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As First Greek CDS "Anstalt" Appears, A Question Emerges: Did Banks Not Square Off Margins?

Tyler Durden's picture




 

The irony is not lost on us that Bloomberg is reporting that KA Finanz, an Austrian bad-bank supported by the Austrian government, faces as much as a €1 billion need for funding to cover its exposures to Greek CDS (coughcreditanstaltcough). In a statement this morning, which we noted in a tweet, the bank noted "activation of the CDS with an assumed loss ratio of about 80% would mean an additional provisioning charge of EUR 423.6 million". KA Finanz's total amount of Greek CDS exposure is around EUR1bn. What is shocking and should be of great concern is that we have been led to believe that very little net cash will change hands on the basis of the $3.2bn net aggregate market exposure. This was based on the now false premise that variation margin was maintained and transferred throughout the process (as we note below from recent IMF filings). What appears to have happened is that dealer to dealer variation margin has been, let's say, less rigorous as perhaps all collateral was netted up across all exposures (or simply ignored on the basis of government backstops). The far bigger question then is: are banks simply marking ALL sovereign CDS at par, and not paying off cash to other dealers? Remember it only takes one counterparty in the chain to turn net into gross and quality collateral seems tied up a little right now at the ECB (or with margin calls).

And then this from KA Finanz' 2011 Interim Statement:

Supplementary to the measures already taken by the European Union and the IMF (International Monetary Fund), the measures now initiated are expected to permit a sustainable stabilisation of the Greek budgetary situation. Moreover, statements made by the International Swaps and Derivatives Association (ISDA) suggest that the measures described above will not trigger a credit event of credit default swap (CDS) portfolios. In view of these circumstances and given the measures already taken and now extended by the European Union, KF does not expect – from today’s point of view – a default of loans and advances to the Republic of Greece.

 

KF’s total direct exposure to the Greek state amounts to EUR 818.6 million; moreover, the bank holds government-guaranteed bonds of EUR 164.6 million and government bonds of EUR 636.2 million. The issue of programme participation only arises for securities maturing by 2020. As of 30 June 2011, this portfolio represents a book value of EUR 311.5 million, of which EUR 303.1 million is, however, locked in until maturity in repo-type TRS (total return swap) funding positions. Under civil law, these positions have been sold to third parties against inflow of liquidity; the underlying risk remains with KF through a CDS structure.

So it does. And surprise, Surprise: so until the bank assumed there would be no CDS, it decided not to daily variation margin its exposure. And only now it has to? But, but, ISDA said "what was decided today was anticipated and had been decided for quite a while." Did KA not get the memo to pay its counteparties when it had to at the end of trading every single day?

Surely KA is all alone in flagrantly circumventing the primary requirement in posting cash shortfall margin.

Surely.

Oh, and congratulations Austrian taxpayers, you are the latest ones on the hook to pay US hedge funds and banks for the privilege of Greece defaulting.

 

 

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Fri, 03/09/2012 - 16:48 | 2241210 Sandmann
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KA Finanz AG holds the securities and CDS portfolio remaining after the demerger of Kommunalkredit Austria AG and is in charge of its structured rundown. Equipped with a banking licence, the company – like all other Austrian banks – is subject to supervision by the FMA (Financial Market Supervisory Authority).

Executive Board Alois Steinbichler

He began his career with Continental Illinois Bank, Chicago, and State Street Bank, Boston, in Vienna, London and Zurich, where he spent seven years. In 1987 he joined Creditanstalt, Vienna, where he established the international credit risk function. In 1990 he transferred to the Creditanstalt London branch as Chief Executive. From 1997 he was Creditanstalt’s Head of International Business and following the establishment of Bank Austria Creditanstalt International, he joined the Management Board of that institution

 

Andreas Fleischmann

Member of the Executive Board,

born in 1967; banking business since 1990 - amongst others for GiroCredit Bank, Oesterreichische Postsparkasse, Bank Austria Creditanstalt.

 

(coughcreditanstaltcough).

Fri, 03/09/2012 - 16:52 | 2241228 Peter K
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Continental Bank was a good place to learn the bad bank trade:)

Fri, 03/09/2012 - 17:30 | 2241429 Iwanttoknow
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Was Micheal Sidona on the board?

Fri, 03/09/2012 - 16:49 | 2241217 q99x2
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Jamie Dimon, at Davos, said it would only be 3.2 billion total. But maybe he had confused that with JP Morgan's profits that were combined with MF Global's losses. Seems like another theft is about to occur.

Fri, 03/09/2012 - 16:52 | 2241227 Jim in MN
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RAn Squawk sez

ISDA's CEO says what was decided today was anticipated and had been decided for quite a while

Which makes some sense in light of comments like this (from last April)

"If there is a coercive restructuring that doesn't trigger CDS, people that have bought CDS for legitimate hedging purposes will have to find other proxy hedges, such as shorting government bonds," said Saul Doctor, a credit derivatives strategist at JP Morgan in London.


Fri, 03/09/2012 - 17:54 | 2241528 css1971
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And if the restructuring is coercive, nets the majority of the bonds but there is a token CDS trigger for holdouts? Seems to me like for the majority they are useless.

Fri, 03/09/2012 - 16:54 | 2241242 Peter K
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Let's not jump to conclusions. It's only "pledged" funds going across to the counterparties:)

Fri, 03/09/2012 - 16:54 | 2241243 barliman
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5 minutes and counting ...

How much risk will the markets discover between now and the start of trading in Asia on Monday?

Amusingly, CNBC just had back to back guests promoting opposing positions ...

"American equities are in the best position because we will 2% growth this year."

"European equities already have the recession priced in and are bottomed."

Lol

barliman

Fri, 03/09/2012 - 17:01 | 2241276 mayhem_korner
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Yes, but both "experts" keep the eyes of the sheep following the bouncing ball and not noticing that monetary debasement is eroding the purchasing power of either investment.

Fri, 03/09/2012 - 17:13 | 2241323 SheepDog-One
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I never understood why the bankrupt sheep are supposedly so important to trick.

Fri, 03/09/2012 - 17:14 | 2241330 mayhem_korner
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...because they are allowed into voting booths on Tuesdays in November.

Fri, 03/09/2012 - 17:19 | 2241354 SheepDog-One
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The 'sheeples vote'? Hell that doesnt even count, just a scam for simpletons with funny straw hats on. 

Fri, 03/09/2012 - 18:21 | 2241586 John Wilmot
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The purpose of voting is to legitimize the government. Why do you think Saddam and other dictators had elections? It's about the government being able to rape the sheep much harder when said sheep believe they volunteered in some indirect way for said raping.

Modern "democracies" get away with shit the old monachies would never even try, precisely because people living under kings know the king works for himself, while people living in a democracy are under the illusion that they control government, and that it works for them.

The mindfuck is deep and hard.

Fri, 03/09/2012 - 17:45 | 2241484 SheepDog-One
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Completely risk-free everywhere!

Fri, 03/09/2012 - 16:54 | 2241245 MsCreant
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Vaporized funds(who coulda node?) or Mark to Model and propped up by gentlebanker's agreement.

Which will it be?

Fri, 03/09/2012 - 16:59 | 2241268 barliman
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All of the above

Fri, 03/09/2012 - 16:57 | 2241255 yogibear
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Time for Spain, Italy, Portugaul and Ireland to ask it's creditors to take an 83% haircut on debt!  Otherwise these countries are fools.

All these countries can cry louder because they have much large debt loads.

 

Fri, 03/09/2012 - 17:32 | 2241416 reload
reload's picture

Spain will be a real pain for the EU/ECB to trample on.

Their PM stuck two fingers up at the EU already this week and said his country was not even planning on implementing EU prescribed budget cuts.

Spains politicians know how restless the population is - and the Spanish have a long history of civil war. The Spanish will not sell their citizens out as cheaply as the Greeks. Even if they wanted to, which I very much doubt, they would not dare.

Pessetas are still legal tender in Spain and there are plenty left in circulation. The was a small report on the BBC a week or two back about how some shops in Madrid are accepting them again. No mention of the exchange rate sadly!

Fri, 03/09/2012 - 17:00 | 2241273 BlackVoid
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Guys, I have a really hard time understanding what the above means.

Where should I start to educate myself?

Serious, honest question.

Fri, 03/09/2012 - 17:03 | 2241287 CvlDobd
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Head meet sand

Trust me, your life will be more rewarding if you stay out of the rabbit hole. To learn the ways you are being fucked is very depressing.

Fri, 03/09/2012 - 17:06 | 2241295 mayhem_korner
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Absent a deep forensic dive into credit default swaps, currency wars, yellow-painted tungsten, and systemic falsification of information, you might read Michael Lewis's The Big Short

Fri, 03/09/2012 - 17:08 | 2241303 Dr. Engali
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It means said bank didn't think there would be a credit event so it doesn't have enough money to pay off on the insurance. Now the real question is who has exposure to said bank?

Fri, 03/09/2012 - 17:17 | 2241346 Global Hunter
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said bank will have to convert some assets into cash to pay the insurance...and what if whoever has exposure to said bank...my head hurts all the time!!!

Fri, 03/09/2012 - 17:13 | 2241325 CrashisOptimistic
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Start here.

Swaps are insurance policies on bonds.  If the borrower doesn't redeem the bond, it's a default and the insurance has to pay the beneficiary.  This is called a swap trigger.  It just happened today.

The attempt to keep track of who has swaps on what was added up and netted to a small number . . . 3 billion euros.  Easily manageable.

The problem is the netting is not by institution.  It's across all institutions.  That means there could be individual institutions (like this KA bank) who didn't net.  They have gross exposure in a single direction.  

And finally, each of these institutions have swaps on *their own* bonds.  If a swap trigger on Greece takes them down, then they won't redeem their own bonds and any swaps on those bonds are triggered for whoever owns those swaps or rather whoever *wrote* those swaps.  They have to pay up.  It could take *them* under.

Chain reaction potential.

Fri, 03/09/2012 - 17:16 | 2241340 mayhem_korner
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Swaps are insurance policies on bonds.

 

"Swaps" in this case meaning "Credit Default Swaps."  Let's not get the boy confused like the CFTC.

Fri, 03/09/2012 - 17:19 | 2241355 Global Hunter
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great overview thank you very clear

Fri, 03/09/2012 - 17:19 | 2241351 hedgeless_horseman
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Start by translating TBTF into Austrian.

Fri, 03/09/2012 - 18:27 | 2241612 alfman
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fyi: we speak german ;-=

some heads will roll on monday in vienna, that's for sure.

Fri, 03/09/2012 - 17:25 | 2241394 MsCreant
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These folks are extended credit to buy pieces of paper that say they have the right to claim funds if x happens. Everyday the price moves up or down on the value of the pieces of paper. In order to keep saying you own the pieces of paper, you must keep a percentage of the value in an account with them. As the price of the pieces of paper moves up and down, the amount of money you need to have in the account moves up and down. If you do not have enough money, sometimes they will sell your paper and put the money into the account to square it. This gets "settled" at the end of every day. 

They may not have been settling it according to the article. 

Why?

Because they have already decided before hand that they are not going to try to find the "real" value of the paper, because knowing the real value of the paper collapses the system, so we best all agree to look the other way? (This happened elsewhere in the system when the banks marked all real estate assets to Model, rather than marking them to market, to save the system, by lying). 

Or because they are engaging in other funny accounting and plan to say, like MF Global, that the CDS/money, whatever, vaporized?

Or?

There are not enough courtrooms and court time on planet earth to sort all these out. No one will be able to know their status on anything because they will keep waiting for the other guy to get their funds. They will all need to go bankrupt before it can get settled. 

I am sure others can say more, better, I hope this was a basic start. Once you wade in and hang out a while, you will get the swing of things. 

Know this, there is nothing they have not done, and will not do.

Know this, the system is a lie you were born into that you were told was coherent and made sense when it really never did.

As a kid, I always thought the stock market and economy sounded like it was impossible to all balance out. Then I thought I just was too young to understand it all and let the adults worry about that stuff. I grew up and found out that my kid instincts were the right ones.

It is hopeless to untangle it and have it make sense for all the players. That is why it will collapse.

Fri, 03/09/2012 - 17:36 | 2241457 reload
reload's picture

MsCreant You have been on a roll the last few days, a lot of great posts, thank you!

Fri, 03/09/2012 - 18:07 | 2241558 Kalevi
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Thank you!

This is the best free school on the planet. I feel humbled to read some of the comments here, so much brain power, so much knowledge, and talk about reality show, I never watch TV anymore.

This is entertainment!

Fri, 03/09/2012 - 18:18 | 2241582 IndicaTive
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Just study the Tylers' posts. Follow any links to previous posts for clarification. Be careful and take comments with grains of salt. Soon you should start to figure our which comments should include the /sarcasm notation. Google search is your friend.

And remember to always pay attention to Trav777. That guy knows his shit.

/sarc. (Clear?)

Fri, 03/09/2012 - 18:38 | 2241644 Kalevi
Kalevi's picture

Tyler, check

Salt, check

Trav777, check

Sarc, check

Be prepared for bloody nose if stupid, big check

I'm good to go, kind of...

Thank you & brgds

 

Sat, 03/10/2012 - 01:33 | 2242606 barliman
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Green check for checklist

Fri, 03/09/2012 - 18:23 | 2241602 John Wilmot
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Just learn economics. All the alphabet soup reduces to simple economics.

Start here:

www.mises.org

Fri, 03/09/2012 - 18:27 | 2241608 John Wilmot
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double post...

Fri, 03/09/2012 - 17:02 | 2241286 resurger
resurger's picture

Yahoo headline

"

Market may be up, but the scars of 2008 are fresh With scars of 2008 fresh, some investors have missed a historic run in the stock market"
Fri, 03/09/2012 - 17:09 | 2241316 surf0766
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After the historic crash right?   Or you don't remember that part...

Fri, 03/09/2012 - 17:14 | 2241329 resurger
resurger's picture

i do remember that part, but the sheeple still thinks this is the start of a fresh run, they did not realize that we are in a bull market for the past 4 years

Fri, 03/09/2012 - 17:17 | 2241344 surf0766
surf0766's picture

Do not confuse money printing with bull market. Tell me you are not paid to do this.

Fri, 03/09/2012 - 17:34 | 2241446 resurger
resurger's picture

 

What do you mean? What is your point? this is a headline on yahoo finance..

http://finance.yahoo.com/news/market-may-scars-2008-fresh-191809624.html

and i dont confuse money printing with a bull market, money printing causes a bull market (unless you think there are traders buying/selling into the market)

supply & demand died long time ago

Fri, 03/09/2012 - 17:03 | 2241288 mayhem_korner
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Wasn't there a jobs report this morning?

Fri, 03/09/2012 - 17:15 | 2241332 CrashisOptimistic
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There was.

Non event.

Fri, 03/09/2012 - 19:03 | 2241699 louisianagold
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Some may call it a jobs report.  I call it lies and damned lies.  Fudging the numbers to keep the natives from becoming too restless.

Fri, 03/09/2012 - 17:07 | 2241300 PhattyBuoy
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Back to the future - 1931 style.

Fri, 03/09/2012 - 17:10 | 2241318 DavidC
DavidC's picture

I've been following the markets since 2007 (I was making money until the 9th March 2009), today ranks as one of the strangest in terms of markets moving (or not) - something's coming.

DavidC

Fri, 03/09/2012 - 17:15 | 2241331 Shylockracy
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Stew in your own juice, pigmen.

Fri, 03/09/2012 - 17:16 | 2241341 Dr. Engali
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Well fellow Hedgers I'm off to have a pint or two of Guinness. Next up on the default docket....Ireland.

Fri, 03/09/2012 - 17:20 | 2241364 hedgeless_horseman
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You may want to consider making that Guiness a Peroni.

Fri, 03/09/2012 - 17:23 | 2241380 Coast Watcher
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It'll be Shipyard IPA for me, thanks. And doesn't Ireland have to get in line behind Spain and Portugal? Who's on first? Why is the Mogambo Guru peering through my windows?

Fri, 03/09/2012 - 17:22 | 2241370 flyingpigg
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Reuters: ISDA says doesn't see significant impact on market from greek credit event, CDS exposure largely collateralized.

We'll see if they are correct in the next wo weeks   :)

Fri, 03/09/2012 - 19:50 | 2241810 Withdrawn Sanction
Withdrawn Sanction's picture

Indeed, we will.  If Jaimie Dimon is correct, on net the CDS payout at $3.2B.  OK, Greece's debt was roughly $300B, of which, what, 70% was "vaporized" by this collateralized default?  Whatever the precise numbers, there are banks, investors, etc. who are taking a multi-billion dollar bath even w/the CDS payout.  That's really gotta hurt.

Fri, 03/09/2012 - 17:22 | 2241373 bertlahr
bertlahr's picture

OK, well...

ISDA news conference just ended.  They maintain thet the total exposure is 3.2 billion and following the auction of any worthwhile greek debt the payouts will be something less--10-30 percent less was the estimate.

Internatonal press corps was in attendance.  There were three questions.

Non-event (so far)

Fri, 03/09/2012 - 17:54 | 2241519 Miss Expectations
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They maintain that the total exposure is 3.2 billion...

I think we need a bigger tote.

Fri, 03/09/2012 - 17:23 | 2241378 lizzy36
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3.5 years after AIG, and these fucking banks are still not reserving properly.

Wow, can hardly wait for those new US bank stress tests next week.

They will tell you banks can withstand SPX @666, GDP at -5% and unemployment at 15%, but will they tell you the  important information: are these fucking insitutions reserving against the CDS they are selling on Portugal, Spain and Italy?

Fri, 03/09/2012 - 17:33 | 2241443 CrashisOptimistic
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You certainly already understand this, but just to re-illuminate . . . banks have reserve requirements, plural.  They are very strictly prioritized.

Reserve requirement #1 is ensuring there is enough cash on hand to pay executive bonuses.

Reserve requirement #2 is ensuring there is enough cash on hand to re-assure the board of directors that the executives are doing okay and can keep their jobs.

Reserve requirement #3 is whatever is required to fund campaign contributions for members of the House and Senate Finance committees.

Reserve requirement #4 is the regulatory minimums.

Fri, 03/09/2012 - 17:48 | 2241492 hedgeless_horseman
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Recently, in Europe, #4 was lowered from 2% to 1% by the ECB. 

Feel better?

Fri, 03/09/2012 - 17:26 | 2241383 ArrestBobRubin
ArrestBobRubin's picture

I mean like this thing wouldn't start coming unglued the moment it was "signed"?

But, Greece is gonna have to find a way to share the spotlight from here.... It's showtime for Portugal!

This banksters brain fart sold by their bullshit presstitutes and media whorebags ain't gonna fix jack squat. The ISDA stuff is just today's BS detail...

Fri, 03/09/2012 - 17:42 | 2241468 slewie the pi-rat
slewie the pi-rat's picture

Hahaha!  they didn't get the memo!

i can only hope there are 799 more!

but nothing's coming unglued but an "accounting glich"  for chump-change (1 Bil EUR) so far, dammit, janet! 

here's the first bloomie link [from almost a year ago]: 

  1. KA Finanz’s CDSs Have 1 Billion Euro ‘Negative Market ... [Apr 29, 2011] KA Finanz ... assets of Kommunalkredit Austria AG, said in its annual report today. KA Finanz ... KA Finanz took on securities, loans and CDSs representing a total ... www.bloomberg.com/news/2011-04-29/ka-finanz-s-cdss-have... -    L0-fuking-L, BiCheZ!!!
Fri, 03/09/2012 - 17:39 | 2241469 Stackers
Stackers's picture

Hey guys, nothing happened on the day Lehman declared bankruptcy either. Then 3 days laters "we had an electronic run on the banks that came within hours of collapsing the world economy" ...... patience grasshopper. Personally I dont think much will happen until the rest of PIIGS look around at each other and want the same deal Greece just got. Then we are in for some interesting times.

Fri, 03/09/2012 - 17:54 | 2241503 SheepDog-One
SheepDog-One's picture

Exactly, the trouble always comes right when everyone has declared 'the coast is clear, safe now'. In 2008 all was safe and calm, until the 'overnite bank run' which of course 'almost imploded the world financial system'...no one ever sees it comin. $3.2 billion has been deemed 'a drop in the bucket' but now some bank has to cough that up, and we're nt talking free Bernenk funny bucks either. $3.2 billion is not chump change.

Fri, 03/09/2012 - 17:46 | 2241487 surf0766
surf0766's picture

21% unemployment in Greece. Who pays this new added bonus bailout back. No one. The people are beginning to starve like they did in italy in the 1900-1915 period.  No meds, no food.

Fri, 03/09/2012 - 17:59 | 2241539 persu
persu's picture

Stupid, AAA counterparty is able to get a unilateral CSA, that is no collateral from its side.
Sometimes, ZH should do its homework before writing these rants. It is bad for credibility.

Fri, 03/09/2012 - 18:07 | 2241560 Tyler Durden
Tyler Durden's picture

Sorry, who is the AAA counterparty? Bankrupt KA?

Sat, 03/10/2012 - 02:17 | 2242655 persu
persu's picture

It likely backed by Austria, which AAA. This how it goes. Trust me, i have been involved in these sitiations many many times.

Fri, 03/09/2012 - 18:18 | 2241563 randfan
randfan's picture

ok, i'm truly confused.  Is KA Finanz saying their CDS exposure is roughly $1b or practically 1/3 of the 3.2b of CDS payouts officals said there was?

 

If so, and I suspect I'm not understanding something here, it seems highly improbable that KA Finanz is the Greece default equivalent to AIG, writing so much of the Greece default CDS.  Or, does this mean that by Monday we could be reading that the $3.2b in CDS exposure is actually multiples larger when all the other banks confess they've understated their exposure?

 

Usually, it's not the payment event that triggers the disclosure and crisis, but the payment date. 

 

As someone above intimated, the payor banks will suddenly say they don't know where the money to payout these claims went. 

Fri, 03/09/2012 - 18:15 | 2241575 Dead Canary
Dead Canary's picture

So. Greece dropped their debt by $138 bill so they could get a loan of $171 billion. So what does this mean:
1. Greece is now $38 MORE in debt than yesterday.
2. Private bond holders took a 50% loss on their bonds
3. The ECB and IMF don't take haircuts on their bonds
Conclusion: The big euro banks just stole private bonds (including Greek pension funds) and for pennies on the dollar, and will get paid at 100%. Am I missing something.
Let's not forget it was Goldman Suks that fudged the Greek deficit numbers in the first place that allowed them to enter the EuroZone with more debt then they were claiming.
Let's not forget the unelected Greek PM is a former Goldman Suks man.
Let's not forget the unelected PM of Italy is a former GS man.
Let's not forget the head of the ECB is a forment GS man
Let's not forget the head of the US Treasury is a former GS man
This whole thing is a long term con by the big banks (also know as Central Banks) to put governments into debt, then bleed them dry. They sometimes use war, now they use runaway socialism to achieve their goals.

Questions? Comments?

Fri, 03/09/2012 - 19:03 | 2241697 Alethian
Alethian's picture

"Conclusion: The big euro banks just stole private bonds (including Greek pension funds) and for pennies on the dollar, and will get paid at 100%. Am I missing something."

 

Question: Can you explain this part? (Apologies: I'm new to this game) 

Fri, 03/09/2012 - 20:02 | 2241838 Hugo Chavez
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.

Fri, 03/09/2012 - 20:01 | 2241854 Hugo Chavez
Hugo Chavez's picture

THE NICE WORD FOR PENSION THEFT IS SUBORDINATION AND VOLUNTARY EXCHANGE.

THUS THE WRITERS OF SWAPS GET TO KEEP THE PREMIUM INCOME. THE ECB gets all future coupons, and pension and life insurance funds get to enjoy a big stick up the ass as their reward.

Fri, 03/09/2012 - 21:00 | 2242008 Alethian
Alethian's picture

I get it now. Cheers.

Fri, 03/09/2012 - 19:17 | 2241734 alfman
alfman's picture

spot on, canary!

if only GS supported the (next) potus. but wait, there is obomba, mittens, grinch, sanscrotum.

Fri, 03/09/2012 - 18:23 | 2241601 HD
HD's picture

Let's for argument say this all works as planned. All their ducks are in a row, no black swans for Greece.

The rest of the PIIGS are next. If CDS can trigger - why would bondholders take the cramdown losses next time? Didn't most of the private bondholders take these losses because they feared they would never allow the CDS to trigger?

Fool me once...

Fri, 03/09/2012 - 19:22 | 2241743 randfan
randfan's picture

Great point...here's a question.  Even if greek bondholder agreed to the swap, can't they still exercise their right to collect under their CDS contracts or is there some language in the CDS that expressly states that if a bondholder accepts less than full face value from the borrower, the bondholder forfeits its right to collect on the CDS?

Why wouldn't Greek debt bondholders argue that they accepted the haircut because they knew it would triggger a CDS payout event?  After all, the CDS guarantors are not the Greek government.  So as a Greek debt bondholder, I merely accepted the settlement and then turned to my CDS writer to pay me.  Moreover, the bondholder would argue that he did the CDS writer a favor by accepting the deal because it effectively reduces the amount the CDS writer has to payout.

Fri, 03/09/2012 - 19:56 | 2241830 Hugo Chavez
Hugo Chavez's picture

Here is your answer.

NO

Fri, 03/09/2012 - 19:59 | 2241849 HD
HD's picture

The actual language of the contracts could be important - but I suspect the obsession with "voluntary write downs" was to circumvent any CDS payout on mass. I suppose they could argue they made a deal under duress, but what *cough* unbiased court would even consider such a claim?

Fri, 03/09/2012 - 18:44 | 2241661 brent1023
brent1023's picture

Any bank that was writing CDSs on Greek debt deserves to be out of business.

Don't bail these puppies - let them sink.

And if the government allowed investment banks to take retail deposits, making the retail depositors whole must come before the shareholders of the bank or any other holder of bank collateral.

Fri, 03/09/2012 - 18:59 | 2241691 chindit13
chindit13's picture

In a nutshell---okay, a coconut shell---this seems to be where we are:

1)  Greece was able to write off 100 billion euros worth of debt in exchange for a 130 billion rescue package of new debt, of which Greece itself will receive 19%, or about 25 billion, so that it can continue to operate as an ongoing concern.  Somehow Greece is in a better position than before, with more debt and less sovereignty and still---by virtue of sharing a common currency---trying to compete toe-to-toe with the likes of Germany and the Netherlands, kind of like being the Yemeni National Basketball team in an Olympic bracket that includes the US, Spain and Germany.  At least a "within the euro" default prevented bank runs in Portugal, Spain, Italy et al.

2)  As a result of the bond haircuts, Greece has many pension plans that can no longer even pretend to be viable, at least according to the original contracted scheme, but pensionholders still working can take heart in the fact that their current wages will be cut, too.

3)  CDS buyers will have to sweat bullets, jump through hoops, and be forced to endure every cliche known to man, but they might end up getting something for all their trouble, provided their counterparty is solvent and that counterparty itself is not heavily exposed to an insolvent party or a NTBTF institution, otherwise known as a Lehman Brothers.  Expect the legal profession to be the prime beneficiary of this "event", as any new CDS contract will be at least a hundred pages of boilerplate longer in the future.

4)  Good luck to any less than AAA rated sovereign who wants to issue debt from now on out.  That contracts can now be unilaterally abrogated, as Greece' bonds were with the retro-CACs, bodes ill for attractive pricing from here on out.  Peripherals in the EU will suffer most, as they face the added indignity of being subordinated to the ECB at any point the ECB chooses to exercise its divine right of seniority.  The thing that used to be called the risk free rate no longer exists.  Bill Sharpe take note.

5)  One hundred billion euros worth of perceived wealth evaporated.  That can not be a good thing for a Eurobanking system already capital short, as it raises leverage (quick back of the envelop calculation) by about 6% across the board.  It also will not make the interbank market any more trusting, thus increasing the likelihood of perpetual LTRO.  LTRO lll looks to arrive sooner than QE lll.

6)  With the drawn-out Greek event and the LTRO, Europe might believe it has firewalled the system for at least three years and limited damage to Greece and Portugal (who will likely undergo a similar default by the 3rd quarter).  LTRO-provided liquidity, it is hoped, will lower market rates enough in Spain and Italy so that those countries can meet sovereign bond obligations and both service existing debt and issue new debt.  When the LTRO expires in 2015, "hopefully" something called organic growth will have taken over in countries imposing severe austerity measures on their public sectors, so that debt servicing becomes easier.  Organic growth obviously is something that comes in a can, a can which has been kicked out to 2015.

7)  As Europe now speaks increasingly of greater EU financial integration, Sarkozy's poll numbers will be the victim and a less EU friendly individual will likely win the upcoming election.  Since France and Germany fortunately have a long and storied history of being the best of friends, and no one in either country would ever pander to nationalist sentiments, this shouldn't present a problem.

8)  Given how much angst was caused by the drawn out Greek affair, the Spanish leader knows he has enormous leverage with EU leadership and he can continue to do what he has been doing with regard to ignoring the deficit targets demanded/suggested by the EU.  The EU might well bark at him, but they cannot afford to bite at this time.  Muchos gracias, Greece.

Fri, 03/09/2012 - 22:18 | 2242194 slewie the pi-rat
slewie the pi-rat's picture

5)  One hundred billion euros worth of perceived wealth evaporated.

yup.  m2m. more losses, worse ratios

done deal

TheEnd

 

Fri, 03/09/2012 - 19:52 | 2241814 Hugo Chavez
Hugo Chavez's picture

Even though by superhuman effort the tide was mostly stopped from receding, there still might be a swimmer or two caught naked.

Fri, 03/09/2012 - 20:30 | 2241894 uranian
uranian's picture

official figures last i looked for the derivatives market were about 0.8 quadrillion dollars. i'd uninformedly guess at minimum, 5% of that is involved in european debt; most of the pile is in interest rate swaps, to manipulate sovereign bond yields, i tend to think. even if it's 1% of total derivatives that are affected here, that's in the trillions range, rather than a paltry billion or 3 here and there. which is why they are covering up the true total by netting it all out, as another trillion or more bailout would have the peasants really revolting. specially now the weather's warming up.

 

more informedly, jim sinclair suggests that the figure affected is $37 trillion.

Fri, 03/09/2012 - 22:33 | 2242228 GeneH3
GeneH3's picture

Two of the things I like about ZH is their appreciation and understanding of economic history and their gallows sense of humor (coughcreditanstaltcough). How those who have studied that history do not learn from it defies any rational explanation, except that they are either stupid or corrupt beyond belief. I leave it to you to conclude who is stupid and who is corrupt.

Sat, 03/10/2012 - 07:22 | 2242837 The Alarmist
The Alarmist's picture

Every time I raise the question of counter-party risk during a derivatives sales pitch, I'm told to not worry my pretty little head as these things are collateralized and settled daily. I have noticed that rule seems to be applied more often than not when the position is against us, which given the pattern would suggest that things are almost always against us. That may also be possible, but in any case it sure seems like collateralization is a one way street.

Things that make you go hmmm!

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