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Economy
In reply to the discussion: STOCK MARKET WATCH - Monday, 20 February 2012 [View all]Demeter
(85,373 posts)52. (oops) How Greece Could Take Down Wall Street by Ellen Brown
Last edited Mon Feb 20, 2012, 06:09 PM - Edit history (1)
http://www.commondreams.org/view/2012/02/20In an article titled Still No End to Too Big to Fail, William Greider wrote in The Nation on February 15th:
Financial market cynics have assumed all along that Dodd-Frank did not end "too big to fail" but instead created a charmed circle of protected banks labeled "systemically important" that will not be allowed to fail, no matter how badly they behave.
That may be, but there is one bit of bad behavior that Uncle Sam himself does not have the funds to underwrite: the $32 trillion market in credit default swaps (CDS). Thirty-two trillion dollars is more than twice the U.S. GDP and more than twice the national debt...CDS are a form of derivative taken out by investors as insurance against default. According to the Comptroller of the Currency, nearly 95% of the banking industrys total exposure to derivatives contracts is held by the nations five largest banks: JPMorgan Chase, Citigroup, Bank of America, HSBC, and Goldman Sachs. The CDS market is unregulated, and there is no requirement that the insurer actually have the funds to pay up. CDS are more like bets, and a massive loss at the casino could bring the house down.
It could, at least, unless the casino is rigged. Whether a credit event is a default triggering a payout is determined by the International Swaps and Derivatives Association (ISDA), and it seems that the ISDA is owned by the worlds largest banks and hedge funds. That means the house determines whether the house has to pay. The Houses of Morgan, Goldman and the other Big Five are justifiably worried right now, because an event of default declared on European sovereign debt could jeopardize their $32 trillion derivatives scheme. According to Rudy Avizius in an article on The Market Oracle (UK) on February 15th, that explains what happened at MF Global, and why the 50% Greek bond write-down was not declared an event of default. If you paid only 50% of your mortgage every month, these same banks would quickly declare you in default. But the rules are quite different when the banks are the insurers underwriting the deal.
MF Global: Canary in the Coal Mine?
MF Global was a major global financial derivatives broker until it met its unseemly demise on October 30, 2011, when it filed the eighth-largest U.S. bankruptcy after reporting a material shortfall of hundreds of millions of dollars in segregated customer funds. The brokerage used a large number of complex and controversial repurchase agreements, or "repos," for funding and for leveraging profit. Among its losing bets was something described as a wrong-way $6.3 billion trade the brokerage made on its own behalf on bonds of some of Europes most indebted nations.
Avizius writes:
An agreement was reached in Europe that investors would have to take a write-down of 50% on Greek Bond debt. Now MF Global was leveraged anywhere from 40 to 1, to 80 to 1 depending on whose figures you believe. Lets assume that MF Global was leveraged 40 to 1, this means that they could not even absorb a small 3% loss, so when the haircut of 50% was agreed to, MF Global was finished. It tried to stem its losses by criminally dipping into segregated client accounts, and we all know how that ended with clients losing their money. . . .
MUCH MUCH MORE
SUPPORTING LINKS:
http://www.marketoracle.co.uk/Article33140.html
http://www.thenation.com/blog/166277/still-no-end-too-big-fail
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