Effort to prevent triggering of Greek public debt credit default swaps: major control fraud with government collusion

S&P has declared that the Greek government is in default.  Most common sense definitions of default — failing to make payments on a timely basis, declaring your intention to default, etc. — have already occurred. Yet the International Swaps and Derivatives Association, in a nonpublic meeting of derivatives bankers, declared this to be a NONDEFAULT!  This leaves those bankers who earned a premium by selling Greek CDS instruments as insurance to the hapless purchasers with pure risk-free profit. This sad story is one of the largest government-sponsored financial swindles of all time!

This saga started in the U.S. with The Commodity Futures Modernization Act of 2000, sponsored by Texas Senator Phil Gramm. According to FusionIQ CEO Barry Ritholtz, Gramm did this as a favor to his wife Wendy who sat on the Board of Directors of Enron, which wanted to trade energy derivatives without oversight. The Bill was rushed through Congress in 2000 and signed into law by President Bill Clinton.

This rule change exempted CDSs from insurance oversight and led to a very specific economic behavioral change: Companies that wrote insurance had to explicitly reserve for expected losses and eventual payout in a conservative manner. Companies that wrote credit default swaps did not. AIG was permitted to underwrite over THREE TRILLION DOLLARS worth of derivatives, without any obligation to maintain any reserves against potential claims, leading to the notorious U.S. government bailout in the fall of 2008.

The E.U. hypocritically argues that they do not want to trigger these CDS instruments by a Greek sovereign default because it would reward ‘speculators’. In fact, these actions are blocking mainly banks hold these instruments as default insurance from being reimbursed for the premium money paid.

What EU authorities really want to avoid is any market-based pricing system outside of their control that objectively rates default risk in the Eurozone. The same perverse logic and self-denial applies to their constant railing against rating agencies that question the solvency of their member states, the viability of their debt load and the wisdom of E.U. debt deflation policies.

The E.U. has a badly undercapitalized banking system, where banks are considered quasi-public utilities and sovereign lending has been heavily subsidized. The single currency euro system makes heavy use of its commercial banks to finance public debt and does not require any reserves for possible losses, exhibiting the same pernicious mentality that led the U.S. authorities to allow their financial institutions to write CDS instruments freely without any backstop for losses. Public policy makers and politicians hide a multitude of sins….

It is said that the majority of the CDS instruments were underwritten by U.S. financial institutions and purchased by E.U. banks with weak balance sheets as a means of cover.

This E.U. political turn-say propaganda about the CDS trigger is just one of many E.U. manipulations that come at the expense of the general public at large. The looming question is whether saving this single currency union is worth the sacrifices of its members, when the burden sharing is so unequal and the results so pernicious in terms of low growth, asset misallocation, credit mispricing and high rates of unemployment.