Sunday, October 30, 2011

Vaporware Credit Derivatives for Greek Debt

Lehman Brothers imploded in September 2008, due in part to kajillions in "off balance sheet" commitments gone bad.  After Lehman's fall, credit derivatives, already in a major run up, exploded in price for investors wanting "financial protection."

Congress and global financial regulators "reformed" credit default swaps, but that's little solace to investors who expected coverage on Greek sovereign debt for an expected 50% loss.  "Standard" CDS products ended up vaporware for buyers, risk-less cash for sellers, according to Tavakoli Structured Finance

“Customers” that accepted ISDA documentation when buying credit default protection on Greece are now discovering that ISDA defends the position that a 50% discount on Greek debt is “voluntary” and therefore not a credit event for credit default swap payment purposes according to its documents.

WaPo's Robert Samuelson reported Europe's solution to their debt crisis:  One element is:

Expand the existing rescue fund, called the European Financial Stability Facility (EFSF). It would provide insurance against losses of about 20 percent on purchases of European government bonds. This protection would supposedly reassure investors, who would continue to lend at low interest rates. An estimated $1.4 trillion of bonds might be covered.

So those selling credit coverage don't have to pay, but European citizens need to fill the gap?

Meetings on a rescue package included French President Nicholas Sarkozy, and German Prime Minister Angela Merkel.  Another Sarkozy, half-brother Olivier added his perspective:

Europe’s banking system is much larger than America’s and gets three-fifths of its funds from the “wholesale” market of big deposits, commercial paper and the like, writes Oliver Sarkozy, head of financial services for the private equity firm the Carlyle Group, in the Financial Times. If these big investors fled en masse, Europe’s financial system would collapse.

“The parallels to 2008” — when Lehman Brothers’ failure caused a panic — “are too stark to be ignored,” he says.
The last time everyone fled in masse, the Chinese government walked on their derivatives commitments. The U.S. Treasury funneled billions to American and European banks to keep the system solvent.  Why does Uncle Sam and the EU back fill for credit welshers, whether banksters, shadow bankers or the Chinese?

Someone's committing fraud, by selling products they won't, or don't have to back.  Holding firms accountable is exceedingly difficult, given their proprietors fund and control institutions charged with passing and enforcing laws.  Many are literally the law.  It's the PEU way.

(PEU stands for private equity underwriter, a particularly noxious form of shadow banker)