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A default that isn’t a default and a sale that isn’t a sale
A default that isn’t a default and a sale that isn’t a sale
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.
.
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massive fiat manipulation / fog of war / iBombs /......
This system has lost all credibility, FED, US Govt, TBTF, ISDA, the notationals, the money fund managers, the media, the congress; all of them participants by omission or by commission to the biggest scandal of capitalism since its inception.
US capitalism, as lead country, has been irredeemably crippled; along with it the whole reserve currency and Euro money co-reserve status. Its a huge scrap yard of massive fiat manipulation.
Enuff said.
I get the feeling you may be having problems maintaining your "full faith and credit" in your Federal Treasury.
"Bullshit" was being kind. The prostitutes responsible for these decisions should be jailed. As I said yesterday, who would buy a less than AAA bond or any CDS, after the ISD actions. And who wants to be in private business when crony businesses don't have to play by any rules?
IRS sec 382 and the CDS issue both prove that we have a government of the banks, by the banks and for the banks. Just like they planned with the help of prostitute politicians.
But most of the sheeple just read the headline and then go to reading every last detail of Justin Bieber or Jessica Biel or whoever it is that is the starlet du jour. So most people don't even realize they are being bullshitted over and over and over again. And they won't realize it until it is way too late.
I highly doubt Jamie Dimon wishes to be categorized as a "sheeple."
How 'bout "SheepFu*cker"?
DaddyO
speaking of sheepfucker...where is sheepfucker these days?
Leave Jessica Biel out of this!!! She's hot.................and she didn't create CDSs and probably thinks NOL stands for the brand "Night Out Lingerie".....
But you can keep trashing that little Bieber kid all you want................
It seems to me that the triggering event for a CDS should be when the country fails to make a payment that was called for under the original terms of the bond. As long as Greece is making its payments, I wouldn't consider it to be in default.
However I would certainly expect CDS's to be triggered in a few weeks if the PSI restructuring goes through. If the CDS are not triggered by that, it would be a HUGE deal because everyone who claims to have hedged their PIIGS exposure would suddenly have their hedges kicked out from under them. Massive chaos might be triggered as no one would know whether their counterparties were solvent.
We can hope that since Greece is a relatively small country and because the markets have had over a year to prepare for this, that triggering of Greek bond CDS's will go fairly smoothly. However you never know. It is possible that someone out there might be quietly sitting on a much larger Greek exposure than the markets are aware of. But if the PSI goes through, companies will be forced to mark their Greek losses to market and pay up on their CDS contracts, and we will see if anyone has been swimming naked.
The moment of truth, CD-Day is coming soon.
The fifty percent haircut is not "the original contract of the Bond"; and furthermore, the original contract of the Bond did not include, "a fifty percent haircut". What part of this is it you're having difficulty understanding?
What will most likely come under intense pressure on CD-Day is contract law. Because the sovereigns will be forced to blanket nullify CDS contracts that promise to upset the carefully loaded EU apple cart. They may have to do this in advance, as well. They may intend to freeze all CDS settlements "until further notice" and do so without much explanation, damned the consequences.
It is hard to imagine how this cat is supposed to land on its feet once it is shaken from its tree.
I cannot really believe the world would allow over centuries of contract law to be violently overthrown by a some punk ass bankers. Just look at all the contracts that cover the U.S. government for just a small example--international laws and treaties. KA-BOOM!! MIlestones
Third world dictators have commonly ignored the rule of law for decades. What hasn't happened is for any economy to thrive when the dictators tried to get their desired result by decree. Zimbabwe used to be a fairly nice country before Mugabe started ruling by dicate. The price of bread is too high? Make a rule that tells bakers what they have to charge... This sort of BS is not just death to markets but to the enderlying economic engine. The unemployment rate may go to 8% but that's because homeless people without landlines can't be surveyed.
Blu,
This may not be a cat.
It is the nature of a cat to always land on its feet om
I have often wondered if the virtual reality of all this drama might not actually change our perception of what is considered 'the real world'; but always came back to my faith in human intelligence and discounted this as a possibility.
It seems, however, with this news and the extreme CB intervention in PMs also being received so casually that the "virtual reality' may be perfectly acceptable by all as what is 'true and good in humankind'-----------------
Sorry, I can't go on.
I am truly quite stunned by this possibility and nearly embarrassed by this oldman's complete stupidity.
Never listen to an old fool om
Prior to the near complete destruction of morality and ethics in this once well intentioned nation, something like this would produce considerable outrage.
Now it produces no more controversy than a fraudulent layered Adobe document traitorously proffered as legitimate by the chief law enforcement officer of the country.
so then whats the purpose of having CDS ?
To open up a portal to "a dimension of endless pain and suffering."
Failure rewarded, perverted money, bullshit markets and record bonuses.
Actually, just record bonuses.
Because having insurance of any kind (even if it will never pay out and everyone knows it) is necessary for money managers to make risky (meaning here any) investments. CDS insurance is a checkbox that managers ask their employees whether it was checked off or not before an investment was entered.
Yes, that is silly. It's like small children making mud pies in the garden and pretending to serve them at tea. It is pantomime. It's not real food, you cannot eat it, and it won't keep you alive.
But then again, nothing in the financial markets is real anymore and has not been for going on 10 years (or 90 years depending on how you count them). Another fantasy more or less is business as usual ... literally.
That's exactly right; it's a pantomine. A charade of "safety"; it's the "accepted practice". Which, of course, means that no one ever thinks about it. It's also the diagnostic for a period of inflationary optimism; when these sorts of things "worked"; ie. glided along in blissful ignorance undisturbed by nasty reality. Now, it's the period of contraction, pessimism, deflation of expectation, at a minimum; these sorts of programs will become "obsolete". People will look back on this 15 years from now and say, "how could they have been so foolish?, why it was all as imaginary as global warming?. Merely another cycle in the drama of human foolishness.
See also, Insurance "Side letter agreement" scams.
To pay your banker overlords fool!
So what is the big deal? NOL is a bank bailout. Lending at 0.25% so banks can buy Treasury bonds at 2%, another bailout. Nothing to see, move along.
It seems the very least that ISDA should do now is tell us what a real credit event (in their not so humble opinion) would look like, so at least we will know when we get there. But, that would require a commitment on their part, and these Wall Street politicos are never going to commit to anything. That's about as far from insurance as you can get.
But, but, but ... we made money on TARP, right?
Elliot Management, on the ISDA committee, votes there is no default, yet are long Greek CDS. They will rightly be sued by their clients for lack of fiduciary duty.
But who owns the courts?
"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."
My further read on the ISDA statement was that the no event of default has occurred YET. And in that, they are technically correct, even though we know it is all 100% bullshit. They did leave the door open to reviewing after (I mean If, of course, cough, cough) the CAC clause is triggered, which it has not been yet - but almost certainly will be.
I would side bet even odds that ISDA will declare, they are just doing a little bit of can-kicking here, so don't get so excited, OK?
They will have to, or destroy the very industry they are trying to protect. And the tab is payable; the big investment banks have had time to slither and slide and back up and otherwise prepare to minimize the payout pain. Hell, they are only talking what - 3 billion now? Take it out of Jamies cigar fund...
that's why i still find all this odd. it really is like..."chump change" for these guys.
Really, we need to smarten up and I include myself in this statement...When the board of the ISDA is completely made up of those that benefit most from the selling and hedging of said CDS, what really was and is the liklihood of ever seeing any payout on a CDS unless the country is Tonga or a small Muni like say New Caanan, CT. We all need to realize that Lehman scared the living bejeezus out of every politician and that they will NEVER, read NEVER allow any type of default to happen whether they have to lie, change the rules, or throw money at it...this is the "New Normal"...
Nice post Bruce. I could'nt agree more with your "bullshit" assessment of ISDA and their actions yesterday. I left a post at their blog about the WSJ article and their rebuttal. (more bullshit) I'm suprised they actually put it up...Thanks!
http://ftalphaville.ft.com/blog/2012/03/01/905911/greece-cds-trigger-sad-2/
From Jim Sinclair
Dear Friends,
The history of this period will focus attention on two economic clutch type events. These events will have mandated the need for the construction of a new monetary system utilizing a virtual reserve currency traded only by central banks. This reserve currency will be related to gold via a global Western world M3.
An economic clutch type event is one that by its occurrence allows the world to shift gears and change into a new economic velocity and direction.
The first economic clutch event took place when the decision was made that the US Federal Reserve and US Treasury would not support a rescue of the prestigious investment firm of Lehman Brothers. By doing this, they threw that institution and all of its transactions in which it was the deficit other party into default via bankruptcy.
Before then the entire OTC derivative debacle had a simple but extremely controversial solution. The tactic would have been similar to the means of nullifying the effect of the historic failure of the Savings and Loan Institutions during the last great housing recession. This at hand solution was to net the entire global derivative problem into a singular institutions named the Derivative Bank. At that time all OTC derivatives which were established would be returned to the instance of establishment when obligations netted almost zero. It was the institution of Lehman as a bankruptcy that removed the ability to net out to near zero from the daisy chain of global derivatives. To bring the daisy chain of OTC derivatives to net the winner would have to place their paper winnings into the pool and the paper losers would have placed their paper losses back into the pool. This would have reduced the entire loss to only part of the earnings on the banking institution from 1991 (the birth of the derivative use globally) rather than the more than now 20 trillion dollars worth of liquidity required to fund the winners who have benefited mightily from that windfall we financed.
The forced flushing of Lehman Brothers is therefore the economic clutch event that brought quantitative easing to provide the rescue funds to finance the winnings of the global Western world financial system. The downshift was from 5th gear to 1st gear that nearly blew up the world economic engine.
We now have had the 2nd Western world economic clutch event that will shift the gears directly from the plodding along in 1st gear economically into reverse gear, therein blowing the transmission and engine simultaneously. This event is the ISDA blessing of the credit event which reduced the value of Greek debt to its holders by 70% without triggering a default. They have now made it virtuous to walk away from the once lest risk loans, loans to Western governments. Such a walk away is now deemed a credit event, not the dirty D word, default.
A pattern of action has been set in place now which takes QE, the gift from Lehman's economic clutch event, to QE to infinity, the direct result of the Greek economic clutch event that was declared via the International Swaps and Derivative Association. These Gods of Mammon declared 70% of the Greek sovereign debt to be valueless without guilt, sin or consequences.
Replacing the lost value from the sovereign credit event (non-default) in this paper selectively to the banking system makes unlimited creation of liquidity an act of virtue and blessedness.
To assume that other nations facing the same problems will not wish the same treatment is madness. To assume the private sector facing the same problems will not demand the same treatment is madness. Therefore QE to infinity is now deemed an act of virtue and blessedness.
A 70% haircut in the value of the Greek sovereign debt does not constitute a credit event defined as a credit default according to the most powerful financial entity on the planet, the ISDA. This group is more financially influential than governments today. This decision by the revered members of the Association's Determinations Committee has acted to prevent the notional value of all the credit default swaps, an OTC derivative, from becoming real value as would occur if the CDSs were called upon to function.
The ISDA has, according to MSM, taken offense to being described as secretive in its proceedings. The ISDA said minutes of the meeting of the committee would not be publicly distributed as the decision was unanimous.
What has occurred in what is now described as "the successful handling of the Greek problem" by the ECB is in fact a total disaster for mankind in its introduction of QE to Infinity as the blessed settlement to a problem that now is more severe than it was prior to the Lehman event. That problem is that the mountain of OTC derivative has not been attended to, but rather has grown to include the size of all Western world sovereign debt as it is all western sovereign debt that is now threatened by an event of default on a national level. That will simply occur regardless of whatever the ISDA says. Much of it will not be paid, period.
This enfranchised QE to infinity sets a floor via Chinese gold acquisitions to any reaction in price. Alf Field's price objective of gold at $4500 is by this 2nd economic clutch event now in the crosshairs of the gold price.
Gold prices staying high have now been guaranteed. Further to that, those intelligently managed gold producers internationally will shift to dividend payers of note, transforming the gold industry into the utility type equity of the future. Opinions expressed to the opposite are simple exercises in economic ignorance.
Gold's price reactions, when they do occur, will be violent and very short lived. This is fact.
Respectfully,
James Sinclair
Here's my approach to saying the same thing you just did:
http://www.youtube.com/watch?v=JoVL1Zs6WTw&feature=player_detailpage
The banksters will just come up with a new product such as NDIP's, short for nuclear destruction insurance policies and will only be payabe in the event of nuclear war and only if your immediate area is hit.
After I wrote that I immediately thought of the move "The Jerk" with Steve Martin. Anyone who has seen that will instantly recall the scene where Steve Martin was working at the carnival running the game stand and the whole rip off con game around the prizes. Take in $100 and give out $2.00 worth of crap. Fkn hillarious for anyone that hasn't seen this movie I highly recomend you watch it this wknd you'll piss your pants. No kidding.
Love the reference to the movie the Jerk. However, I preferred the advice Steve Martin received when he left his home down south to enter the real world.
1.) If you get it, see a doctor and get rid of it!
2.) Never trust Whitey.
3.) Lord loves a working man.
So basically, if you see a white banker (most of them) that isn't working (all of them), get rid of them as fast as possible and all of the crap they peddle (CDS, CDO, and countless other derivatives).
Love the movie as I always crack up at how simple the movie's humor was.
"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 must be catching on, that's exactly what I said a couple days ago. LOL. Fkn bastards. Insurance, insurance companies are all the same. They're the best thing in the world till you need them and are required to have it. They think all those premiums are theres to keep.
with all this intervention, a complete distortion of pricing.
Yes, precisely. The whole idea of "insuring" a risk-investment is rotten and currupt. Now I'm hearing radio ads for some lawyer gang that will "sue your broker" if you take an investment loss. What a kosher madhouse it all is.
a total mess that will unwind, maybe the mother of all unwinds.anyway watching HFTs trying to hit 13000 knockouts on the Dow. the 13000 swing trade is looking like easy money.
like clockwork
Hence the bond holders will still hold out on major haircuts and Greek CDS's are dumped en masse. I suspect the interbank fear gauges will start to tick up again i.e no one wants to take a loss.
Quite a pickle for the ISDA. If they declare a default event, the required CDS payouts would destroy the TBTF banks. But if they continue to pretend that no default occurred, no one is going to buy their non-paying insurance policies in the future.
There are no longer any solutions, only outcomes.
And bondholders who hedged their deals with CDS will be reticent to take haircuts knowing the insurance they purchased to hedge their bets is worthless. It's gonna get real intersting real quick.
These banks are TBTGAF....Too Big To Give A Fuck............there will be NO ISDA payout....
"I think both of these statements are bullshit."
another description of Govt by-passing all rules for elite groups is anarchy
that is Govts assured glide-path when people wake-up and stop swallowing the bullshit
It ain't government initiated, its total private sector play: the ISDA is the creme de la creme of private sector. THe FED is similarly private sector banking trust. So the whole crisis is a crisis of private sector banking gone mad.
The government sector is just a surrogate organisation to private sector since RR/Thatcher days. They gave them the keys to the palace. Now the politicians have been locked in; and the keys have been thrown away by the private sector Oligarchs, who don't even care to observe the rules they make themselves.
This is the greatest debacle of private sector capitalism. And there is no true government of accountability and independence since ....(well choose the date you like, it goes back at least to 1999, when Clinton revoked G-S).
Your avatar dreamt of this world, now you have its "magic" being displayed right in front of your eyes.