Since around the time that everyone figured out that Jon Corzine is a) just another thief and b) not a very bright one at that, a crazy idea has been getting floated around the financial world…..That there are people in this world willing to lose half their money voluntarily. I don’t know any of these people. Of course I speak of the proposed plan that Greek bond holders receive a 50% haircut, but won’t be allowed to collect on their credit default swaps (CDS), because this will not considered a credit event because the haircut is voluntary. It restores your faith in the goodness of mankind, doesn’t it? The Haves gracefully giving to the Havenots and more impressively, refusing to demand payment on that insurance policy they bought because they suspected the Havenots were deadbeats all along.
But I must re-emphasize, I don’t know any of these people.
The realm I’m familiar with has more than its fair share of people who will weasel out of their obligations by any means conceivable, so try this on for size: Yes Virginia, there is a European debt crisis, but there’s also a credit default swap issuer crisis. The latter has been with us for at least four years. Worse yet, there’s considerable evidence that protecting 5 banks from having to honor their CDS obligations is Job 1 in America. Now these US banks are trying to conquer Europe.
5 US firms represent more than 70% of Global CDS market.
Fun facts: JPMorgan’s Blythe Masters is widely credited with the creation of the modern credit default swap in connection with JPM’s obligations over the Exxon Valdez oil spill (the clusterfuck that just keeps on giving) and is living proof that Americans will embrace any harebrained scheme pitched with a British accent.
Credit default swaps distort markets. Wall Street could never have sold mortgage-backed securities without the “guarantees” CDSs promise. No MBS, no housing bubble. When the housing bubble broke, Goldman CEO/Treasurer Hank Paulson drafted a three-page memo demanding that the US taxpayers buy $700B in “Troubled assets.” What made these assets so troubling for Wall Street was that they had insured most of them and were on the hook for the losses. Congress gave Paulson the money, but he never bought any troubled assets. Instead the Fed stepped in and bought $1.25T in mortgage backed securities, and rumors are that HeliBen will be buying more in 2012. Meanwhile the Fed unleashed program after program to stabilize the financial system. If you’re inclined to review the madness in detail, I recommend the Government Accountability Office’s 266-page report on the Federal Reserve’s management of the last crisis (found here). If not, I recommend Laura Numeroff & Felicia Bond’s If You Give A Pig A Party with this special edition cover I made:
If You Give A Pig A Party, chronicles a rollicking series of unforseen events that in the end only leads to another party. We could learn a lot from this masterpiece. More than 60% of the Fed’s so-called “broad-based” emergency programs went to Pig 5 ($9.9T of $16.1T).
In other news, I’m trying to cash in on the success of the If You Give A _____ A _____ franchise with an offering of my own:
So far no takers.
Notes: All CDS data is notional value. Data on Global credit default swaps from most recent BIS Semiannual OTC derivatives statistics (Q2, 2011). The BIS claims to capture more than 95% of the OTC derivatives market. Individual bank data from OCC’s Quarterly Report on Bank Trading and Derivatives Activities (Q2 2011) . According to the OCC, 97% of credit derivates are credit default swaps.The “Pig 5” added more than $135 B in credit derivatives in Q3 (comparable BIS data is not available). The data used from the GAO report can be found in Table 8. Fun fact: Artist Felicia Bond’s name is an anagram for “Fed bail con I.”