Would A Ponzi By Any Other Name Smell As Bad?

Tyler Durden's picture

Via Peter Tchir of TF Market Advisors,

Would a Ponzi by any other name smell as bad?

The bond market has always had clever names for bonds in specific markets.  Eurobonds, Yankee bonds, Samurai bonds, and now, Ponzi bonds.  I’m not sure what else to call these new bonds, but Ponzi bonds seems as good as anything.

I couldn’t find the new National Bank of Greece Preferred bond that was issued to the Greek government, but I did find a bond that was issued back in June.  Euribor + 1200 may seem like a big coupon, but I cannot imagine that any actual investor bought these bonds.

National Bank Of Greece 3 Year Bond

The fact that NBG is the “book runner” of this bond is further demonstration that no real account bought these bonds – back when NBG sold actual bonds to actual institutions it hired banks like DB to lead the deals for them.  As further evidence of the “special nature” of these bonds is that the “Collateral Type” is “Govt Liquid Gtd”, which means the Greek government guaranteed these bonds.  So just like the Italian bonds, NBG issued these bonds to themselves, got a Greek government guarantee (how can a country that can’t borrow, provide a guarantee?) and took these bonds to the ECB to get some financing.  The ECB won’t buy National Bank of Greece bonds directly, they won’t buy Hellenic Republic bonds in the primary market, but they will take these ponzi bonds as collateral?  Not only have they gone with form over substance in skirting around rules, but they have clearly thrown out any reasonable attempts at being prudent with the use of their balance sheet.  Where do these guarantees show up?  Is anyone out their negotiating the haircut on these bonds?  Probably not since somehow a guarantee doesn’t count.  Yet NBG is likely at the PSI negotiating table since they own actual Greek debt in addition to these ponzi bonds.  All very confusing.

NBG has now issued preferred bonds to the same bankrupt country.  The bankrupt country provided €1 billion of capital to the insolvent bank.  Whether the country got the money by posting the bonds to the ECB as collateral, or from their last tranche of TROIKA money, I don’t know.  What I do know is that NBG is trying to use that money to buy back bonds and preferred shares at a discount to par (where they carry them at).  Those purchases would generate profits for the bank as they would book the difference between par and purchase price as income.  That would increase their equity capital.  In the case of preferred bonds/stock they buy back, I’m not sure how much of a benefit they get as retiring those issues would reduce capital by the face amount, but it certainly works on straight debt.  The scary part is that you can almost see the logic behind it.  You can see how they are attempting to use what little firepower they have left to keep the bank alive and pretend like all is good.  Yet, it is sacrificing the people and the country for the good of the bank.  Does Greece really benefit from buying these bonds/preferreds?  Greece has NO money!  Greece is living bailout to bailout yet, is finding ways to help the banks meet regulatory requirements.  Why are existing lenders letting Greece pile on more debt to save the banks?  I just don’t see how this works, and I really don’t understand how the IMF (US Taxpayer) can be comfortable with Greece using money to buy National Bank of Greece bonds.

Lets shift to Italy.  In Italy at least 3 banks issued bonds just ahead of the LTRO. 

Intesa SanPaolo 3 month Bill

UniCredit 3 month Bill

They issued bonds to themselves.  Yes, they sold bonds to themselves (I wonder how many sales credits the salesperson got?).

So after the bond purchase and sale, we have a bank with a matching asset and liability.

So the next step is for the Italian Bank to get a guarantee from the Italian government.  I assume there is some cost to this, but haven’t bothered to check because frankly the fee is small relative to the benefits received.

So now the Italian bank has a bond that is guaranteed by the Italian government.  That is marginally better than having their own debt, since if they stop paying on their debt, the Italian government would make payment on these bonds.  The beneficiary of the guarantee payments would be the other creditors of the Italian Bank, so the guarantee has minimal value at this stage.  The Italian Government has created a new liability – the contingent guarantee of this Italian Bank bond.  Thanks to “modern” accounting, or the market’s self deception, somehow a guarantee doesn’t count against the Italian government (or at least that is the hope).

Now the bank participates in LTRO and pledges the guaranteed bonds to the ECB.

The ECB loaned money to the Italian Bank.  The ECB deems it as “safe” because they received a bond Guaranteed by the Italian Government as collateral.  The Italian Bank gets money from the ECB, pays itself money on the bonds it issued, and owes the ECB interest on the money they received.  The Italian government is happy because they didn’t issue any debt, yet used their guarantee (which somehow they seem to think doesn’t count against them) to get one of their banks much needed money.

It is unclear from this chart (and to the world in general) where the ECB got the money to lend to the Italian Bank in the first place.  Right now the banks don’t seem to need the money they got from the ECB so they are lending it back to the ECB.  So at the moment the ECB is getting the money to lend to the banks, from the banks themselves, but ultimately where is the ECB getting the money to lend once the banks won’t lend it to them?  It is bizarre if you think about it.

It is one thing to read about how the ECB’s deposits have skyrocketed since LTRO, but to look at balance sheets of the entities involved makes it even more mind-boggling to me.

But this is where it gets really good.  The Italian Government and the ECB both put pressure on the Italian Banks to use at least some of the money to purchase Italian Government bonds.  Surely some of the money will be used for other purposes (it won’t permanently be lent to the ECB), but at least part will be used to help Italian banks finance existing Italian government bonds or to buy new ones.

So, here is what the world now looks like.  The Italian government has some money.  The Italian Government issued bonds AND guarantees to get that money!  If they could have issued bonds directly to the ECB they would not have incurred the Guarantee.  The size of the guarantee is likely to be larger than the Italian Government Bonds proceeds since even Italian banks won’t use all of the LTRO money to buy Italian government bonds.

The banks have cheap funding via the LTRO facility and some assets against it.  They pay an interest rate on the “new bonds” they issued, but receive that money back via the repo agreement that is part of the LTRO.  They are the proud owners of Italian government bonds with cheap financing.  They could have bought the bonds directly, except they cannot borrow cheaply.  Yes, the market had made some attempt to charge banks with bad risk management, awful assets, and opaque books, more than they charged the country they were domiciled in.  But rather than let the market (and common sense) rule, a mechanism to let banks fund themselves cheaper than the countries they rely on, was created.

The ECB has apparently created money, and can pretend as though they didn’t print money, and also pretend that they didn’t participate in financing sovereigns directly in new issues (I guess).

Countries and Their Banks are Becoming Indistinguishable

Asides from giving Ponzi a bad name (at least until the ECB just admits that they are printing faster than even Big Ben) this is tying the banks and the countries ever closer.  A long, long, time ago (1 month) it was conceivable that a bank could fail and the sovereign survive.  That is becoming less clear.  Whether Italian Banks use all of the LTRO proceeds for new sovereign debt is relatively immaterial, since they already hold lots of Italian government debt.  It was always very difficult to see how an Italian bank could survive a default (or haircut or restructuring) by Italy.  They just had too much exposure in addition to their other weak holdings.

It was possible to imagine the sovereign surviving a bank default.  A default by any individual bank didn’t necessarily bring the sovereign down.  It would likely drag other banks down and put pressure on the sovereign and the ECB to take drastic measures to support the banking system, but there was a real chance the sovereign (even one without money printing capacity) could survive.  But that may no longer be the case with LTRO and the Ponzi Bonds.  Once a bank defaults, the ECB would rely on the government guarantee.  The government debt burden would increase by the amount of that guarantee.  In addition to having to get new money into the rest of the banks, the markets would certainly start pricing in all of the other guarantees the government had made via this program.  The pressure on the surviving banks would be more than it would have been otherwise because investors will know they relied on government guarantees to remain solvent.


This program seems to ensure the destruction of the entire banking system and the sovereign if any reasonably large participant fails.  We have gone for “sovereign ceiling” to “weakest link” in terms of credit.  If this program become common and larger, we have effectively linked all the banks in the system, and the sovereign, to the WEAKEST bank.  Maybe that is an overstatement as this time (the program is new, and it isn’t huge yet) but it is already material and threatens to grow.  Intesa Sanpaolo did €12 billion this time around.  Their equity market cap is only €22 billion.  If all of the banks defaulted and Italian government debt went up by only €40 billion, maybe the market could handle it.  But this is just the first time Italy has done this.  Another LTRO is coming up.  We have also seen that Greece is using this “methodology” to get money to the banks via programs other than LTRO.

As an investor, unnecessary complexity and off-balance sheet obligations scare me.  What is going on in Italy is limit long unnecessary complexity and has a decent amount of off-balance sheet contingent liabilities to go along with it.  Similar ideas seem to have worked in Ireland, have helped Greece keep NBG alive, and the program is not yet large (that we know of), so I’m not panicked right now, but I would start evaluating Italy from the weakest link perspective much more than trying to figure out “what dirty shirt is the least dirty”.  Greece had all sorts of ways to hide debt before anyone was looking too closely.  Clearly other countries are learning, and who knows what they already have hidden that hasn’t come to the surface (Spain did just miss their deficit by a full 2% points with zero warning).

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GOSPLAN HERO's picture

Smells like ass...

"The ECB has apparently created money, and can pretend as though they didn’t print money, and also pretend that they didn’t participate in financing sovereigns directly in new issues (I guess)."


trav7777's picture

they just "grew their balance sheet"

Ghordius's picture

"they just "grew their balance sheet"" exactly - same as monetization

"Countries and Their Banks are Becoming Indistinguishable"

the trick is only marginally better than what the Italians did for a few decades - it worked for a while until it was not necessary anymore

it's shadow nationalization - I was expecting the latter but I have to say the "shadow" part is quite a novelty... a financial innovation

Spigot's picture

The snap back from this mother fucking bullshit is gonna rip people's heads straight off of their bodies. God, this is gonna be a bloody mess before its all done.

bank guy in Brussels's picture

That big 'collapse' upcoming, might turn out to be a shunt detour.

The background of the shenanigans that astonish Peter Tchir above ...

Here in Europe we may just be keeping the Ponzi afloat for a few weeks or months ... till the Americans start World War III in Asia ... after which the Big News is not that Germany leaves the euro, but that Germany leads the way to a new EU partnership with Russia, and we will jettison the US and Nato (and the Brits too).

Re debt and the banks we will simply have a great re-set and wipe a lot of it out. Europe's debt is mostly owed to itself. With Russia providing energy, Europe is complete, self-sufficient including food, we have no trade deficit ...

From America we now get nothing except fraud, lies, theft, and attempts to control the internet and media with propaganda.

But we are not going to be the initiator of the divorce from the USA. That will happen after America starts W W III and drops a nuke bomb on somebody, and it is totally clear that the USA are the new fascist Nazis, while here in Europe along with Russia, we will be the no-death-penalty and self-sufficient socially progressive People of Enlightenment.

Elwood P Suggins's picture

Which bank in Brussels are you the janitor at?

Bob Sacamano's picture

The US wishes you the best.  All redistributionists / collectivists should make your plane reservations to join our Russian/German friends.  

Ghordius's picture

bank guy in brussels - do you really think you can dis-entangle the empire?

bob sacamano - do you really think it's european redistributionism that is afflicting your country? you have your own, more potent brand

Spigot's picture

Be my guest to embrace Russia as your long lost soulmate. I'm sure you'll find what you are looking for, there. Just remember history, as it will inform you of your future.

hugovanderbubble's picture

Peter attention to

France and EFSF downgrade

TooBearish's picture

whatever...poos 25000!

youngman's picture

I am amazed at how hard they work to get around the rules or laws....no need to be honest...just cheat..it will all work out in the end....

Spigot's picture

Reminds me of what I learned about lying as a kid: it just gets worse and more tangle until you can't keep up the lies anymore. Only I don;t think these guys ever learned that...

my puppy for prez's picture

You should see how the R establishment is trying to figure out how they can rig the caucus so Paul won't win.  They are being open about it!

my puppy for prez's picture

If you support Ron Paul, PLEASE go to drudgereport.com and vote in their IN HOUSE poll.  It's right at the top and DOES NOT link you or spam you.  I just voted and after it just shows the results.


kito's picture

i already have my gary johnson bumper sticker on deck should ron paul lose tonight..............

my puppy for prez's picture

Okay.  But please vote at drudge in the meantime!

PartysOver's picture

OK, I voted 42 times for RP at Drudge.  Re-hypothecating my vote.  Seems to work nicely.

GiantVampireSquid vs OWS UFC 2012's picture

If you think a politician is gonna save ya, THINK AGAIN.  Only you can secure your financial freedom and independence.  Just saying, 'cause there is a lot of hype that RP is gonna fix things for everyone.  That may or may not be true.  Shutting down the Fed is a good start but it will cause one hell of a shit storm in the process.

kaiserhoff's picture

Ponzi Bonds sounds so judgemental.  How about Juden Confetti Bonds?  That sounds festive and New Yearish.

francis_sawyer's picture

How about "Mexican Standoff" Bonds?

Hippocratic Oaf's picture

and I see that Moodys actually gave this shit a rating

Buzz Fuzzel's picture

We learned all we need to know about the bond raters back in 2007-2009.  Anyone who still cares what Moodys thinks is either misinformed or delusional.

They are Ponzi enablers.

Pretorian's picture

When the Greece defaults and NBG is in bigger trouble. ECB will take over NBG assets outside Greece (Turkey and South East European Countries)predominantly many good working banks, big fat portfolio and let NBG rotten in Greece.

boouood's picture

NBG Albania is full of developer's bad loans. Their assets are mainly abandoned half-build buildings left behind after the local housing bubble. There are enough flats here for 3 milion inhabitans....but the city of Tirana counts less than 1 milion. 

Timmay's picture

I make my living off the evening news
Just give me something, something I can use
People love it when you lose, they love dirty laundry

Well, I could've been an actor, but I wound up here
I just have to look good, I don't have to be clear
Come and whisper in my ear, give us dirty laundry

Kick 'em when they're up, kick 'em when they're down
Kick 'em when they're up, kick 'em when they're down
Kick 'em when they're up, kick 'em when they're down
Kick 'em when they're up, kick 'em all around

We got the bubbleheaded bleach-blonde, comes on at 5
She can tell you about the plane crash with a gleam in her eye
It's interesting when people die, give us dirty laundry

Can we film the operation? Is the head dead yet?
You know the boys in the newsroom got a running bet
Get the widow on the set, we need dirty laundry

You don't really need to find out what's going on
You don't really want to know just how far it's gone
Just leave well enough alone, keep your dirty laundry

Kick 'em when they're up, kick 'em when they're down
Kick 'em when they're up, kick 'em when they're down
Kick 'em when they're up, kick 'em when they're down
Kick 'em when they're stiff, kick 'em all around

Dirty little secrets, dirty little lies
We got our dirty little fingers in everybody's pie
Love to cut you down to size, we love dirty laundry

We can do the innuendo, we can dance and sing
When it's said and done, we haven't told you a thing
We all know that crap is king, give us dirty laundry

Seasmoke's picture

Charles Ponzi could never have thought his name would live forever.......good for him !

The Axe's picture

fucking amazing!!!!

Gief Gold Plox's picture

Every single time I read an article like this I feel lucky for having been able to exchange some of my soon to be worthless zEUROs for gold, silver, arable land and so forth.

Spigot's picture

Absolutely spot on, you are a genius. Good choices.

flacon's picture

And don't forget to buy toilet paper and soap. 

Gief Gold Plox's picture

Toilet paper... hm... Has the paint they use in euros been dermatologicly tested?

Spigot's picture

Consider not the aspersions of fools, Gief. They are your toilet paper.

Sandmann's picture

Do you think Bankers are Marxists ? They have driven product markets to commoditisation; driven incomes of persons engaged in manufacturing into the ground, and they have financialised the whole society and reduced nation states to simply locations for debt warehousing. Britain truly is Airstrip One and the whole sluicing of toxic debt around Europe rather resembles Ebola Virus on a trip around the human body. The consistent and inexorable destruction of national identity and sovereign states to serve some globalised One World Agenda makes one wonder just how brutal reassertion of National Interest will be when it emerges into full light of day. I mean Europe has unleashed the two most violent wars in history and it is not a happy continent

supafuckinmingster's picture

"Europe has unleashed the two most violent wars in history and it is not a happy continent"


On both occasions with a little help from Uncle Tom, and next time, i.e. shortly, with a little more help methinks.

Scalaris's picture

Ponzi bonds sounds about right. 

It's like injecting embalming fluid with redbull and cocaine. At some point you are bound to get some kind of movement.

As for the guarantee, let's just assume that is the unlimited non-taxable Greek sunshine and leave it at that, cause we would be then seeking for logic where it clearly doesn't apply anymore.

Big Ben's picture

This seems to be the European version of QE. Just as in the US version, the ECB creates some money and loans it to banks, which loan it right back to the ECB. As long as the banks loan the newly-printed money back to the ECB, this is not inflationary. But it will not stimulate the economy either. It is mainly a bookkeeping operation which doesn't serve much purpose.

It would be interesting to know the interest rates that the bank pays to the ECB and is paid by the ECB. Is there a positive spread for the bank?

GiantVampireSquid vs OWS UFC 2012's picture

You nailed it.  It may be inflationary for things that banks buy though, such as preffered shares, maybe gold or oil futures, biflations.

Dick Darlington's picture

It was the Irish banks who started the ponzi bond circle jerk by issuing bonds to themselves and surprise surprise others have followed.


And just for the laughs take a look at this, tweeted earlier today by NamaWineLake:


"22 days before Ireland pays €1,250m to unsecured unguaranteed bondholders at zombified Anglo on 25th Jan"


Irish66's picture

there you go again Dick....my feelings are getting hurt. lmao

Dick Darlington's picture

Lol! +1


Sorry mate!

But since i mentioned Ireland, here's some bed time reading.


Irish66's picture

My friend tried to get me to buy property about 5 years ago and I declined.

She was funneling at the time, she is a US citizen now

smiler03's picture

I couldn't help but giggle at the link to www.daft.ie in your link.

daft.ie  Ireland's Biggest Property Site!

supafuckinmingster's picture



€2000,000,000,000,000,000,000 for a house in fucking Kilkenny, bahahahahahahahahahahahahahaaaaaa!!!!!!!!!

oogs66's picture

Occupy wall street will be back with a vengeance

valley chick's picture

help me out here in understanding this....when this mess collapses will the government then own everything the bank has?  This is one of the craziest things I think I have seen.  Since there is no real buyers (for who would want the crap), what is in for the government to guarantee other than ownership for control?


Does the ECB actually have anything that is real or is it all ponzi anymore?

Gief Gold Plox's picture

They've got some real gold, unless they're lying about that too.

Volume in millions of fine troy ounces: 346.844