Austrian Civil Servant Blows $440 Million In Taxpayer Funds On Risky Derivatives
It is oddly ironic that on the day the US bailout of AIG is complete, and with a "profit" at that, the spin goes, even if the spin ignores that the "profit" was only purchased at the expense of trillions in sovereign debt issuance and near immediate monetization by the Fed, which has onboarded a mindbogling amount of duration risk (from under $500MM in DV01 in 2008 to over $2.5 billion currently, but nobody will discuss this issue as few if any grasp just how much risk exposure the Fed has shifted away from entities such as AIG), that we learn just how far the abuse of virtually free taxpayer funds goes. Only instead of some US government apparatchiks blowing through billions in some concrete government building in downtown D.C., we go to the birthplace of Mozart, in Salzburg, Austria to learn that a "civil servant gambled hundreds of millions of euros of taxpayers' money on high-risk derivatives."
While this is merely one incident in a faraway land, what it does show is that in an environment in which cheap money is handed out loosely by the government (of which the US government is most guilty) the opportunity cost for prudent, fiducariy responsibility is very low, and it is only a matter of time before the new normal moral hazard rears its ugly head, as one after another more such incidents will come to light. And just like housing could never go down in the credit bubble years, so the Fed is perceived as infallible in the current latest, greatest and luckily final, peak bubble. Just like housing, the Fed is infallible until it fails.
Salzburg officials said last week they had sacked a finance director after determining she used doctored documents and false signatures to hide a trail of losses from deals that started more than a decade ago, causing a book loss of 340 million euros ($439 million).
The incident has sparked calls for fresh elections in Salzburg state and for regional financing rules to be reformed. Austrian states have 8.2 billion euros of debt, or 8.1 percent of the country's public debt.
"It can't go on that one keeps getting cheap money from the BFA and then starts gambling with it," Fekter told journalists, adding that the states could save 150 million euros per year by using the BFA for all their financing needs.
Foreign currency speculation and trading in derivatives without having underlying assets would be banned, and valuation of assets on the books would have to be updated every year.
Fekter said: "We will make the standards compulsory for everyone. How the states then implement the standards will of course remain a matter of regional autonomy."
The head of the BFA, Martha Oberndorfer, said she would welcome stricter governance and the BFA would give a more detailed statement later.
Uh, why was she fired: she should be promoted to running a derivatives desk at one of the TBTF banks (oh yes, remember how the TBTFs were supposed to be made smaller, nimbler and no longer systemically important - just like AIG - following Dodd-Frank? Oops...), and when she blows up and said bank is bailed out by the government, the government can proceed to issue another several trillion, with the fungible proceeds used to fund the bank's "profit" on the bailout, and the spin can go on that another bank was rescued at a profit to taxpayers.
Joking aside, was the punishment enough? Or will those who want to gamble with free taxpayer money merely find it elsewhere? And how long will the global sovereign regime tolerate such moral hazard which now is backstopped not by shareholders, but by all taxpayers? It appears that the answer, when the myth of the welfare state ending is the alternative, is a surprising "far longer than most had expected." Surprising, too, the ability and length of time people are willing to delude themsleves, and stick their head in the sand of complete denial.