Tuesday, January 31, 2012

ISDA (International Swaps and Derivatives Assoc.): "Someone is broke"


The Impending Undeclared Default Of 5 Major US Banks

This even has the potential to cause a second financial crisis that would require significant financial intervention. If you have time to spare, listen to this interview. If you don’t have time to spare, listen to it anyway.

So Be It
By Dave in Denver, The Golden Truth

"Fiat:"  an arbitrary decree or pronouncement, especially by a person or group of persons having absolute authority to enforce it: The king ruled by fiat - dictionary.com
The big topic of discussion in the cyberworld today was an interview with Jim Sinclair, who discussed an imminent ruling by ISDA - the board of OTC derivatives rules and enforcement - which would pronounce that any massive haircut in value taken by Greek bondholders would not constitute an event of default.  This is not new information, as it was reported as far back as October that ISDA would make this declaration once the a Greek restructuring occurred.  And it will occur despite the poker game going on, because if Greece defaults, then ISDA will have its fiat powers stripped by market forces when Greek sovereign paper goes offered without any bid (i.e. worthless).  You can hear Sinclair's interview at http://www.jsmineset.com/"

What bothered me was that Sinclair made ISDA sound like some dark, mysterious force out there that was largely hidden but imbued with supernatural powers.  ISDA has been around forever.  I used ISDA documents when we would engage in high yield bond swaps with funds like Harvard Investments in order to hide positions from the back office risk Nazis at year-end.  It was de rigeur back then.  It's rampant beyond control now.

The problem with ISDA is that it is governed by the same banks that stand to benefit the most from ISDA rule declarations:  the big banks that have been declared by fiat as "too big to fail" by Team Bernanke/Obama (really, just Team Bernanke, but Obama reads the script off the teleprompter like a good circus animal).   

So, in the Greek bond situation, what you have is a situation where big hedge funds and money market funds have loaded up the boat with short term Greek sovereign paper at high yields (and Italian/Spanish/Portuguese, etc), and bought OTC derivative credit default protection in the even of default.  The way this works, if Greece is unable repay its bonds at a minimum of some small discount to face value, or if Greece defaults outright, the issuer of the credit derivative - the big bank in most cases - has to make the investor whole.  On $10's of billions in Greek debt with credit protection issued, it can get expensive for the big banks.

To make matters even more interesting, there has been been outright speculation on Greek debt in which a hedge fund will bet on a Greek default by buying a fancy derivative from a big bank such that the hedge fund doesn't even have to own any bonds and it will still get paid.  It's like buying a put option on a stock betting it will go down without actually owning the stock.  Again, in the event that Greece has to "restructure" its debt at 30-50 cents on the dollar, or outright defaults, the big banks would have to cough up $10's of billions in "default insurance" payments.

But there's a way around this.  It's called rule by fiat (see the above definition of "fiat").  Since the banks control the rules and procedures of ISDA, if they determine that a Greek restructuring which requires a 50-70% haircut on the debt held by investors is not really a "default" event, so be it.  The Greek bond investor will be coerced into receiving a new bond that will be in the range of 30-50% of the face value of the original bond, thereby getting hammered on its investment, and the big bank who got paid a handsome premium to underwrite default insurance on that paper will get to keep the money it was paid and it will not have to make obligatory restorative payments to the investor.  Isn't it good to be King in a completely fiat system?

The problem with the fiat currency and financial system is that eventually it turns into one giant Ponzi scheme.  The politically/socially correct term for this would be "a fractional banking and financial system."  It's a system based on "full faith and trust."  When the trustworthiness of this system starts to fade, investors will start to move "fiat" money into hard asset currency - that is, gold and silver, the world's oldest and most trustworthy hard asset currency.  It's happening now, only it's a lot more prevalent in the eastern hemisphere countries like China, Russia and India.  In our own backyard, Venezuela demonstrated this movement by recalling nearly 100% of its sovereign gold that was being "safeguarded" by big banks in NY, London and Zurich:  LINK  Hugo Chavez, love him or hate him, is one smart hombre.

Gold and silver are on the cusp of another big explosive move higher.  James Turk in his latest commentary on King World News said it best: 
Regarding gold, I don’t think people realize that gold could explode from current levels.  I think the potential for explosion is there and what you are going to see is not only silver on the move, but you will also see gold smash through the $2,000 level
Here's the LINK.  If you don't understand why Turk makes these comments, re-read my commentary above.  If you still don't understand why, so be it.  Unfortunately, by the time the masses understand this, gold and silver will likely be too high in terms of fiat currency price for them to buy enough to matter.  It is what it is...

Somebody is broke...do you know who? Does it really matter?
by Bill Holter, GATA, [lemetropolecafe.com] subscribe!

To all; Jim Sinclair did an interview yesterday with Ellis Martin http://www.jsmineset.com/2012/01/30/the-impending-undeclared-default-of-5-major-us-banks/

The subject of the interview is nothing new as we we were already aware that the big banks are broke, what IS news is that Mr. Sinclair believes that THIS week is "when" it happens. Well...not the bankruptcies of course but a "decision" by the ISDA (International Swaps and Derivatives Assoc.) will make regarding the "non default" or "trigger" of Greek debt.

This has been written and talked about for months on end, the 5 largest banks in the U.S. have written 97% of the CDS (credit default swaps) on the planet. Think about this for a moment, were one (which would lead to many) defaults occur at the same time, we would have another AIG situation. However, this time it would be "AIG cubed, times 5"! The banking system would then be ..."officially" bankrupt rather than bankrupt for all intents and purposes. It is this decision by the ISDA that Mr. Sinclair believes will be made this week that will (and has already) lead to more massive QE money printing to liquify the system in the hopes of putting enough cushion in ahead of time for whatever reaction comes about.

He is talking about 10 or more "MF Globals" in the near future where sovereign debt was purchased, then hedged, yet the "hedges" have been made worthless because ISDA refuses to "admit" that default occured. THIS really is a big problem! Someone, somewhere is broke. Will it be the "writers" of the insurance? Or the "buyers"? Well, let me clear this up for you, IT DOESN'T MATTER! This is like saying you went to an orgy with 20 people and 1 of them had AIDS. Does it really matter who it was? Actually, this is a great metaphor for Europe at present, no bank trusts any other bank and thus interbank lending has basically ceased to exist. Then, going one step further, if the European banks don't trust each other, why would any other non European bank trust them?

"Someone is broke" is a fact and because the global financial system truly is "global", this means they, (thus "we") are ALL broke! Period, end of story! Which leads us back to broken record time. Nothing paper has the true value as is perceived today. Either they allow bankruptcies to occur as Mother Nature demands or they print $ Trillions more and throw it on top of the already raging bonfire. We know which choice will be made, TPTB will not ever admit defeat nor give up "power" willingly, they will print until the cows come home and the currencies approach zero. What we do not know is how long investors will leave their heads in the sand. Do they wake up and panic or continue their oblivious ways while $1,000 is not enough to purchase a Happy Meal?

I have believed all along that a panic will happen first, then and only then we will get a revaluation of the currencies. Can we go down the Weimar road for 2,3, 4 more years? Yes but I still believe that the "structure" and leverage of the current system makes an "accident" along the way very, very likely. Again though, does it really matter? Matter how? How you will prepare and protect yourselves with "precious metals everything" of course! No, no matter how this plays out, in a currency/debt crisis such as this, REAL MONEY is your best safe haven. Whether it is this week as Mr. Sinclair says or 6 months from now, "they" will have to decide what road we will take. Deny everything, admit to nothing and print...or call reality for what it is and let bankruptcys roll around the planet like atom bombs. It doesn't matter "when or how", what really matters is what you have done and are doing to prepare for it! Regards, Bill H.

The International Swaps and Derivatives Association (ISDA), has the final say on whether a "credit event" has occurred, triggering the payment of default insurance taken out on Greek bonds via the credit default swap …Daily Telegraph · 1/21/2012

by Ann Barnhardt

News out of Brussels last night was that a package is being put together that would haircut Greek bonds by 70%, thus only paying back 30 cents on the dollar to anyone holding Greek paper. This will set a precedent that will eventually be played out all over Europe.

Full AP story HERE.

This is extremely bad, and will spell the end of the big U.S. banks and the financial system in total. But EVERYONE needs to understand credit default swaps (CDS) first. CDS are insurance policies that investors have traded – very similar to OPTIONS for my old clients and cattle people out there. Buying a CDS is essentially like buying a put. The buyer pays a premium, or fee, to the writer, or seller of the CDS that says that the seller will guarantee and make whole the buyer’s position in a specific bond IF the entity behind the bond (such as Greece) defaults. In exchange for paying the premium and being made whole after a default, the buyer of the CDS surrenders the bond position to the seller of the CDS, and the seller gets to keep both the premium paid plus gets to keep any salvage value of the defaulted bond.

So the CDS buyer pays a premium or fee, and the seller guarantees against a default but gets to take ownership of the bonds and keep any salvage value if a default does happen.

Here is what I STRONGLY suspect is going to happen with this 70% haircut plan. The bondholders are going to take the full brunt of the 70% haircut, BUT the body that actually dictates whether or not a default has happened – the International Swaps and Derivatives Association (ISDA) – will declare that this credit event is NOT a default, and thus all of the banks and entities that THOUGHT that their European debt positions were hedged with CDS will find out that they have no protection at all. And then the excrement hits the fan. Big time.

The argument that the ISDA will make is that a 70% haircut isn’t a default. This is, of course, abject horse manure. Try paying only 30% of your mortgage and see how quickly the word “default” is used. They are using the 70% figure because a 30% payout is just enough to make the legalistic argument that a FULL default hasn’t occurred - which makes NO SENSE because salvage value is one of the core concepts in CDS contracts. The SELLER GET THE RIGHTS TO THE SALVAGE VALUE, which by definition implies that the default need not be 100% in order to execute the CDS. ARRGGHH!!!!

The obvious question is, WHO IS IT THAT HAS WRITTEN ALL OF THESE CREDIT DEFAULT SWAPS, because they are going to make off like bandits. They are going to have received all of the premium, the default event will have happened, and they won’t have to pay out. Like the old Dire Straits song says, “Money for nothin’ and chicks for free.” Fish in a barrel. Lambs to the slaughter. Candy from a baby.

I will venture a guess as to who two of the largest writers of Eurotrash CDS might be. How about . . . oh, I dunno, Goldman Sachs and J.P. Morgan? Guys, what MF Global was doing with customer funds – “hypothecating” and leveraging the customer money into European bond positions “hedged” with credit default swaps – THEY’RE ALL DOING IT. All of the brokerage houses. All of the investment firms. All of the retirement account custodians. ALL OF THE BANKS. I can almost promise you that Goldman Sachs and J.P. Morgan have been sitting on a net short position in Europe, quietly betting against European paper, all the while pimping and selling long European positions (It will be fine! The bailouts will come!) AND happily selling TRILLIONS of dollars worth of CDS to their customers to “guarantee” the customers’ long-Europe positions against default, knowing full well that Europe WOULD collapse. (Duh. Anyone who can do 2nd grade math knows that.) When the collapse happened they knew from the beginning they WOULD NEVER HAVE TO PAY OUT ON THE CREDIT DEFAULT SWAPS THAT THEY WROTE because the ISDA was populated BY THEIR OWN PEOPLE, and the ISDA would therefore never declare a default. They would therefore pocket the premium received, but most importantly would then swoop in and BUY UP ALL OF THE BANKS AND BROKERAGES DESTROYED BY THEIR UNHEDGED NET LONG-EUROPE POSITIONS.

Think about it. Why would a Goldman or a J.P. Morgan write trillions of dollars of CDS on Europe in the first place? CDS aren’t like regular options. CDS are binary in their outcome. Either there is no default, or there is, and the payout required would be massive. There is no middle ground. There is no “moderate” payout on a CDS. It is either all-or-nothing. Why would Goldman and J.P. Morgan write these CDS contracts knowing full well that Europe was mathematically impossible to save and thus guaranteed to default, and that the inevitable European default would then lead to demands for payout that were – again – mathematically impossible? We are talking tens if not hundreds of trillions of dollars. We are talking multiples of the size of the entire economy of the U.S. - and that is just the exposure of ONE BANK (i.e. JPM @ $78TTT). There is no possible way to payout on that. It seems to me that these CDS writers knew from the start that they would never have to payout. They knew that their people in the ISDA would never declare a default, but would always leave some trifling payout to “legally” skirt default. If it ever got to the point that there was a full default, World War 3 would be the result and thus the entire point would be moot. The bankster oligarchs would at that point be moving fully to declare a new totalitarian world government and abolish and seize all private property. Game over.

Bottom line:

A declared NON-default is still a default to those that own the bonds that are given a "haircut"...much will be lost in the way of fiat money by many.  The only way to make up what is lost, is to print more fiat to replace what is lost.  This is bad for the Dollar...PERIOD!

...and great for the Precious Metals!

Got Gold you can hold?

Got Silver you can squeeze?

It is not too late to accumulate!

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