Farce Is Complete As ISDA Finds 50% "Haircut" Is Not A Credit Event

And, as expected, here is ISDA with the most farcical of decisions. From Reuters: "A new voluntary deal for holders of Greek debt to accept deeper losses is unlikely to trigger a 'credit event' that would cause a payout on default insurance, said a top lawyer at the International Swaps and Derivatives Association. Greek bondholders face losses of 50 percent under a plan to lower the country's debt burden and contain the euro zone's long-running debt crisis. The aim is to complete negotiations on the package by the end of the year. But because participation in the deal is voluntary rather than forced, it would typically not trigger payment on CDS contracts. "As far we can see it's still a voluntary arrangement and therefore we are in the same position as we were with the 21 percent when that was agreed," said David Geen, general counsel at derivatives body ISDA, referring to an original deal proposed in July that involved smaller bondholder losses. "The percentage (of losses), as far as the analysis for CDS purposes goes, doesn't change things. typically a voluntary arrangement won't trigger the CDS." Geen said the final decision on whether a credit event has occurred rested with the ISDA determinations committee, which would consider the issue when requested to do so by a CDS market participant." The fact that the decision is "voluntary" under duress from an entire political system which realizes its ponzi structure is collapsing is seemingly irrelevant. Luckily, the market is not all that stupid and the preliminary reaction is as expected, and to paraphrase Willem Buiter, "Failure to trigger Greek sovereign CDS when economic logic indicates this ought to occur would likely be detrimental to financial stability." But that's irrelevant. The EU has kicked the can down the road. Now it is literally a race for the fade to discover who is first to realize that as Zero Hedge and now RBS chimes in, "the EFSF is still too small to restore investor confidence."

Comments

[Iam_Silverman]

"The message is you cannot buy insurance on your neighbor’s house burning down."

Excellent point!

On the other hand, the neighbor doesn't get to collect either, and now you are left staring at a pile of smoldering rubble and a tearful, homeless family.

[Cat On A Ledge]

Very interesting game theory that you've proposed! Indeed this might have been the game plan all along - to keep raking in illicit 'earnings' until such time the house is about to catch fire, then pull out the trump card (this here ISDA ruling). Of course, now that the trump card has been played, the game is up. Can't possibly imagine any private investor interest in sov CDSes from this point on (but demand might still be found in corporates... such is life).

And they tried to convince me derivatives weren't a gamble. Well in all fairness they were probably right, they're worse - a scam!

Fortunately our host(s) closed out on that Belgium/Dexia trade early, good foresight.

[glepo]

OF COURSE!

Recent data from the BIS suggests U.S. banks have $41B in exposure to Greece, mostly in the form of CDS contracts sold to European banks who own Greek paper. 

[Peter Pan]

So are they telling us that the European banks will NOT make a claim on the CDS they bought? Wow! They took out policies for fire, voluntarily let the European Governments set the fire and then sit back and not claim? I never knew bankers could be so generous and idealistic. Are you sure there is nothing else behind this whole show?

[glepo]

FROM TYLER LAST NIGHT IN CASE YOU MISSED IT

ISDA CREDIT EVENT DECISION MAKERS:

EMEA

Voting Dealers
Bank of America / Merrill Lynch
Barclays
BNP Paribas
Credit Suisse
Deutsche Bank
Goldman Sachs
JPMorgan Chase Bank, N.A.
Morgan Stanley
Société Générale
UBS

Consultative Dealers
Citibank
The Royal Bank of Scotland

Voting Non-dealers
BlackRock (Third Term Non-dealer)
BlueMountain Capital (Second Term Non-dealer) 
Citadel Investment Group, LLC (First Term Non-dealer)
D.E. Shaw Group (First Term Non-dealer)
Pacific Investment Management Co., LLC (Second Term Non-dealer)

[glepo]

HERE IS THE SCRIPT

FIRST ECB BUYS THE GERMAN/FRENCH BANKS GREEK DEBT AT 80C AND BAILS THEM OUT, THEN EVERYONE ELSE IS TAKING 50% HAIRCUT (MAINLY GREEK INSTITUTIONS)

SECOND THEY FORCE ITALIAN AND SPANISH BANKS TO MARK TO MARKET THIER PUBLIC DEBT BUT LEAVE THE GERMAN/FRENCH EXPOSURE TO GREEK PRIVATE DEBT AT FACE VALUE AND HIDE IT IN THE BOOKS FOR AN ANOTHER DAY.

SAME THINGS WITH PORTUGUESE AND IRISH PRIVATE DEBT FOR UK/FRENCH/GERMAN/SPANISH BANKS

THEN THEY DONT EVEN TALK ABOUT US UNFUNDED SOCIAL SECURITY AND MEDICARE-MEDICAID OR FRENCH OFF BALANCE SHEET LONG TERM PENSION LIABILITIES (AAA!) WAY WORSE THEN ITALIAN PENSION SYSTEM.

http://graphics.thomsonreuters.com/F/09/EUROZONE_REPORT2.html

[Iam_Silverman]

glepo,

Look all the way to the left side of your keybord.  Between the key marked "Tab" and "Shift", there is a key.

Press it ONCE.

It changes things, you'll see.

[glepo]

[DogSlime]

I'm confused about how this affects the ratings on bonds.  If sovereign CDSs are now worthless, doesn't this effectively lower the ratings of investment portfolios that include sovereign bonds?

[MsCreant]

Wow. I'd like to hear about that too. Unintended consequences, indeed. 

[Bansters-in-my-...]

So who in thier right mind would but into CD'S IF THEY DON'T PAY OUT...???

Fucking CORRUPT Mother fuckers.

[ItsDanger]

Any shortfall in payment is a default by definition.  So if they are taking a 50% w/d in the bonds, that should be covered by the default risk provision of the swap.  If it doesnt, what were they paying the fees for?  Or is this part of the deal for accepting the 50%?  These deals stink.  Just wait for Italy to be in the same situation.

[techperson]

I can't decide. Should I post on how unfair this all is, how it is just hopium, how it will ruin everything, etc.?

Or shall I just BTFD and make money?

Decisions, decisions.

[pauldoc1]

Is this not covered in the contract? Apparently not. Old CDS will be worthless. New CDS will be created that specifically states what is covered and when. I'm surprised this was not already clearly laid out, although insurance of all forms has been a scam. No surprise this is one as well.

[jmc8888]

Don't you love the arbitrary rules of bullshit monetarism? Glass-Steagall

This reminds me of fizzbin, the mythical card game on the episode of Star Trek, titled 'A Piece of the Action'.

"The rules of Fizzbin were intentionally very complex. Each player gets six cards, except for the player on the dealer's right, who gets seven. The second card is turned up, except on Tuesdays. Kirk dealt the henchman two jacks, which are a "half-fizzbin." When the henchman said he needs another jack, Kirk warned that a third jack is a "shralk" and is grounds for disqualification. With two jacks, one wants a king and a deuce, except at night, when one wants a queen and a four.

At this point, Kirk dealt a third jack, but to keep the ruse going, he ignored the disqualification rule he had just made up. He explained that, had a king been dealt instead of a jack, the player would get another card, except when it is dark, in which case he would have to give it back. The top hand is a "royal fizzbin," but the odds of getting one are "astronomical": when Kirk asked Spock what the odds are, Spock truthfully replied that he had never computed them.

Kirk called the last card a "kronk" and then purposely dealt a card such that it fell on the floor. As the henchman being taught reached down, Spock nerve-pinched him while Kirk and McCoy attacked the other guards, allowing the three to escape."

Yep, ISDA and everyone else plays Fizzbin (this time with EOD regarding CDS) with everything to hold together their monetary system based on sophistry.

Once again Glass-Steagall