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The Dealbreaker: Barclays Sees A 50-60% Haircut As A CDS Trigger

Tyler Durden's picture


Finally someone dares to go ahead and say what is on everyone's mind, namely that proclaiming a 60% "haircut" as voluntary is about the dumbest thing to ever come out of ISDA. As is well known, the ECB and the entire Eurozone are terrified of what may happen should Greek CDS be activated, and "contagion waterfall" ensue. The fear is not so much on what happens with Greece, where daily CDS variation margin has long since been satisfied so the only catalyst from a cash flow market perspective would be a formality. Where it won't be a formality, however, is for the ECB which has been avoiding reality, and which will have to remark its entire array of Greek bonds from par to 40 cents on the dollar, which as Alex Gloy indicated earlier, will render the central bank immediately insolvent all else equal. What it also will impact is treatment of all other banks and pledged collateral valuations which is effectively the only bridge in the chasm between Mark to Unicorn and reality. So here is Barclays with what can be the effective dealbreaker, because if a bank: an entity that owns the credit event determinations committee at ISDA, comes out with a contrarian statement to the conventional "stick your head in the sand" wisdom, then pretty soon everyone else will have to follow sui: "In our view, there is little doubt that a large notional haircut of c. 50-60% would be considered a credit event, consequently triggering CDS contracts." And here is why Wednesday's summit is now guaranteed to be a flop: "We consider that launching a hard restructuring without the adequate backstop could be too risky from a financial stability perspective, and we think the ECB would likely take this view." Since the summit will have to announce a decision on the Greek haircuts to be taken even remotely seriously, and since the ECB simply can not make one at this point, look for major disappointment, whether the summit is Wednesday, Thursday, next month, or next year, simply because the ECB will not be ready to pull the trigger for a long, long time.

What happens when a 50% Greek default is declared a "Credit Event"? Here is Barclays' Antonio Garcia Pascual with the explanation:

The FT is reporting today that "European negotiators" have asked the Greek government to impose a 60% notional haircut on sovereign bonds. The EU stance was apparently presented over the weekend by Vittorio Grilli (head of the Italian Treasury and lead European negotiator) to the IIF. Press reports over the past two days have also indicated that the IIF has warned against any haircuts above 40% as they would not be voluntary. The FT also reports that the ECB, France and the IMF remain concerned of the likely credit event and the trigger of CDS contracts. German and Greek newspapers argue that investors should brace for losses between 50% and 60% but they do not provide details as to whether this would imply notional haircuts or whether it would be done through drastic reductions of the coupon and/or extension of maturities. Ekathimerini indicates that Greek FM Venizelos had referred to a "radical haircut" that would not threaten the stability of the Greek economy. 

Also, several Greek and international press reports have reported on a leaked draft debt-sustainability-analysis carried out by the IMF in the context of the 5th programme review. The report appears to indicate that a deeper PSI has a vital role in establishing sustainability of Greek debt. In order to reduce the debt below 110% of GDP by 2020, the report indicates that it would require a face value reduction of at least 60% of Greek debt and/or more concessional official sector financing terms.

Our views on a "hard" restructuring

In our view, there is little doubt that a large notional haircut of c. 50-60% would be considered a credit event, consequently triggering CDS contracts.

However, this would imply that the ECB would have given up its "resistance to a hard restructuring". In our view, that resistance has been motivated by concerns on the potential impact of CDS-triggers across the European financial institutions (FIs) and, more broadly, on concerns on financial stability, in particular on the potential trigger of a bank run in Greek institutions and the scope for contagion to other EMU countries. A hard restructuring would have its largest impact on Greek FIs, which hold more than EUR80bn of Greek debt, of which c.EUR45-50bn is held by banks (including bonds and T-bills).

We have argued in several research reports that the ECB could accept a hard restructuring (eg, 50-60% haircut) only after adequate safety-nets are in place. Specifically:

  • EFSF has adequate financial resources and there is agreement on how to best deploy them, including in the form of a second programme for Greece;
  • Italy and Spain have sufficient support from the EFSF and ECB and the countries are committed to deliver the needed adjustment policies (ie, Italy delivers pro-growth policies and reduces public debt-stock, including through privatisation; Spain completes the restructuring and recapitalisation of the cajas and contains regional deficits);
  • ECB maintains its exceptional liquidity facilities, including the SMP programme for as long as is required;
  • ECB provides full liquidity support for Greek banks even in the event of a sovereign restructuring (EFSF and IMF, in the context of the Greek programme, would provide funds to recapitalise Greek FIs)

We consider that launching a hard restructuring without the adequate backstop could be too risky from a financial stability perspective, and we think the ECB would likely take this view. Therefore, we would see scope for a possible delay in the announcement of a hard restructuring (ie, a specific size of the haircut) unless there is a substantive announcement on all the other fronts mentioned above.

Other likely implications of a hard restructuring, include:

  • A 60% notional haircut would imply a similar reduction in the collateral available to banks using EGBs as collateral (however, collateral at the ECB should normally be MtM, so to the extent it is marked in the 40s, then a 50-60% haircut should not have a substantial impact).
  • The ECB would need to authorise a larger use of ELA by Greek banks, which are already using EUR21bn.
  • Euro area countries would need to decide how to treat ECB holdings of Greek debt under the SMP programme, c.EUR45bn.  A possibility is for the ECB to be taken out of its exposure (possibly by the EFSF) before launching a hard restructuring.

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Tue, 10/25/2011 - 08:33 | 1807577 Popo
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On what planet is a 49% loss not a credit event?  


..(oh... apparently this one)

Tue, 10/25/2011 - 08:33 | 1807585 FunkyMonkeyBoy
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A fascist planet. Wake up, it's here, all as planned.

Tue, 10/25/2011 - 08:37 | 1807591 Popo
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Tyler,  can we please stop repeating the clever MSM propaganda word, "haircuts".  

This is in no way a "haircut".  

49% is complete and utter "dismemberment", with massive blood loss and a minimal chance of survival.  

"Haircut" my ass.   

Can anyone imagine using the word "Haircut" if the DOW tanked 49%?

"'Tis nothing but a flesh wound!"

Tue, 10/25/2011 - 10:50 | 1807633 Doode
Doode's picture

"If do not bail us out we will explode and take you with us!" Barcap sounds like terrorists - do we negotiate with those even if they are financial ones? Or are they just retards so we have to babysit them even though they wear suits and ties to work? Which one is it because I am furious if the bailouts continue long after all of those folks had an opportunity to get out/unwind their positions/learn things can blow up!!!!


This shit makes me really angry - it was ok/understandable in 2008 when things were not clear and sort of came out of nowhere, but this shit has been telegraphed for years - ever heard of Russian default. And this was stinkier and nastier. Arghghhghghghhghgh!!!



Tue, 10/25/2011 - 09:05 | 1807691 gojam
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Yes, I agree Popo.

It's more like a 'Brazilian' and I'm talking about the pubic trim not some historical South American default.

Tue, 10/25/2011 - 09:09 | 1807703 SheepDog-One
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Step right up! Free haircuts at the guillotine!

Tue, 10/25/2011 - 08:40 | 1807614 SheepDog-One
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But FMB still at the end of the day they cant squeeze blood from a bunch of turnips!

Tue, 10/25/2011 - 08:34 | 1807587 qussl3
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Tue, 10/25/2011 - 08:42 | 1807620 SheepDog-One
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So bankers rule over Fullretard Planet, then what? Theyll have no producers, no one knows how to do anything anymore...see what Im getting at? What does it get them?

Tue, 10/25/2011 - 08:46 | 1807626 CrimsonAvenger
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Oh, it'll all work itself out. We've gotten this far, haven't we?

Tue, 10/25/2011 - 08:57 | 1807664 SheepDog-One
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Well the Bolshevik Revolution also worked itself out a real horrible fashion for millions upon millions of people....but yea it worked out.

Tue, 10/25/2011 - 09:46 | 1807850 tmosley
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You misspelled "Eudopia".

Tue, 10/25/2011 - 09:18 | 1807731 SamAdams1234
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I want a Hippotamus for Christmas:


Tue, 10/25/2011 - 10:06 | 1807950 gojam
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Have you been good this year ?

Tue, 10/25/2011 - 10:16 | 1808011 Sudden Debt
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Tue, 10/25/2011 - 08:33 | 1807584 Dr. No
Dr. No's picture

IF there is one thing I have learned since 2008: Nothing is priced in.

Tue, 10/25/2011 - 08:35 | 1807594 qussl3
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People only panic when its too late, rare are those that leave the party early and be willing to be mocked by their peers.

Tue, 10/25/2011 - 10:50 | 1808198 Shvanztanz
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I'm usually mocked by my peers while I'm still at the party.

Tue, 10/25/2011 - 08:35 | 1807590 lunaticfringe
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It just never ends. Never have I seen such outlandish and ridiculous attempts to keep central bankers in power. It is a wonder to behold, like water running uphill. It will be a pyrrhic victory in the end.

Tue, 10/25/2011 - 08:38 | 1807604 SheepDog-One
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Your words to Kroms ears!

Tue, 10/25/2011 - 08:36 | 1807596 ArkansasAngie
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Que me when I should start holding my breath.

I must be dense.  I cannot understand why bankruptcy is so fought against.

Insolvency is a state of being ... not of the mind.

Tue, 10/25/2011 - 08:36 | 1807599 SheepDog-One
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Yea yea everyones terrified, Im terrified, youre terrified....but the STAWKS refuse to be terrified in our 25 days non stop giggling continuous melt-up...and after all, stawks are all that matters here in Fullretard Ville.

Tue, 10/25/2011 - 08:37 | 1807603 Fips_OnTheSpot
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@ftbrusselsblog: A sign Wednesday's summit could fall short?
           ". << here we go. FT says pre summit Finmin meeting off

Tue, 10/25/2011 - 08:38 | 1807605 Corn1945
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So I assume Barclays owns a lot of Greek CDS and wants to get paid on them?

Tue, 10/25/2011 - 08:38 | 1807606 Irish66
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DAX positive...hum

Tue, 10/25/2011 - 08:38 | 1807607 danger close here
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Germany opposes a phrase in a draft conclusion for Wednesday's EU summit that calls for the European Central Bank to continue buying bonds in the secondary market, Chancellor Angela Merkel said on Tuesday, sending the euro lower.

Tue, 10/25/2011 - 12:13 | 1807609 GoldBricker
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Is 'analysis' now reduced to the point of guessing exactly which card in the house of cards will be the one that topples the structure?

If it's that much of a problem, governments could simply declare that henceforth their courts will enforce no derivative contracts. They cancelled gold contracts in 1933 in just this way.

  1. Screw things up
  2. Declare an emergency as a result of your own screw-up
  3. Do whatever it was you always wanted to do anyway
Tue, 10/25/2011 - 08:40 | 1807613 Tense INDIAN
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off topic but this is a nice one ...they are moving ahead with their PLOT

Tue, 10/25/2011 - 08:55 | 1807656 SheepDog-One
SheepDog-One's picture

The similarities are pretty eerie.

Tue, 10/25/2011 - 09:31 | 1807770 Odin
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Adbusters is not owned my "zionists"... pure paranoia...In fact, the have actually been accused of being anti-Semitic if you do the research... These OWS kids are just un-informed, disillusioned, and probably mostly jobless people who do not understand the root cause of their anguish. They are right to protest, but they do not know what specially to protest. They need leadership...

Tue, 10/25/2011 - 09:44 | 1807825 Use of Weapons
Use of Weapons's picture

...which is the last thing any popular movement needs.


They're working it out, trust me. Basic democracy is a bit slow.1


Btw, these kids are mostly Gen Y - means they were weaned on the intarweb, they're usually aware of the more out there conspiracy sites. What they lack is the 1970's paranoia & fear over RL political paramilitary groups - something that they might learn the hard way.

  • 1. If only there were an App for that
Tue, 10/25/2011 - 09:45 | 1807819 Problem Is
Problem Is's picture

Nice to link to some history... but again we have FullRetard as:

"dismantled the Russian Republic of Czar Nicholas."

Never Let Facts Get in the Way of Revisionist History
As the autocratic regime of Czar Nicholas was a looting oligarchy of hereditary lords just like his cousin King George of England and present Britain...

Hence, one can see this MI5, City of London disinformation slant "dismantled Russian Republic of Czar Nicholas"...

This revisionist fallacy of the false dichotomy is being spread to scare the sheeple away from even thinking of dethroning the banksters who currently rule the system and own you and me with their fractional reserve counterfeiting....

Tue, 10/25/2011 - 08:42 | 1807621 PAPA ROACH
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Europe better start loving the printing press....................sooner than later.

Tue, 10/25/2011 - 08:43 | 1807622 hbvyh
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time to's bullish!!!!

Tue, 10/25/2011 - 08:45 | 1807624 max2205
max2205's picture

TPTB are making sure no CDS trigger happens...even if they have to change the rules....

Tue, 10/25/2011 - 08:48 | 1807627 Saxxon
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You notice the language used repeatedly . . . 'terrified' of what might happen . . . the banks know who has what CDS, this is a bluff to frighten the sheep . . . Goebbels would have been proud.

The international banks are lampreys feeding on the healthy sector of the populace.

[Google a few photos of a lamprey and tell me otherwise!]

Tue, 10/25/2011 - 08:49 | 1807634 slaughterer
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Sell the news today, tomorrow it will be too late. 

Tue, 10/25/2011 - 09:07 | 1807649 SheepDog-One
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They got nothin! They stretched it out for a couple months with the carrot and stick rumors and cancelled meetings, now they have to show the numbers and it will impress no one. 

Tue, 10/25/2011 - 08:55 | 1807652 xPat
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I think it very likely that the EU governments will simply pass a law saying that this is not a credit event, and that CDS shall not be triggered. I'm not joking here. Consider that they recently proposed with a straight face to prohibit rating agencies, by law, from downgrading sovereign credit ratings.

The solution here (for them) is to take the big haircut, and declare as a matter of law that it's not a credit event. Yes, what I am saying is completely absurd. Fits, doesn't it?


Tue, 10/25/2011 - 09:03 | 1807682 ZeroPoint
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Bank of America is a foreign CDS writer. How can they stop bond holders from demanding their insurance payouts?

Tue, 10/25/2011 - 08:56 | 1807659 youngman
youngman's picture

"Give me your gold..or terrible things will happen"....we will soon hear this from the Bankers

Tue, 10/25/2011 - 09:02 | 1807677 SheepDog-One
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Exactly. And what would it really take? A speech from ZeroDamus about how he wishes he didnt have to, but just signed an Exec Order that youre a felon after the grace period 48 hours from now unless you hand over your gold to 'save the country'...its not a stretch.

Tue, 10/25/2011 - 09:08 | 1807701 ZeroPoint
ZeroPoint's picture

And what's worse is that order won't be applied equally. They will raid precious metal IRAs and bank safety deposit boxes.

Wealthy people holding offshore will get a pass.



Tue, 10/25/2011 - 09:01 | 1807673 ZeroPoint
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So let's get this strait. The ECB does not have the money to backstop the increases in the ESEF fund, and yet the can't allow a credit event to seize the markets.


They are going to print or they are going to rob the plebs. Either way, the plebs are screwed.

Tue, 10/25/2011 - 09:03 | 1807680 SheepDog-One
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Yep, and even if they go all-out retard printfest...then what? They still got nothin.

Tue, 10/25/2011 - 09:26 | 1807689 drivenZ
drivenZ's picture

right, so theyll take a 20-30% haircut and throw a bunch of other measures on top that will last them another 6 months. sounds about right to me. world collapse will have to wait. 


don't know who junked me, but this is what happens. Those people that think the collapse is coming next week or the week after are mistaken. Remember the debt ceiling debate? back in May? now 6 months later we're hearing talk that the super commitee may not get everything done and of course they dont make the reforms or have any authority to do so. So any reccomendations they have would probably keep being stretched out. Mandatory cuts dont take effect until 2013, so keep on waiting. 


Tue, 10/25/2011 - 09:06 | 1807693 Johnny Lawrence
Johnny Lawrence's picture the banks might actually have to take a loss?  Did hell freeze over?

Tue, 10/25/2011 - 09:07 | 1807698 buzzsaw99
buzzsaw99's picture

nice to have such a huge gaping gray area built into the contract so the issuer can weasel out of having to pay.

Tue, 10/25/2011 - 09:16 | 1807726 Johnny Lawrence
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If I recall correctly, the ECB is THE largest holder out Greek bonds.

Tue, 10/25/2011 - 09:22 | 1807746 Problem Is
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"in particular on the potential trigger of a bank run in Greek institutions and the scope for contagion to other EMU countries."

The Bernanke Has The Answer
Bald Bennie has the answer on the worry over depositor withdrawals and bank runs...

0% Required Reserve Ratio...

Ahhhhhh, The Bernank is a "brilliant" PhD Economist from one of the "right" schools, of course...

Tue, 10/25/2011 - 11:34 | 1808428 Withdrawn Sanction
Withdrawn Sanction's picture

Really, required reserves are the problem?  Good grief.  Wrong side of the ledger, BB.  It's capital (or the lack of it) that's the problem, not cash.  As usual, the Clueless One has mistaken insolvency for illiquidity.  Not surprising, I suppose, since he has a cure for the latter, but is powerless against the forrmer.

Tue, 10/25/2011 - 09:25 | 1807753 PulauHantu29
PulauHantu29's picture

Haircuts sound very deflationary...destruction of Trillions of currency....mmm....that is unless the ECB can print faster ...

Tue, 10/25/2011 - 09:25 | 1807758 Troy Ounce
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Das Endspiel um den Euro findet in Rom statt. The final game on the Euro will take place in Rome, Italy.

Tue, 10/25/2011 - 09:33 | 1807776 Balmyone
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I am sick and tired waiting for this to happen.  Greece has no options but to have its debt slashed.  If ISDA can consider 50%-60% haircuts voluntary, they should just outlaw all CDS.  What's the point.

If a Greek haircut of 50%+ doesn't create a worldwide panic I'd be shocked.

Keeping a load of cash ready just in case.

Tue, 10/25/2011 - 09:39 | 1807801 SheepDog-One
SheepDog-One's picture

When the banksters feel pain, thats when bad things happen.

Tue, 10/25/2011 - 09:41 | 1807804 ItsDanger
ItsDanger's picture

Your article is lacking detail.  A 60% writedown can be done if handled properly.  Wipe put 60%, wipe out banks that are capitalized by those bonds.  Recapitalize and collaterlize new loans after that.  Move forward.   Never does anyone get specific.  Why?  They are protecting their big money buddies constantly.  They get screwed in this process but not on money they made already.  Who saved the trust companies 20 yrs ago?

Tue, 10/25/2011 - 09:48 | 1807860 kaiserhoff
kaiserhoff's picture

This whole Euro-leadership thing is an embarrassment to the species, but at least it's over.

The real question is how we keep mad dog Ben on a leash.

Tue, 10/25/2011 - 09:56 | 1807900 prophet
prophet's picture

Counter Party !

Tue, 10/25/2011 - 10:16 | 1807948 lookma
lookma's picture

...which as Alex Gloy indicated earlier, will render the central bank immediately insolvent all else equal.

LOL, Alex Gloy simply proved he doesn't understand the ECB by talking only about the captial buffer and ignoring the revaluation account.

Risk Management in Central Banking Speech by Lorenzo Bini Smaghi, Member of the Executive Board of the ECB,
International Risk Management Conference 2011,
Free University of Amsterdam, 15 June 2011


The solvency profile of central banks also differs significantly from that of private financial institutions. The latter need to weight their risks against the financial buffers provided by their explicit capital position. In the case of the Eurosystem, its explicit capital position is determined by consolidated capital and reserves amounting to more than €80 billion, but also by revaluation accounts amounting to more than €300 billion. Although such explicit financial buffers remain a valid and necessary benchmark to assess the leverage and the risk-taking capacity of central banks, their financial strength cannot be fully captured by using capital adequacy metrics such as those applicable to private banks for regulatory purposes, as it has been done in a rather simplistic way by some commentators.

Neat footnote:

[4]From 5 September 2008 to 3 June 2011, Capital and reserves have increased by 13.2% (from €71.7 to €81.2 billion) and revaluation accounts have increased by 100% (from €152.3 to €305.9 billion). Total Eurosystem assets have increased by 31.8% (from €1441 billion to €1899 billion) over the same period.

Guess what gets bigger if the Euro weakens? Maybe the revalaution account, as all that gold (you know, the FIRST ASSET listed  on quarterly Consolidated Financial Statement) goes up as the euro goes down.

Its almost like the planned it that way...oh wait

Tue, 10/25/2011 - 10:43 | 1808162 Shvanztanz
Shvanztanz's picture

Funny how it was a possible 20, next it's 50, next it's 50-60...

Tue, 10/25/2011 - 11:00 | 1808258 michael_engineer
michael_engineer's picture

Consider the BAC mingling of $53 trillion of derivatives with their normal deposits where the derivates might get first cut at the cash in the event of a bankruptcy and the cash depositors are left fighting for crumbs or possibly for nothing at all.  The counterparties to those derivates might be able to lay claim to around 1 trillion of normal deposits.  Now that is a lot of money.  It is on the scale of the amount being bandied about needed for a European bailout.  Does it then make you wonder if those counterpartiies might just end up being European banks or governments who could then use those funds for European bailouts?  Europe does seem to be having difficulty coming up with the bailout funds needed from other sources.  It would seem an interesting possibility.  Reference this link for some of the background :

On a related note, I saw someone comment recently that maybe a Force majeure  approach in the courts might be able to shut down paying off derivative counterparties and making whole on them, such as was done in the AIG debacle.  Maybe someone with a legal background in economics could provide some commentary insight about this.

Tue, 10/25/2011 - 11:09 | 1808304 Shvanztanz
Shvanztanz's picture

I'll comment: He with the biggest Bull, generates the most bullshit. Bullshit = kryptonite to sheeple, so, the biggest bullshitters will get the most cash, as usual. Therefore, I introduce Schwanztanz's Law of Absolute Bullshit = the longer you are bullshitting, and sheeple are grazing, the longer you polish your horns on a scapegoat's ass. 

Tue, 10/25/2011 - 11:49 | 1808499 TK7936
TK7936's picture

And ? There is no reason to even have CDS if there never triggered.

Wed, 10/26/2011 - 22:36 | 1815549 devo
devo's picture

I've never bought a bond in my life, and I dont' see that changing any time soon.

Wed, 12/07/2011 - 11:27 | 1954822 KentBrockman
KentBrockman's picture

How exact this thoughts sound 4 months after. If everyone could be sure that things will keep going worse, there would be no problems in the economy at all. But now the guys in the government act like things are always going to go better. Its like dealing with forex signals

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