This page has been archived and commenting is disabled.

A default that isn’t a default and a sale that isn’t a sale

Bruce Krasting's picture




 

A default that isn’t a default and a sale that isn’t a sale

By Bruce Krasting

One of the biggest frauds of the past few years took place yesterday. The International Swaps and Derivatives Association (ISDA) confirmed that no “event of default” has occurred with the Greek debt restructuring, therefore no payouts on any outstanding Greek Credit Default Swaps (CDS) contracts are due. 

The following are just a few of the links this morning on those who disagree with the ISDA. I particularly liked Barry Ritholz’s comment, "Bullshit."

 

.

I wonder if the ISDA decision was not intended to end CDS contracts as a tool used in global finance. That certainly will be the consequence. Who in their right mind would buy an insurance policy on their sovereign bond exposure, knowing that the outcome is rigged and no payout can ever be expected?

I’ll go on record with this one. In less than one year, the bankers and political leaders in Europe will come to hate the ISDA decision. By destroying the private market for sovereign risk insurance, they have made it certain that Spain, Portugal and Italy will be locked out of the global bond market. Global investors were already shunning these countries. The ISDA decision on Greece will just make it worse for other countries that are considered potential default candidates.

There was another development yesterday that had parallels with the ISDA decision on Greece. The US Treasury sent out an email:

 

This is a technical discussion on Internal Revenue Service (IRS is Treasury) rule #382. This rule spells out how a company's Net Operating Losses (NOLs) are treated in the event that the company is sold to a third party. Rule 382 was introduced in 1986. The initial intent was to limit the sale of a company’s tax losses. Treasury had this to say about the importance of rule 382:

It is a longstanding principle of our tax code, which is designed to measure taxable income more accurately over time.

Rule 382 is longstanding, and it does measure income more accurately (and fairly).

There is no dispute as to what happened in 2009. A number of very large US banks went tapioca. Banks like Citi and BoA (and many others) would have had to close up shop if the government had not intervened. If the big banks were shuttered, it would have had very significant and lasting consequences. So the government implemented TARP. The government’s initial investment in the banks was in the form of preferred stock. The "Pref" was convertible to common (and later it was, for the most part, converted). Through this process the federal government became the TARP banks' controlling shareholders. To insure that the banks were doing what their new owners (the tax payers) wanted, the Treasury inserted individuals at the banks in supervisory positions.

What took place in 2009 is a classic definition of Change of Control. The active intervention by the Feds coupled with the public ownership/control of a majority of the common stock of the banks was functionally a sale.

If the transactions were treated as “sales” (which they were), rule 382 would have been triggered causing devastating consequences to the banks. The banks had hundreds of billions in losses (NOLs). The financial future of many of the TARP banks dependended on their ability to use the old losses to shelter future gains. Treasury agrees with that conclusion:

Treasury determined that guidance was necessary to clarify the scope and applicability of Section 382.

.

The Notices provide that Section 382 does not apply to the government’s investments—both its purchase and, within strict limitations, its subsequent sale of shares in private companies.

With that, the usual financial consequence of the change of control/sale that was precipitated by TARP were waived. This decision saved the banks. Treasury concurs:

Allowing those companies to keep their NOLs made them stronger businesses.

The US banking system and economy would look very different today if rule 382 had been applied to the change of control of the banks in 2009. Without the NOLs, the old banks had no assets. But the NOL’s were allowed to be retained; they were treated as an “asset”. This saved the banking system as we know it.

Separately, the administration is crowing about the "success" of TARP, and how little it cost:

 

 

In measuring the costs, the administration fails to include the losses that the government (aka the taxpayers) incurred as a result of the NOLs. The NOL’s are a backdoor bailout that the (now profitable) banks can use to avoid the taxes they would normally be paying.

Treasury makes an impassioned defense of its decision to allow the banks to avoid the 380 trap. I’ll let you decide if they make a convincing argument (Link).

The last sentence of the report sums up Treasury’s whole case:

The IRS Notices interpreted the law in the best interest of taxpayers.

This is the last sentence from the ISDA’s statement (Link) in defense of its decision on not calling a default on Greek debt:

In sum, we think the credit event/DC process is fair, transparent and well-tested. There’s simply no evidence to the contrary.

I think both of these statements are bullshit.

.

.
 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sun, 03/04/2012 - 15:06 | 2222092 blueridgeviews
blueridgeviews's picture

Does anyone think that their Credit Default Swaps are worth anything when TSHTF? Might as well cash them in ans kill the market place for them.

Sun, 03/04/2012 - 11:19 | 2221613 fallst
fallst's picture

So, All countries can now haircut their central banks, Sorry , Rothchilds, your 500 Trillion goes to 480 Trillion, Get Over It.

Looks like the CDS vehicle , done blew hisself up big, Sorry Suckers!

Told You someday All CDS will be Null and Void, just return your insurance premiums received, back to Your Now UnProtected Counterparties, Thanks.

So, the $700 trillion CDS souffle, will now fold up and go home? Please?

Sun, 03/04/2012 - 13:24 | 2221839 covert
covert's picture

doublespeak has always been the political way.

http://expose2.wordpress.com

 

Sun, 03/04/2012 - 11:06 | 2221591 XtraBullish
XtraBullish's picture

This is precisely why the current fiat regime is doomed. All currencies that play in this shitbox, ponzi-schemed, fraud-ridden circle jerk will be jettisoned. Hard money (Ag and Au) will continue to replace dollars, pounds, yen, krona, drachmas etc etc etc until the attempted confiscation occurs creating massive civil unrest and unprecedented capital outflows from the offending nations. 

 

Then again, go read Atlas Shrugged again and the pattern is all-too familiar. Government = The Banking System = The Legal System. Contract law is now "Null and Void" whenever and whereever it challenges the solvency of the banks (translation: "power").

Sun, 03/04/2012 - 10:58 | 2221580 Gold Dog
Gold Dog's picture

I am now selling insurance on everything!

PM me if you want some cheap...better than Gieco!

Cash only.

Love,

Dog

Sun, 03/04/2012 - 10:22 | 2221537 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

"Just the basic facts, can you show me where it hurts?"

The markets have become, Comfortably Numb.

Sun, 03/04/2012 - 08:53 | 2221472 NuYawkFrankie
NuYawkFrankie's picture

1st rule of gambling - oops! -  investing :

The Bank can change the "rules" any time it wants

Sun, 03/04/2012 - 08:52 | 2221468 SAT 800
SAT 800's picture

Excellent. You report the news the people need to know, and it's understandable.

Sat, 03/03/2012 - 15:03 | 2219942 geotrader
geotrader's picture

If the ISDA says there is no default, who are we to disagree?  They know what they are talking about much better than we do.  

 

</sarc>

Sun, 03/04/2012 - 06:08 | 2221378 Boris Alatovkrap
Boris Alatovkrap's picture

Please for Boris, close XML tag. Cannot tell where it sarcasm begins and is ends.

Sat, 03/03/2012 - 10:53 | 2219542 bigkahuna
bigkahuna's picture

The ground is just starting to rumble.

Sat, 03/03/2012 - 10:53 | 2219540 Fix It Again Timmy
Fix It Again Timmy's picture

Ah, Glasshopper - the beauty of rigged markets is that you can do whatever you want.  Contract law?, "phhht", who needs it? 

Sat, 03/03/2012 - 10:28 | 2219525 Stuck on Zero
Stuck on Zero's picture

Ever try to collect disability insurance?  Welcome to the world of insurance.

Sun, 03/04/2012 - 06:14 | 2221379 Boris Alatovkrap
Boris Alatovkrap's picture

"Welcome to the world of insurance"

 

No, is welcome to end of world of insurance, and is end of world of Euro Debt Bonds. If cannot pay default benefit, no one is buy that insurance. Insurance is kaput! No insurance, who is buy Euro Debt!?

 

Welcome to SOVIET UNION - can count on nothing except long lines!

Sat, 03/03/2012 - 06:03 | 2219380 etresoi
etresoi's picture

... and a government of the people, for the people and by the people is not.

Sun, 03/04/2012 - 08:56 | 2221473 SAT 800
SAT 800's picture

Common, that was Public Relations Spin in the first place; you're supposed to be able to figure that out. Government exists to rip off the people and schmooze them along so they don't revolt; that's all.

Sat, 03/03/2012 - 05:51 | 2219375 canuck
canuck's picture

I find any discussion of Tobin taxes for instance, completely irrelevant. Even a .0001% Tobin tax would be too much for the mechanics and administration of the system. Not that we're discussing them here, sorry, tangent.

Sat, 03/03/2012 - 05:44 | 2219371 canuck
canuck's picture

But if I was an industrial company I would have never limited the financialization or hedging of the company to a couple of complex derivatives. Derivatives just ride on top of everything else and are the first that need to go or be severely regulated. It's in the name.

Sat, 03/03/2012 - 05:40 | 2219369 canuck
canuck's picture

'Industrial' companies are totally disadvantaged in the whole scenario if they weren't already and can count on having their weakness manipulated. Many of them are turning themselves into financial companies so they carry the same risks as the banks when push comes to shove. Just a thought.

Sat, 03/03/2012 - 02:01 | 2219250 eatthebanksters
eatthebanksters's picture

So when is the shit going to hit the fan?  Will the sheeple ever stand up to these guys and the lies the tell? What will be the event that infuriates the masses to the point that they rage against the machine?  I believe if people really understood what was going on they would be rebelling in the streets right now, but the mindset of the entitled masses is to watch the Oscars and play video games, comfortable in their ignorance.  When it all is to late and the shit really hits the fan, it will be the ugliest time in the history of mankind.  I only hope that the first sacrifices are the likes of the crooks and liars that conspired to fuck everyone else for their short term personal gain. 

Sat, 03/03/2012 - 01:36 | 2219232 GeoffreyT
GeoffreyT's picture

Both the Rule 382 and ISDA outcomes should reinforce in the public mind that the overlords no longer feel compelled to even bother coming up with plausible justification for why they decided to fuck you in the ass.

They just have to cobble together a press release, e-mail it to Bloomberg, the NYTimes, the WSJ and CNBC, and it will be parrotted as Holy Writ.

 

In a couple of years when the amounts are in the trillions and the thing being justified is that they decided not to prosecute anybody who ever worked for Goldman Sachs for anything ever... the press release might be even more frank:

 

"Treasury spokeperson Vlad Tepesbergstein continued to Obama administration's continued laudable policy of transparency when asked today about new SEC rules that exempt any current of former Goldman Sachs employees from being indicted for anything, ever.

In a question and answer session that is being widely praised for its frankness and clarity, Mr Tepesbergstein - recognised by all journaliss as a genius and a super-hyper-maestro - had this to say in response to questions:

'Why did we feel this was necessary? Because fuck you, that's why.'

In other news, The Goldman Sachs Industrial Average rose to a new high, while the G&S500 failed to hit a new all-time high by a single point. Sources at Goldman Sachs say that this was an error and that the numbers will be revised in the post-market to reflect the new 'every day must see a new nominal high in all indices' rule promulgated by the SEC last year."

Sun, 03/04/2012 - 10:53 | 2221569 Gold Dog
Gold Dog's picture

GT,

Hilarious and true!

"..because fuck you..."

Coffee out my nose, thanks!

Dog

Sat, 03/03/2012 - 01:32 | 2219227 GMadScientist
GMadScientist's picture

Yup, that's some serious Calvinball.

Rigged like a jiggermast'd frigate.

The fact they kept their NOLs and hid their depreciated bases with FASB changes is beyond 'bailout'; it's a do-over and they're still screwing it up.

 

Sun, 03/04/2012 - 10:25 | 2221541 disabledvet
disabledvet's picture

just because the Fed is saying "create another bubble" doesn't mean you "created the right one." Europe for example...

Fri, 03/02/2012 - 21:59 | 2218845 vinoverde
vinoverde's picture

well, duh. I have been telling anyone who cares to listen that US Treasury CDS's are pointless. Lets see, the US Treasury declares a state of default...okay think about what else might be going on in the world about that time...not good right? Any sane counterparty will tell you to get in line, and maybe when the sh*tstorm blows over and we are both still solvent, we'll talk about settling your claim. Contract is complete bullshit.

Fri, 03/02/2012 - 22:38 | 2218923 HungrySeagull
HungrySeagull's picture

No one has Claim.

Except the Fed.

Where does that leave the rest of us? Hmm?

I managed to read everything and say to myself no one could stack bullshit this high back in 2009 and each year it seems something along comes down the yellow brick road with all the little ones saying "We are in the money, we are in the money."

After the balloon has left and all the munchkins disperse and have time to think over the brave new world....

I would think they would go to war.

Do I even dare think that anyone with a pulse who bought a mansion a few years ago and is now underwater and insolvent in addition to be heavily indebited from trying to sustain a family plus carry the costs of a Student Loan to "Retool" into a lesser employment if any can be found at all?

What then? Under the rule presented above... "Poof" problem solved. There fore the USA is leading the world all over again.

What am I thinking?! This is theft plain and simple.

Who has claim.

Fri, 03/02/2012 - 21:19 | 2218765 Bansters-in-my-...
Bansters-in-my- feces's picture

EXCELLENT article.....

Call them like ya see them.

The corrupt,lying,thieving,cheating fucking bankers.

Sun, 03/04/2012 - 08:57 | 2221475 NuYawkFrankie
NuYawkFrankie's picture

What happened to sock-thucking?

Fri, 03/02/2012 - 20:11 | 2218643 donsluck
donsluck's picture

I believe we may be reaching a PM sell moment. If interest rates actually react to the upcoming Greece default by way of vaporised CDS insurance, that will finally kill the PM market.

However, there is also the chance that with viable private investors abandoning the sovereign debt market, the central banks will be forced to buy up the debt themselves, keeping interest rates low and powering the PMs higher.

It has been thus since the early '90's. It's either hyper-inflation or hyper-deflation. There are only two safe investments, cold hard physical cash and cold hard physical PMs.

Sun, 03/04/2012 - 09:09 | 2221482 SAT 800
SAT 800's picture

First you need to understand what you're talking about. The "Interest Rates" that killed the first big PM party, that came in under Volcker, were actual US Dollar interest payments on US Treasury Bonds; These interest payments, combined with the fact that you were going to make 80-90% profit on the resale value of the bond, made this a once in a lifetime opportunity. Essentially, Volcker forced the Federal Government to pay for its criminal enterprise of inflation and make the Bond Holders Good. US Long Bonds far out performed the stock market and everything else on the planet for 10-12 years. This will never, ever happen again, it's completely out of the question. The PM market reacts to uncertainty, fear, and loss of confidence; bullishly. A greek default will not produce a contract from the US Federal Government to pay you any useful amount of money; eg. a bond that pays more than inflation. There is no danger to the PM market in the Greek prolem.

Sat, 03/03/2012 - 01:20 | 2219215 FeralSerf
FeralSerf's picture

Interest rates cannot go up significantly because America doesn't have the wherewithal to pay for higher rates and can't reduce spending.

We are now trapped into QE until the system totally resets.

Sun, 03/04/2012 - 09:12 | 2221483 SAT 800
SAT 800's picture

That's right. There is no one to pay the interest that would attract people away from the PM's. That person, or entity, doesn't exist. The Central Banks are well aware of this; ZIRP isn't an accident, it's what the market will bear.

Fri, 03/02/2012 - 21:22 | 2218771 disabledvet
disabledvet's picture

i agree...but my view is that "the tanks rolling into Athens" will do it. i also forsee a second major government intervention vis a vis the banks to happen coincidently to said "first action" (which is inevitible--this "train" so to speak--since the trains have stopped running their for quite some time now--have left the station long ago on Greece) in the US banking system necessitated by total financial mayhem in the euro-zone. "cold, hard lead" could be the operative phrase in that part of the world for a long, long time--and it could happen as soon as this weekend as well.

Fri, 03/02/2012 - 19:53 | 2218600 Coldfire
Coldfire's picture

1. Identity of actual individual members of ISDA EMEA DC: secret.

2. Minutes of the meeting determining imminent Greek failure to repay in full on time not EOD: secret.

3. Evidence - if any - of substantive conflict analysis under the Credit Derivatives DC Rules: secret.

Yeah, ISDA has a secret all right. But it is no secret that it is a fraudulent clown show.

Fri, 03/02/2012 - 19:42 | 2218571 bankruptcylawyer
bankruptcylawyer's picture

bruce,  you know i  love your posts. I am going out  on a limb here to say that you are , for the first time, betraying your naive belief in the value of markets. 

 

I'm as disgusted as anyone with governments generally , but who do you think cds has ever really benefitted other than the fraudulent fraudsters who are benefitting from serial bubble blowing of various bond and stocks?

 

you think that the destruction of the 'market' for cds is bad because hedgies and other investors will now 'flee' bonds by selling them and driving yields up?

 

seriously, why is insurance good? in 04' i took a business school class at columbia b-school on cds, and i was the only law student. I asked the professor, "so why is cds not bond insurance? " i swear to god you know what he said?

he said " because it's not regulated ". 

 

CDS was and remains a fraud. insurance of can and will be sold by unscrupulous private organizations who ALWAYS will plan on taking money up front and never paying it back. it is the very definition of moral hazard. cds is the worst of the worst and is responsible for helping blow the massive asset back securitization markets for decades. the quicker NO ONE buys cds the better off the bond market will be in the long run, because the sooner the bond yields go up the quicker we will get to where we are going. 

by defending cds as a tool to deal with risk, you are seriously offering the same arguments that all the tools who sell cds and make money off the cds market-----have been making for years. 

cds, and other forms of financial insurance create little if any value to the economic balance of society as a whole ,and arguable no value to anyone in the investing world except those who help use it to perpetuate a game of musical chairs that is derived off what used to be a healthy bond market. 

 

you are assailing isda for destroying the parasitic insurance market when the real problem is the giant fucking bubble of soveriegn  debt. you MUST BE KIDDING ME----YOU ARE NAKEDLY DEFENDING THE SPECULATORS POCKETBOOK TO THE DETRIMENT OF THE SAVERS POCKET BOOK. 

LET GREECE DEFAULT LET THEM ALL DEFAULT--AND DEFAULT QUICKER WITHOUT THE VENEER OF A FRAULENTLY FUNCTIONING CDS MARKET--- AND THEN MAYBE THE FED WILL SOONER BE FORCED TO PAY 5% TO MY GRANDMA---. 

 

this post dissapointed me. you are defending cds. shit, you may as well be defending high frequency trading because it provides 'liquidity' . 

Sun, 03/04/2012 - 09:25 | 2221495 SAT 800
SAT 800's picture

No-one exists to pay the 5% to your Grandma. The 5% itself does not exist. The financial system is over-extended. ie.; we're broke. growth has come to an end. No growth. no "interest". The sooner you understand this , the better. Grandma needs to get into Silver Bullion. NOW.

Sun, 03/04/2012 - 10:38 | 2221553 Hugo Chavez
Hugo Chavez's picture

If there is no growth then silver will fall. If no one exists to pay five percent returns then growth is a mirage.

Sat, 03/03/2012 - 06:57 | 2219394 DevilsPrinciple
DevilsPrinciple's picture

EXCELLENT post.

Sat, 03/03/2012 - 12:14 | 2219618 DeadFred
DeadFred's picture

True but a little more emotion would have been good.

Sat, 03/03/2012 - 02:03 | 2219252 Clowns on Acid
Clowns on Acid's picture

Is bond insurance regulated? What / who declares a "claim event"?

With CDS it is ISDA that dictates the "claim event", with bond insurance it would be anotyher "body" but the outcome would have been the same. The rules would have been changed.

There is no differnec when the laws are ignored manipulated for the benefit of the4 Fed and the banks (sorry to repeat).

Don't be a stoopid lawyer....

Sat, 03/03/2012 - 00:37 | 2219121 Thisson
Thisson's picture

As a lawyer who has worked in the commodities operation of a major investment bank, I mostly disagree with you.  CDS have a legitimate function (hedging).  The problems occur when the event-triggers are gamed for political reasons (as in Greece now) and when there is no central clearance mechanism (because that allows the AIGs of the world to sell insurance that they are incapable of paying out on). 

Where I do agree with you is that a hastier default would be a good thing.

Sun, 03/04/2012 - 09:20 | 2221489 SAT 800
SAT 800's picture

Let me fix this for you; CDS have a legitimate function; they provide make-believe insurance. "The problems occur when the event triggers are gamed for political reasons"---the event triggers will be gamed every time, because it has nothing to do with politics; there's no one to pay off on the contract. The guy who ran the AIG operation, the actual man who took down the world, knew very well that he was selling vapor ware. They were always incapable to pay out; there's never been and never will be an resource available to pay out. It's a game that makes it look all-right to hold the paper in the first place, (risk free). It's bullshit; it was bullshit to begin with, and it will be bullshit until it all crashes and we live in a world where responsible bankers pay attention, judge their risks with knowledge and are responsible for their mistakes. There you go.

Sat, 03/03/2012 - 03:20 | 2219310 Elmer Fudd
Elmer Fudd's picture

You think sovereign debt needs oddsmakers?  Talk about layers of uselessness masquerading as money.  Why dont we just bet on when your mum's gonna die too?

Fri, 03/02/2012 - 23:20 | 2219003 Milestones
Milestones's picture

Bruce, is to me one of the many reasons i've  been tuned into ZH for over 2 years. Having said that I was very impressed with your points and the obvious fire that you presented them. Now have passed that along; i'm going back to reread your piece.         Milestones

Fri, 03/02/2012 - 19:55 | 2218602 Yen Cross
Yen Cross's picture

I didn't catch much of that ECB ponzi money running to buy bonds. Last I checked the 800 leeches(banks), parked their cash (700B $) at the ECB for 25 basis points.

 Let's not for get the 100 basis points they pay for the privilege.

Sun, 03/04/2012 - 12:31 | 2221712 slewie the pi-rat
slewie the pi-rat's picture

Financial Sphere Weak Links

dougNoland points out (paste):

Ten-year Portuguese yields surged 101 bps to 13.42% (up 65bps y-t-d).  Italian 10-yr yields ended the week down 58 bps to 4.89% (down 214bps).  Notably under-performing Italy, Spain's 10-year yields fell 15 bps to 4.89% (down 15bps). German bund yields declined 8 bps to 1.80% (down 3bps), and French yields sank 17 bps to 2.78% (down 36bps).  The French to German 10-year bond spread narrowed 9 bps to 98bps. Greek two-year yields ended the week up 753 bps to 206% (up 8,100bps).  Greek 10-year yields jumped 127 bps to 33.33% (up 202bps).  U.K. 10-year gilt yields dipped one basis point to 2.14% (up 16bps).  Irish yields were little changed at 6.81% (down 145bps). [endPaste]

makes it look like portugal's next, doesn't it? herrS's stealth-recorded kiss0'death  L0L!!!  elmerFudd gonna skin him sum wabbitZ!

it looks to slewie like the ECB might have taken the bonds, here, in the LTRO

except for port&greece, these "sovereigns" can't be too disappointed!

the banks have been buying and have now rolled the bonds into the ECB for "3 years";  they probably "won" enough price-wize  in buying/bidding this bullshit up to make up for the 1/4% per year, at least for a good while

we'll hafta wait and see about the upcoming "default" call by the ISDA

on the one hand it might unleash holy financialTerror; on the other, the cB's have had well over a year to order and dress these contracts, so they should  be ready to cross the trades and clear the accounts, at least for those who HOLD GREEK BONDS

if you just hold the "insurance" i guess it will still be "negotiable", but i'm so ignorant, i ass-u-me you hafta fork over greekBonds to the banksters or there is no "swap"

beyond the actual bonds changing hands over these instruments, all else would just be "trading derivatives" in a "market" composed of nothing except carnivorous cartiliginous elasmobranchii

not entirely bidless, or the sharks won't get to eat!


Sat, 03/03/2012 - 12:18 | 2219621 DeadFred
DeadFred's picture

All that parked money will buy much more at the upcoming fire sale.

Fri, 03/02/2012 - 21:24 | 2218773 disabledvet
disabledvet's picture

that "sounds like a negative"--as in "before you stiff your creditors you better not be forced to got right back to them for 1000 times the amount you stiffed them for."

Fri, 03/02/2012 - 23:17 | 2218463 Widowmaker
Widowmaker's picture

Give the bank racket a penny and they will take all that you own.

I'm glad the crooks are dishing bullshit to other crooks.

 

Fri, 03/02/2012 - 18:59 | 2218451 Yen Cross
Yen Cross's picture

 Greece is like that cheap "loss leader", to prime the used car lot.

Do NOT follow this link or you will be banned from the site!