Tuesday, June 14, 2011

Greek Debt Crisis Rests On A Foundation Of US Banking Fraud

For the past seven weeks now, the financial markets [and the Precious Metals] have been held hostage by a "push me/pull me" effect tied to the fate of Greek Debt.  "Renewed fears" of Greek Debt Default push the Euro down, and pull the US Dollar up.  Announced consensus on how to "prevent" a Greek Debt Default conversely pulls the Euro up, and pushes the US Dollar down.

How can the debt default of a tiny little country like Greece hold such sway over the global financial markets?  Greece's $532 BILLION debt as a portion of "global external debt" is only 0.009% of the global total of $59 TRILLION.  The USA's $14.3 TRILLION of external public debt is equal to a whopping 24% of the total global external debt outstanding.  Shouldn't the massive public debt of the USA be of grave concern to the global financial markets instead of Greece's tiny debt?  Obviously it should be, but it is not.  Why not?

Perhaps because, at this moment in time, Greek Debt has the shortest fuse before exploding in default, and represents the most immediate risk to the global banking system.  Who has the most exposure to a Greek Debt Default?  What if the PIIGS Debt Crisis has less to do with a $532 BILLION  Greek Debt Default, and more to do with the potential for a $120 BILLION credit default swap payout by US Banks to the European banks holding the PIIGS Debt that defaults?  Could the US Banks "afford" a $120 BILLION payout to the European banks should the PIIGS begin to default on their debts?

It is no secret that the banks in the US and in Europe have been the single biggest recipients, and beneficiaries, of global government bailouts and monetary stimulus since the Global Financial Crisis broke in 2008.  Would it be so shocking to learn that these banks have used all of this monopoly money created and distributed by the Federal Reserve to not make the global financial system stronger, but to in fact make it weaker?

Without mincing words, the world does not face a crisis of liquidity, nor a crisis of insufficient debt, but one of entirely too much debt. That's the entire predicament in three words: too much debt.
More debt is only going to compound the predicament, yet that is what the world's central banks and political structures are busy manufacturing. More debt.
 -Chris Martenson

Time to Get Outraged by the Banks
By John Mauldin, Millennium Wave Advisors, June 13, 2011
Long-time readers know I continuously pound the table that credit default swaps [CDS] need to be put on an exchange. The Frank-Dodd bill failed in so many ways to deal with the last crisis and prevent the next one, it is hard to start a list.

I have openly speculated that US banks were selling CDS to Europe but had no idea how much. Now we do.

An analysis by economist Kash Mansori, at http://streetlightblog.blogspot.com/2011/06/betting-on-pigs.html, tears apart the mind-numbing 146-page report from the Bank of International Settlements:

First, the BIS data very helpfully breaks exposures into two pieces: direct exposures, which basically means creditors who own bonds issued by one of the PIGs; and indirect exposures, which for the most part means agents who sold default insurance to creditors, primarily through credit default swaps. As summarized in the following table, it seems that approximately 30% of total potential exposures to debt from the PIGs are covered by default insurance. Put another way, if one of the PIGs defaults, creditors who actually hold bonds from that country will absorb about 70% of the losses, while agents (primarily banks and insurance companies) that sold insurance against the possibility of default will have to cover the remaining 30%. That's not a trivial amount.

“The table above also hints at striking differences between how European and US creditors would be hit in the case of default by one of the PIGs. If Greece were to default, for example, approximately 94% of the direct losses would fall on European creditors, and only 5% would fall on US creditors. However, US banks and insurance companies would have to make about 56% of the default insurance payouts triggered by such an event, while European agents would make only 43% of those payouts.

“The next table illustrates this difference even more starkly. In the case of Greece and Portugal, the vast majority of the losses that would be borne by creditors in Europe would be direct losses. In fact, French and German creditors would almost certainly be substantial net recipients of default insurance payments. (That's less clear in the case of Ireland.) Meanwhile, US financial institutions would have to make substantial net default insurance payments, which would account for between 80% and 90% of all losses borne by the US in the case of default.

“Finally, it's worth noting that once you account for the substantial payouts that US agents will have to make to European creditors in the case of a default by one of the PIGs, financial institutions in the US have roughly as much to lose from default as those in France and Germany.  The apparent eagerness of US banks and insurance companies to sell default insurance to European creditors means that they will now have to substantially share in the pain inflicted by a PIG default.

“This has some important implications. First, US and European financial institutions are likely to have very different incentives as negotiations regarding debt restructuring and reprofiling proceed. US banks and insurance companies are surely delighted with the "soft restructuring" that is currently being discussed. Such a partial default would probably not trigger default insurance payments, and so the pain would be borne almost exclusively by European institutions. On the other hand, some time soon it seems likely that European creditors will begin to prefer a "hard restructuring" that would require default insurance payouts from the US institutions that sold such insurance. Given how strikingly one-sided the net default insurance payments will be (from the US to Europe), it's easy to imagine how that could shape future negotiations over debt relief for the PIGs.

“Second, there's an interesting puzzle here. Why have European and American financial institutions behaved so differently when it comes to the PIGs? Specifically, why have American firms been so willing to sell default insurance to the Europeans, though they have not bought much PIG debt? And conversely, why have the Europeans systematically been so eager to buy insurance for their PIG debt, even at the very high price such insurance now commands? In essence, European firms have been betting that a PIG default will happen sooner rather than later, while US firms have been betting that default would happen later or not at all.”

If I read those tables correctly, that means US banks have sold some $120 billion of credit default swaps to European banks. Let’s think about that for a minute.

When, not if, Greece defaults, US banks are going to have to dip into capital to pay those commitments. Capital that should be available for loans to businesses but will have to be paid to European banks instead. Will it be a 100% Greek default, or only 50%? If it is a default, do you have to pay all or just the defaulted portion, and when?

Why, oh why, are banks putting American taxpayers at risk, as these too-big-to-fail banks certainly are?

GREED!  The banks are putting American taxpayers at risk purely for profit.  With the US Government still standing at the ready to bailout the bad bets of the banks, how can the banks lose insuring PIIGS Debt?  Some would argue that without the "insurance" offered by the American banks to those European banks buying the debt of Greece and the other PIIGS to keep them solvent, the PIIGS would have long ago defaulted on their debt already. 

Curiously one wonders aloud, "Why would the European Banks loan money to the PIIGS for use in paying the interest on their already existing debt?"  Seriously, how dumb is that?  The European banks are loaning their EU debtor nations money so that these EU debtors can pay back the interest due on loans they already owe the European banks.  What kind of a circle jerk have we got goin' on here?

The Phony Argument Against Debt-Default
by Jeff Nielson
Quite obviously, if (when) Greece’s bankrupt government defaults on its bond-debt, then the #1 reason/need for using those foreign credit markets will be gone: to borrow more money simply to pay interest to bond-parasites. When we accompany this premise with the obvious point that much of this bond debt is fraudulent, then defaulting on such debt is not only the most economically advantageous path for Greece’s government to take, but also the only morally just one.

The debts are “fraudulent” in many respects. To begin with, several of the Euro debt-sinners deliberately “fudged” their accounting – in Greece’s case as a pretext for gaining entry into the EU. Naturally when these governments were looking for sleazy accounting gimmicks which would effectively allow them to lie about their sovereign “balance sheets” they went to Wall Street.

However, the Wall Street fraud regarding the accumulation of these bond debts goes much further. Using two of their “financial weapons of mass destruction”: credit default swaps and interest rate swaps, they duped governments all over the world (but especially in Europe and North America) into using these fraud devices – which, in fact were nothing but (more) Wall Street scams.

Here is how the scamming worked. The banksters would approach these governments and tell them they had come up with a “magical” way for them to not only borrow more money than ever before, but to also permanently pay a much lower rate of interest on all that debt. Obviously these governments should have responded exactly as they would have if some shyster offered to sell them a “perpetual motion machine”, or perhaps the “secret” to cold fusion.

However, being a group of weak-willed opportunists (who were also incredibly incompetent), all of these politicians allowed themselves to be seduced by the banksters’ phony promises. In fact, these derivatives were not a “magic” means of negating the laws of economics (and the rules of arithmetic), but they were merely a malevolent “trap” set by the banksters.

I have already explained how both of these scams worked in previous commentaries. Interest-rate swaps were simply governments betting on interest rates against the same bankers who were writing-up these interest rate swap contracts. Understand the magnitude of stupidity here: on every interest rate swap there must be a “winner” and a “loser”. The only way that these governments could have saved money on these interest rate swaps is if the Wall Street banksters lost on the other side of the bet (and what kind of fools bet against their own “bookie”?).

We thus have a situation where Wall Street approached all of these governments, offering to make bets on $trillions of dollars worth of these interest rate swaps. There was only two possible outcomes on these bets (since the bankers all bet the same way): either the countries would “win” all their bets, Wall Street banks would be bankrupted by their losses – and all the “savings” would instantly disappear; or (as did happen) the bankers won all the bets, costing these governments (and other institutions all over the world) $trillions in losses.

One would have thought that these “leaders of the free world” would have taken a moment to contemplate Wall Street’s offer to “save these governments money”, since the only way the bankers could have done so was through their own bankruptcy. It was a scam which shouldn’t have fooled any reasonably astute child, but it was “clever” enough to dupe all of our leaders.

The credit default swap sham was even more transparent. Once again it was a scam where (viewed as a whole) the numbers could never possibly add up. This was “pretend insurance” (again in the form of a ‘bet’). Wall Street conned our governments into believing they could permanently lower interest rates by loading all this fantasy “insurance” onto these debts – to create the illusion that they were “backed” against any default.

As with the interest-rate swap scam, the parties to these deals were never capable of “performing” on these contracts – since (as with interest rate swaps) the banksters literally wrote up $trillions in these extremely leveraged contracts.

How leveraged? In a bankster vs. bankster lawsuit between Citigroup and Morgan Stanley, Citigroup had to sue Morgan Stanley to force it to “make good” on one, tiny CDS contract. Even after Morgan Stanley had liquidated the “collateral” which supposedly “backed” this fraudulent deal it was faced with a 300:1 pay-out. Obviously, it would take only a small number of “claims” on these $trillions in phony insurance to vaporize all of the chumps holding such insurance (like AIG).

In this scam, Wall Street needed to find two sets of chumps: an entity willing to borrow excessively, and then an even bigger chump to actually write-up the pretend insurance. Then, when the made-in-Wall Street “crash” occurred in markets, the Wall Street vampires placed massive bets against those credit default swaps.

Consider for a moment how outrageous this is. Instead of “debt insurance” for bonds, let’s think of the credit default swaps as “fire insurance” for a home. The analogy then is that not only did Wall Street place huge bets that all of these houses would burn-down, but they had already doused all of these houses with gasoline – so that all they had to do was light a match.

We have already seen the evidence of the banksters’ crimes here. While the U.S. is clearly more totally insolvent than any of the Euro debt-sinners, and with its state governments especially vulnerable, U.S. deadbeat governments are only paying roughly half the rate of interest as is being paid by European debtors – all due to the “attacks” by Wall Street’s economic terrorists in the credit default swaps market.

These added percentage-points on this $trillions of bond debt translates into $100’s of billions in added interest every year – interest that the Wall Street vampires guaranteed all of these governments that they would never have to pay. Thus there cannot be the slightest doubt that much of these $trillions in bond debt is totally illegitimate – and there cannot be the slightest moral or economic argument made that such debts should be honoured.

It is the bankers who conned these (idiot) governments into taking on this excessive debt, and the bond-parasites who recklessly lent-out these additional $trillions (which could never be repaid). Yet despite being the obvious cause of these debt-crises, these are the only “players” in this drama who have yet to absorb a single penny of pain (i.e. their own “austerity”). Instead, 100% of the “sacrifices” have been forced upon the ordinary citizens of these nations – despite the fact that these victims bore 0% of the responsibility for these crises.

The Too Big Too Fail Banks, the root of all evil...the root of the global financial crisis past, present, and future.  Why don't the PIIGS just give the banks the finger?  It is becoming increasingly obvious that the "supposed" sovereign debt crisis unfolding in Europe today and the US tomorrow was conceived by the US banking industry purely for profit.  How is it that the fate of entire nations is allowed to rest in the hands of greedy and wicked bankers? 

It is the US Federal Reserve's responsibility to "regulate" the US banking industry.  Failure to do so has left the US Federal Reserve responsible for a debt fraud that stretches around the globe.  Recognizing it's failure to regulate the US investment banks, and now it's responsibility for cleaning up this global financial mess these investment banks have created, the US Federal Reserve has embarked on an ambitious fraud of it's own to transfer all of the global banking losses onto the backs of the American taxpayer.  As purveyors of the world's reserve currency, the US Dollar, the US Federal Reserve through sleight of hand, a printing press, and word games have duped the American taxpayer into paying for the losses of the greatest banking fraud in the history of the world.

Exclusive: The Fed's $600 Billion Stealth Bailout Of Foreign Banks Continues At The Expense Of The Domestic Economy, Or Explaining Where All The QE2 Money Went  [MUST READ]
by Tyler Durden of Zerohedge
Courtesy of the recently declassified Fed discount window documents, we now know that the biggest beneficiaries of the Fed's generosity during the peak of the credit crisis were foreign banks, among which Belgium's Dexia was the most troubled, and thus most lent to, bank. Having been thus exposed, many speculated that going forward the US central bank would primarily focus its "rescue" efforts on US banks, not US-based (or local branches) of foreign (read European) banks: after all that's what the ECB is for, while the Fed's role is to stimulate US employment and to keep US inflation modest. And furthermore, should the ECB need to bail out its banks, it could simply do what the Fed does, and monetize debt, thus boosting its assets, while concurrently expanding its excess reserves thus generating fungible capital which would go to European banks. Wrong. Below we present that not only has the Fed's bailout of foreign banks not terminated with the drop in discount window borrowings or the unwind of the Primary Dealer Credit Facility, but that the only beneficiary of the reserves generated were US-based branches of foreign banks (which in turn turned around and funnelled the cash back to their domestic branches), a shocking finding which explains not only why US banks have been unwilling and, far more importantly, unable to lend out these reserves, but that anyone retaining hopes that with the end of QE2 the reserves that hypothetically had been accumulated at US banks would be flipped to purchase Treasurys, has been dead wrong, therefore making the case for QE3 a done deal. In summary, instead of doing everything in its power to stimulate reserve, and thus cash, accumulation at domestic (US) banks which would in turn encourage lending to US borrowers, the Fed has been conducting yet another stealthy foreign bank rescue operation, which rerouted $600 billion in capital from potential borrowers to insolvent foreign financial institutions in the past 7 months. QE2 was nothing more (or less) than another European bank rescue operation!

The implications of this allegation are profound.  The Federal Reserve has been filling liquidity holes in European Bank balance sheets so that "when" the PIIGS default on their debt the European Banks will be fully protected from an ensuing capitalization shortfall.  Unfortunately it would appear the Fed has the left the US Banks holding the credit default swaps on PIIGS debt under capitalized as a result.  Will this capitalization shortfall at the US Banks be the catalyst for QE3 to be announced?

Bet on Gold and Silver, Not U.S. Treasuries
by Jeff Nielson
The market’s perspective is a simple one, borne entirely of naked greed: it simply wants to see more and more and more money-printing, which it can then use to pump-up valuations even higher. The American public wants to see more jobs, and more purchasing-power in the banker-paper they carry in their wallets (i.e. less erosion in the value of the dollar, which has translated to much higher prices for necessities). Ordinarily, those two desires are opposite in our debt-based economic systems (you can only have one or the other), however Ben Bernanke has accomplished the unique achievement of having mismanaged the U.S. economy to the point where he can (and will) fail in both of the Fed’s legislative mandates.

Of course “failure” is nothing new for the Federal Reserve. Indeed, it is only success which has managed to elude the Fed throughout its entire 98-year existence. Tasked with the twin (conflicting) responsibilities of “promoting” employment and maintaining price stability, it inherited an economy which not only created vast numbers of jobs, but more good-paying jobs than any other economy in history. Along side that, the “strong” U.S. dollar was viewed so favorably by the rest of the world that it was soon to become the global “reserve currency”.

Ninety-eight years later, the anemic U.S. economy can’t even produce enough (net) new jobs to keep up with population growth, long-term (“structural”) unemployment is at its highest level in history, while wages for the average worker (in “real” dollars) have been falling for 40 years.

In terms of “price stability” the dollar has lost roughly 98% of its value in those ninety-eight years, or (put another way) prices have increased by a factor of fifty.

Despite this 98-year record of unmitigated failure, B.S. Bernanke is treated with the utmost reverence in financial markets – in what can only be viewed as a real-life reenactment of “The Emperor’s New Clothes”. Understanding the next move of this unrepentant charlatan requires nothing more than understanding how the Federal Reserve has managed to destroy the value of the dollar: through relentless, excessive money-printing.

"Monetizing debt", or "quantitative easing", or simply "buying" your own debt can be illustrated by an easy example.

Imagine you're a deadbeat looking to borrow money. NO ONE will lend to you any longer - because everyone has finally figured out that you're a deadbeat and IF they lend any more to you they will never get it back.

So you WRITE YOURSELF an "IOU" - payable to YOURSELF.

THIS is what the U.S. is currently doing: it's "buying" worthless paper with other worthless paper - and then PRETENDING to the world that it has "financed" its debt.

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