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The Banks Have Volunteered (at Gunpoint) To Get 50% of Their Money Taken - No Credit Event???
So,
the European joke has come full circle. Indebted nations borrow more
money to bail out other indebted nations who ask insolvent banks to cut a
50% off deal on the loans that were given to them, but the insolvent
banks will then have to raise capital which the will of course borrow
from the over-indebted nations whom they just gave money to. Get it?
Problem solved - BTMFD!!!
The rally is
based off of bullshit and an inability to count. After the voluntary
haircut (volunteered at gunpoint, may I add), Greece will still have
roughly 120% debt to GDP ratio with a declining economy. Unsustainable still. I would fade this rally with careful stops.
I
have went over the Greek debt tragedy in detail with subscribers and
things are unfolding exactly as I had anticipated. Before we get to the
Greek default rehash, let's peruse an email I received from one of my
many astute BoomBustBloggers.
I'm a lawyer (and investor). There is no analysis by anyone on the internet
about whether the announcement last night would in fact trigger CDS
payout. Rather, everyone seems to be accepting the claim by ISDA that
the decision would not trigger it. Because I can't find any legal
analysis worth reading on the internet
I decided to do my own research. In about 5 minutes I found a case in
the 2nd Circuit (USA) that explained to me what's going on with those
contracts. First of all, they are unregulated private contracts between
private parties. In order to know whether a trigger occurred you have to
read each individual contract. As a result, what the ISDA says about
whether a trigger occurred as to private contracts that are out there is
totally meaningless.
There is merit to this assertion since the ISDA contract is simply a non-binding template, often marked up to accomodate financial engineering widgets designed to increase profit margin and decrease transparency to clients and counterparties.
By the time all of the widgets are installed on some of these highly
customized deals, the original ISDA template is a non-issue.
What
seems to be the issue is whether there is considered to be "economic
coercion" going on if one of the events to trigger is "restructuring."
| Whaaattt!!! Coercion? What Coercion???!!! |  |
Furthermore, you have to not look at voluntariness in a vacuum but compare the (Greek) bond with the substitute being offered by EU to determine if economic coercion or true voluntariness
exists. For example, if the EU will give priority in payment to the
substitute it is offering and not the original bond, that is the proper
analysis in determining economic coercion/voluntariness
etc. My analysis here is based upon a very brief reading of the case
and I would need time to analysis fully. Also I'm not a financial
professional I don't understand all the implications of what the EU
announced. The reason I'm contacting you is because I believe that in
the coming days/weeks we will hear of entities that are buyers of the
CDS protection giving notice of a credit event to their counterparties to seek to collect on the CDS contract. If payouts aren't made lawsuits will be filed.
You
had better believe it. I really don't know why everybody is glazing
over this very obvious fact! Imagine if you bought protection on a bond
you acquired at par and you are offered 50% of it back (NPV) to be
considered whole while the CDS writer laughs at and says thanks for the
premiums... You'd probably break your fingers dialing your lawyer - out
of both the swap payments, the CDS payout, and 50% of your investment
that you thought (but really should have known better) was protected!
I
don't know what a US Court will decide as to whether a trigger has
occurred but there is a 2nd circuit case (the one I mentioned above)
that is the best I've found to give an inkling about this... I'm telling
you all this, because if I am right and there are claims that CDS was
triggered and CDS in fact gets triggered... [it should be made] public
so people start analyzing whether CDS was in fact triggered instead of
blindly accepting the drivel out of Europe that no trigger will occur.
That claim is obviously all about perception management not necessarily
truth.
As excerpted from A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina Wednesday, 26 May 2010
The
restructuring of the Argentina debt in default was occurred in 2005
when the government offered new bonds in exchange of old securities. The
government gave the option of either accepting A) a par bond with no
haircut in the principal amount but substantially lower coupon and
longer maturity or accept B) a discount bond with a haircut in principal
amount to the extent of 66.3% but relatively better coupon rate and
shorter maturity than in case of Par bond. If the bondholder accepted
A), for each unit of bond, one unit of Par bond will be allotted. If the
bondholder accepted B), for each unit of bond, 0.33 unit of Discount
Bond will be allotted. The loss to the creditor, which is decline in the
NPV of the cash flows, was nearly the same in both cases as the lower
principal amount in Option B was offset by better coupon rate and
shorter maturity. The price of the par bond in the market and the price
of the discount bond multiplied by the exchange ratio (real price to the
bond holder) were largely the same when they were listed in the market
in 2005.
The IMF estimated the average haircut (decline in the net
present value of the bond) was on an average 75% and the market priced
in most of this haircut before the actual restructuring in Feb 2005. The
prices of the bond in default declined nearly 65% between Feb 2001 and
Feb 2005.
One should keep these figures in mind, for in the blog post "How Greece Killed Its Own Banks!"I
ran through a much, much more optimistic scenario that wiped out ALL of
the equity of the big Greek banks. Remember, the Greek government
stuffed these banks to the gills with Greek bonds in order to created
the perception of a market for them. As excerpted...
Well,
the answer is…. Insolvency! The gorging on quickly to be devalued debt
was the absolutely last thing the Greek banks needed as they were
suffering from a classic run on the bank due to deposits being pulled
out at a record pace. So assuming the aforementioned drain on liquidity
from a bank run (mitigated in part or in full by support from the ECB),
imagine what happens when a very significant portion of your bond
portfolio performs as follows (please note that these numbers were drawn
before the bond market route of the 27th)…
image001image001
The same hypothetical leveraged positions expressed as a percentage gain or loss…
Professional and Institutional level subscribers (click here to upgrade) may access the live spreadsheet behind the document by clicking here (scroll down after for full summary, spreadsheet and charts).
Greek Restructuring Scenarios
There
are several precedents of sovereign debt restructuring through maturity
extension without taking an explicit haircut on the principal amount,
and many analysts are predicting something of a similar order for
Greece. This form of restructuring is usually followed as a preemptive
step in order to avoid a country from technically defaulting on its debt
obligation due to lack of funds available from the market. It primarily
aims to ease the liquidity pressures by deferring the immediate funding
requirements to later periods and by spreading the debt obligations
over a longer period of time. It also helps in moderating the increase
in interest expenditure due to refinancing if the rates are expected to
remain high in the near-to medium term but decline over the long term.
However, the two major negative limitations of this form of restructuring if applied to Greek sovereign debt restructuring are –
- It
solves only the liquidity side of the problem which means that the
refinancing of the huge debt (expected to reach 133% of GDP by the end
of 2010) will be spread over a longer time period while the debt itself
will continue to remain at such high levels. The sustainability of such
high debt level, which is growing continuously owing to the snowball
effect and the primary deficit, is and will continue to be highly
questionable. Greek public finances are burdened by a very large
interest expense which is approaching 7% of GDP. The government’s
revenues are sagging and the drastic austerity measures need to first
bridge the huge primary deficit (which was 8.6% of GDP in 2009), before
generating funds to cover the interest expenditure and reduce debt.
Why the Taxpaying Population of Greece Is Still Not Off the Hook, Start Looking Into Stocking Up On Their "Greece"!
Wednesday, 06 July 2011
...
Thus, even though the amount of funds required each year to refinance
the maturing debt will be reduced by extending maturities, the solvency
and sustainability issues surrounding Greece’s public finances, which
were the primary reasons for it’s being ostracized from the market in
the first place, will remain unanswered.
I'd like to make this perfectly clear and have absolutely no problem going on the record with it in full HD fidelity...
There
has been a large amount of capital lent to (and invested in) Greece.
The collateral behind (recipient of) said capital has devalued along
with popping of the asset securitization crisis bubble to such an extent
that it is a mere fraction of what it was valued at when said capital
was invested. What does this mean? Well, it means that no matter what
financial engineering scheme you attempt to wrap around it (and I happen
to be particularly skilled at financial engineering, so I should know),
no matter what socio-political financial
nomenclature you attempt to drape it in, and not matter how far you
attempt to kick said can down the road in a "delay and pray" tactic of
pushing the inevitable collapse past your particular tenure at the helm
in an attempt to make it someone else's problem... The only way out of
this for Greece, Portugal, Ireland and other profligate states is an old
fashioned reneging on its payback obligations. A plain vanilla default. The explicit action that unequivocally informs you in no uncertain terms - You ain't gettin' your money back!
The
chart above is an obvious reason why Greece not only has an inevitable
default in its future, but why the faster they default the better off
Greece is as a whole. Reference the test case known as Iceland whose
banks default on $85 billion, from Bloomberg:
Debt Raters Miss Iceland Rebound
The
credit rating companies that were too slow in predicting Iceland’s
economic collapse in 2008 may be underestimating the strength of its
resurrection.
Fitch Ratings said in May it may take two years for the island to shed its junk status, while Moody’s Investors Service and Standard & Poor’s give Iceland their lowest investment grades. That hasn’t
deterred investors from trying to buy twice the amount offered in last
month’s $1 billion bond sale as the island returned to global capital
markets less than three years after its banks defaulted on $85 billion
in debt.
“When you
look at how successful that auction was, it’s clear that investors are
now crunching the numbers themselves and that the credit grades from the
rating agencies are less relevant,” Valdimar Armann, an economist at Reykjavik-based asset manager Gamma, said in a July 4 interview.
Iceland’s
experience shows the rating companies may be overcompensating after
failing to identify some of the risks that led to the global financial
crisis, said Armann. While Moody’s kept a Aaa
rating on Iceland until five months before its banks collapsed,
reluctance to raise the island’s credit grade now is blocking the
country’s access to a broader investor base. Debt derivatives show the
low ratings may be unwarranted as credit default swaps on Iceland
indicate it’s less likely to default than euro member Spain.
You
see, the only true workable solution is to expunge the debt and have
the original debt investors take realize their significant and material
capital losses. As it stands now, for political reasons and to maintain
the status quo of the existing banking oligarhcy,
more debt is being piled onto these nations for the tax paying populace
to attempt (and fail) to service! Thus, severe and aggressive austerity
plans are being implemented to payback banks and other lenders (at what
can be considered usurious terms, enter the IMF), thuse
forcing recessionary pressures upon the working populace. This is a
thick and heavy shaft, one that is onerous enough to quite possibly
require grease for the citizens and denizens of Greece to consider
palatable. On the other hand, they can do the Iceland, who is already
lapping Greece in both economic growth and demand for its debt!
The situation between the 1st and 2nd Greek (and soon to be Portuguese) bailouts have essentially remained unchanged!
As excerpted from It Should Be Obvious To Many That The Risk Of Defaulting Sovereign Bonds Can Spark A European Banking Crisis
If you think those charts look painful, imagine if the Maastricht
treaty was actually respected. Our models haven’t pushed passed 80%
debt to GDP, but if you were to put the treaty’s debt ceiling in you
would see the very definition of contagion. The following chart
represents the first order consequences of a 62% haircut on Greek debt…
Despite
the fact that the only way out of this is a true default and
destruction of the debt capital proffered during profligate times, TPTB
will try their best to find a workaround, because what's best for the
people of Greece, Portugal, Ireland and as we have already seen -
Iceland, is absolute anathema to the bankers that binged on this stuff
at 40x leverage and sitting on 50% devaluations as we speak. You simply
do the math: 40 x (-50%) = what kind of returns? Insolvency, first and
foremost!
Subscription Document Archive:
Greece Public Finances Projections
Sovereign Contagion Model - Retail (961.43 kB 2010-05-04 12:32:46)
Sovereign Contagion Model - Pro & Institutional
Online Spreadsheets (professional and institutional subscribers only)
- Greek Default Restructuring Scenario Analysis
- Greek Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts
- Portugal's Debt Ridden Finances: An Analysis of Haircuts, Restructuring and Strategy - Professional Analysis
Here
is the rub that all seem to be missing. A 50% haircut to principal is
simply not enough - and it appears as if it is by extension and not
solely principal - we don't even know if it is to principal yet because
thus far all reports that I have come across simply referenced NPV or
extensions, which could be a combination of any number of things. As
explained above, without an explicit hit to principal, Greece will still
be in need of excess Grease, believe it.
My next post on this topic will delve into the BoomBustBlog online subscriber model "Greek Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts" to try and work it out...
»
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1981 all over again when Poland...then Mexico then Brazil..and so on defaulted.....losses were passed on but Bankers kept lending in order to charge massive fees.
The Chinese (and Deutsch) better stock their stores with lots fo KY....b/c history shows...Banks Never Take a Loss.
Well, Reggie... this is "fight club" ... after all.
;
Nice Muay Thai! I'd like to take him to the ground though and see him grapple!
you'd like to take another man to the ground and 'grapple' with him....... ummmm, oooookay Barney Frank !
i can't imagine Barney Frank would be much good on the ground.. much like a Weeble, he just rolls about around the centrifuge of his tummy ...make a good rocking chair base though
Reggie has owned the Euro Bank debacle since day one -- beats some of the Momo calls by many of the Jabroni's around here
My take is that the "non-credit event" is a quid pro quo, the banks never should have been in the sovereign CDS market and Merkozy are basically saying that the contracts are null and void....
The mechanism at the root of this glorious shit show is the CDS. They serve no useful purpose, it only multiplies risk and leverage.
For the record, I use to work for a mono-line.
Is this really a total heist or is it simply the case that CDS buyers/holders are just now waking up to the fact that they are and always have been beholden to a reality that is whatever some Credit Event Determination Committee says it is.
I’ve never been much of a CDS fan as it has always seemed to me that too many fallible human beings and institutions (but no central clearing authority) stand between you and your money when what you’re insuring against actually happens.
Looks like the fine print might be on the side of the CDS writers.
that's what the fine print is there for ...obfustication
Turn your hips over when you kick and you'll hit harder. And keep your hands up.
one hand has to come down when kicking if you want any power
techinical issues ...you don't get that with a gun
I'm a admirer of reggies work.
But what you other dumbass yankees don't understand is that this is more politics than economics.
Gemany is not a truly independent nation (has not been since you dumbasses bombed all their cities into smithereens) The Euro was forced upon them in exchange to get East-Germany back, the main culprit here is France and they are also the ones who will suffer the most if Sarkozy can't get the FOOL Merkel to bankrole this forgone conclusion that the Euro is doomed.
I lived in Frankfurt when they "got East Germany back" and I can assure you that was years before the Euro was agreed and that was not a factor at all in that decision.
I just read this and my head is still spinning... What the #$%@ are you talking about?
Please, be more specific.
And I'll answer your questions.
Give Reggie a break, he has spot on analysis and good insights. He is just keeping it entertaining with the kickboxing, its a lot better than Kramer throwing around foam rubber bulls and puking out cheetos as he gives you his picks of the day "Buy Buy Buy." Besides, it looks like Reggie has good hand speed.
Reggie crushes Cramer as a financial analyst and as a street fighter ...many of us would like to see the latter too, in fact i've got 5 figures here if anyone can 'arrange' the entertainment???
Reggie,
After the circle jerk last week whereafter you dislocated your arm patting yourself on the back re: AAPL, I am left wondering what the actual impact was. The stock lost a couple days worth of gains, and THAT was your moment of truth? If readers had acted on your advice at any point in the last 2 years re: AAPL, they would be worse off for it. On the other hand, maybe your point is that at some nebulous time in the future AAPL stock will go down, but of course not YET. Or perhaps you'll have some other weasel path to take. But the truth is you failed to provide any lucid or valuable insight.
Perhaps you did get something right 5 years ago, but at the same time I am reminded of something I heard once about a blind squirrel and a nut...
The biggest problem with folks that read ZH is that they never the disclaimer.
More importantly, if you've been here long enough, you'll realize Reggie is pretty good about his input/analysis and the last thing you want to reference him to is a "blind squirrel and a nut." I'm sure with your critiques of Reggie, you can go set up your own blog of critiques about free financial information and I'm sure you'll have your own following in no time..
I guess you (and other uninformed folks about Reggie) constantly miss is the memo about Reggie only providing the AAPL short info you seek to his paid subscribers. What Reggie described the past few years was a basis to short AAPL. What he disclosed to paid folks prior to AAPL's earning release was to *actually* short AAPL prior to last qtr's earning release.
Bottom line: quit yer whinin' about Reggie. He doesn't owe anyone here on ZH a damn thing just like you don't owe him your money.
He is posting about long-term trends being against AAPL, pro-GOOG. I saw the previously referenced circle-jerk last week when there was a down day - 1 down day with most of it already recouped. Long-term, He has been as wrong as the day is long.
I agree Reg owes me nuthin'. And props to him for putting in the effort and being willing to take a stand, no matter the monumental wrongness of it...
Reggie as i (now!) understand is long Google ...i thought he was short Apple too but apprently not
the problem is Reggie keeps dissing the consumate smoothie techno-King, Apple, while pumping up in the same articles the techno copy-cat and also-ran, Google.
It's sure to raise hackles.. and it does (especially me ...and Banzai)
but we've been here before with leading thoroughbred Apple versus hobbling donky derby Microshite. More-Shite was so smashed nobody dares compare them in the same breath any longer.
But Reggie hasn't learnt from that race and continues to gauge a horse by its financial profile when in fact it's about technology, in particular software, which nobody on Earth gets close to Apple on. Goo like Monopolist-Shite are going to suffer for thinking they can buy genius or buy a lead or buy consumers
The fact that Apple is also a class act, and a class apart, from any other company in design, marketing, consumer 'Wow', strategy, vertical integration and brilliant at executing a pin sharp business plan with faultless precision has also all been lost while Reggie has had his head in his books looking at the financial form
I forgive him his 1 failing because he's such a class act on the financials
I don't care what anyone says Reggie, I am very greatful for your information......and I think you are funny as hell!
But who the hell did speak in the name of the banks and with what kind of power! And if a bank does not agree? What will happen to their claim?
lawyers of the world unite!
maybe the 50% haircut is really 100% on the 50% issued without CDS protection and made whole on the 50% of issue with them........sorry Slovenia; shoulda held out for more.
i think the metaphor is that you can do all the analysis you want but in then the only way to get your attacker off, once you understand you are indeed being raped by an invisible fist, is with violence against the rapis
most people on zh are still in denial that one day perhaps decades away there is goingvto be wwiii as we are tricked by bankers into another war---- and / revolution. funny how both seem to happen at the same time every now and then--- for a number of large countries
Did this dude really just post a vid of himself kickboxing a punching bag?
What was the point of that? It didn't add anything to the point he was trying to make. Just monotonous noise. Don't distract from your otherwise great message. Sorry.
It looks to me that the move to save the CDS-writing banks backfired.
Big US bank stocks are up big time but government debt is being sold. If bond buyers (except the Fed) do not believe in bond insurance any more, interest rates will have to price in the default risk directly.
That would lead to much higher interest rates and trigger a default.
It's amazing what we let the elite get away with.
Imagine if you tried getting your debt reduced by 50%, you'd get laughed out of the bank.
not so. Just don't pay your credit cards for a couple of months and then negotiate your debt. I averaged 68%. Those fuckers took my 401k and SS, I drink their goddamn milkshake any way I can.
Up today, down tomorrow, and it's not the "market"...it's the NY Banks playing trick-or-treat; they get the treat, we get tricked. But I'm actually hoping this latest move in the European debt shell-game works out for a few more months. For maximum change (civil war) we need the economic collapse to coincide with the existential political crisis that will be the 2012 election.
They will get their comeuppance one day. Eventually what goes around comes around. Sometimes it just takes a while.
'In the long while, we're all dead' - famous dead guy.
The only reason folks are pissed at Reggie's "Mirror Kissing" is because the market is up +356 pts
If the dow was down 5% there would be a full on Reggie love fest and you guys know it.
Tis true, Reggie. Your often brilliant analysis should come "a la carte" without the self righteous based product sell. I enjoy the read, but cringe on the feed. If you build a better mousetrap, they will come.
I didn't see all the angles and threw my money on the Risk-Off deflation side with abandon. I should have known they would re-write the laws or just plain ignore the CDS fly in the ointment. They were trapped. They just changed the rules mid game and pretended they won due to their brilliance. The market seemed like it wanted to go up all this time too so the insiders had to know. Lesson learned.
Thanks, Reggie, awesome info & opinions- thanks for sharing. Europeans must think we're stupid if we believe their BS. Well, judging by the Russell, I guess we do believe their BS. BTMFD funny!
Reg,
Normally I am want to agree with folk getting sick of the constant self promotion, and when I saw the still where you are (once again topless) punching the bag I thought, "Thats it, I'm done.". But then when the clip rolled and I see you thrashing around like a rabid hammerhead shark whilst considering your track record and penchant for straight talk... I laughed out loud and thought it was the best thing ever. On reflection, I realize that the visually depicted burst of controlled rage touched a nerve in me somewhere. A great metaphor.
Keep it coming!
Each ISDA Master Agreement is negotiated individually. The Master Agreement serves as a template, yet issues such as Termination Events and Default parameters are negotiated separately and then plugged into the agreement. Therefore a credit event such as that which occured in Greece could trigger a payout in some CDS contracts and in others there would be no payout.
In other words, this Greece fiasco is even more convoluted than one could imagine.
http://www.lowenstein.com/files/Publication/e402d74f-5bfb-4d34-9757-0048...
My initial reaction to the article was, 'the ISDA will never trigger a credit event because the underwriters of the CDS contracts are the tbtf banks (BAC, AIG et al)'
I've been saying for years that CDS is flim flam. Dangerous flim flam because third party ownership encourages defaults and criminal conflicts of interest. You heard the saying, "Worth more dead than alive"? Well, George Papandreou must have had a good look at his country a few years back and must have said the exact same thing about Greece before buying up CDS on Greek bonds and putting them away with his mates at IJ Partners in Switzerland.
Yes, you can make a ton of money like John Paulson in 2008 by buying up all the mortgage based CDS, but it does not make it right to profit from the misery of others.
"I HIT HARD!!!!"
What a stud. You've scared another 7 inches out of me. Oops wait a sec I'm hetero.
Shit. You wanna see some heavy hitting, search for some video on Geo Foreman working the bag. Damn thing cries every time he hits it.
FWIW Chuck Norris worked the heavy bag pretty good in his day too.
So hetero that you eat your hot dog sideways, from the middle?
Thank you as always for sharing your insights and research Reggie!
Dear purchasers of CDS contracts,
Sincerely,
- Goethe, Fokovski, Yersif and Partners LLP
The deal will delay the inevitable that Europe is screwed, but in the meantime everyone who is short is now facing a 1998 rally to new highs. Eggee.
If a credit event is not triggered by a 50% haircut, then wouldn't it imply that all those banks (like MS) that claim their European exposure is "fully hedged" are in fact not really protected at all?
Right, and commercial real estate is about it collapse also.
The REITS and banks have been run up about 20% in a few days.
What difference does it make anymore? Laws don't apply unless you are one of the ones that can be jacked.