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Thursday, March 1, 2012

Self-Interest Always Trumps Fairness

~ Caption:  "What's our policy on honesty?"

Banking and finance is quite complex-- intentionally so.

Think of it this way-- if you wanted to conduct fraudulent, criminal and/or unethical behavior on a consistent day to day basis, would you be open and transparent in your deceit, or would you hide your actions so that most would have no clue?

Banking and finance are no different.  Oh certainly, many people think negative of those entities but its in a general 'all banks are crooks' way, much like how politicians are viewed.   The specific reasons the reputations are deserved, most have no clue of.

Here's a prime example:  In order to "officially" determine whether Greece has defaulted which would trigger credit default swaps (CDS) i.e. insurance investors and financial entities take in case of a loss due to a country declaring bankruptcy and only paying a portion of their debt back, there is a special committee created to decide.  Its called ISDA - International Swaps and Derivatives Association, Inc.-- a trade organization of participants in the market for over-the-counter derivatives.
Now today, ISDA unanimously voted that Greece's recent $3.25 billion in bond swaps did Not constitute a default and thus no CDS to be triggered.   Mind you, this swap did provoke Fitch and S&P credit rating agencies to lower Greece's credit rating to "SD" meaning 'selective default' which is only 1 notch on the belt above full default.

Now how could the ISDA vote the opposite way and do so unanimously?   Hmm.. wonder who makes up the voting membership in this organization's determination committee?  Let's take a look:

Voting Dealers
Bank of America / Merrill Lynch
Barclays
BNP Paribas
Credit Suisse
Deutsche Bank
Goldman Sachs
JPMorgan Chase Bank, N.A.
Morgan Stanley
Societe Generale
UBS

Consultative Dealers
Citibank
The Royal Bank of Scotland

Hmm, isn't it a funny coincidence..  if the CDS were triggered, guess who sold the CDS insurance in the first place?  Guess who would be responsible for repaying the investors' lost earnings?   Guess who is exposed to a Greek default to the tune of trillions of dollars combined due to CDS sold not only to investors but to themselves?

CDS insurance was sold under the assumption there was a 1 in a trillion chance of pay out.  Think of it this way:  I sell you $1mill of insurance if Martians attack and you pay me $20.  You think, well for only $20, I am fully covered even though I don't expect Martians..  And my position is I basically made a quick $20 off you.
Take it a step further:  I sell Martian insurance to 10,000 people.  At $20 each, I sold a total of $10 billion in insurance if Martians attacked which I never intend to pay out while pocketing a quick $200k.  And perhaps I get a little nervous at the possibility Martians may come and I might be on the hook, I then buy $10bill in insurance from another for say $40, who also sells to 10,000 people, etc.. on and on...

Now, Martians attack... If I am part of a committee to officially determine if this occurred, you better damn well believe I am not admitting it.  It wasn't an attack, it was mother nature.  Those little green men- they're just children in funny costumes.   And so forth..  

And all the investors who bought insurance from me?  "F" them..

This is how corrupt & in-house banking and finance is.

Now this was just a procedural step what occurred today.  The big decision is what does this corrupt band of bastards decide once the PSI (purchase, sales & inventory) process is complete.  

As ZeroHedge puts it, "If there is no credit event then either, especially when the CACs (collective action clauses) are triggered as expected - an event which will certifiably be a trigger event under Section 4.7, then ISDA is truly hell bent on blowing up the CDS market as a hedging vehicle in its entirety."   
In layperson language, investors would be very very hesitant to invest again, knowing their insurance policies were not honored.  And even among the dishonesty and duplicity which comprise banking and finance, there has to be some level of trust among buyers of financial instruments like CDS, for everyday business to be conducted.

We still expect an economic event in late March involving Greece.  The only real game changer is if those behind the scenes pushing for Greek contagion get cold feet and fear they're not truly buffered against blowback, and thus delay the endgame for a few more months to build up their so-called 'firewall'.