?id=2907

Then you extrapolate a little from published reports. http://riskinstitute.ch/146490.htm

The three largest losses in 2007 were Merrill (MER:US), Citigroup (C:US) and UBS (UBS:US). It was blamed on that undefined term called "sub-prime". OTC derivative statistics from the BIS and others have never shown a drop in notional value except the quarter after Enron and the fourth quarter of 2007 suggesting very little unwinding over the past 10 years.

The first loss in 2007 was blamed on the Bear Stearns (BSC:US) hedge fund. That hedge fund used the Cayman Island courts to avoid scrutiny. Mr. Cayne, was a personal investor in Long Term Capital according to published reports and resigned this year after the losses. Bear Stearns was the clearing agent for Long Term Capital in the above story.

Merrill (MER:US) was the closest to the Long Term Capital and had the most exposure according to published reports. Mr. Komansky also had personal investments in Long Term Capital. Notice Merrill published the "term sheet" in the story above indicating their closeness. The CEO of Merrill also resigned after the 2007 losses.

Notice as well that SOC GEN was at the meeting in the above story. SOC GEN has been in the news of late. Most rationale observers do not accept the story.

UBS (UBS:US) - was an investor but more importantly Mr. Costas who went to run the Dillon Read unit was close to Mr. Merriwether. (Incidentally, coming back to the Liechenstein article that got me started - UBS sold the offshore mutual fund company Global Asset Management (www.gam.com) to Julius Baer in 2005 - which at the time was eye popping. LGT Capital and Global Asset Management had a relationship in that the funds often shared names - from my days offshore analyzing the Micropal Database that was later bought by Standard and Poor's. However, I don't know the exact nature of the LGT Capital/GAM relationship except that their was one. Incidentally, Julius Baer has been in the news lately with its' own troubles in the offshore world. UBS bought Paine Webber in 2000. The CEO of Paine Webber - Mr. Marron was also a personal investor in Long Term Capital Management. It also explains recent press reports that the German Bank Nordbank is suing UBS over the Dillon Read unit. There is a code among bankers that they don't sue each other.

Mr. Merriwether of course used to run Salomon's Fixed Income - hence the large Citigroup connection. Citigroup management also turned over in 2007 as a result of the losses like Bear Stearns and like Merrill. Citigroup (C:US) had a drop of just over $1 trillion in notional OTC interest rate swaps between September 30th 10q and the December 31st, 10K.

LTCM had over $1 trillion in notionals according to published reports. 10 years ago was 1997. They were active in 10 year swaps. Very active. Swaps don't get unwound. They go to maturity and the losses are reported at maturity. I may have been green when I started at an interest rates swaps desk, but I do know that with certainty.

It also explains how Lehman (LEH:US) and Goldman (GS:US) didn't report "sub prime" losses in 2007. They weren't involved in Long Term Capital.

It also explains some of the swap widening activity including LIBOR we saw in the fourth quarter of 2007 and some of the action in the treasuries.

The question you have to ask yourself two fold.

Who do you trust?
How do you make money?

My answer is simple

Conclusions
Buy all the bullion you can carry. Who do you trust? Do you know who your counterparty is? 1 2 or 3 zeroes.

Hell of a campfire story wouldn't you say?