Tuesday, January 31, 2012




There are, as many of you know, ongoing "haircuts" for debtors in the Euro markets. Say you've loaned Greece money by buying a bond. You expect to get a certain amount back (more than you put in, obviously). But with the recent Eurodoom, debtohlders have to take "haircuts" -- 30% for example. 

Now, when this happens, a certain type of insurance is supposed to kick in for some investors. A CDS (type of derivative) is one example. Say you are a US investor ten years ago, and you wanted to invest in Greek bonds but you are worried (understandably - look what happened) about the risk. You might buy a CDS, which is similar to an insurance contract. It says you will be paid such-and-such amount if Greece defaults.

It's not a bad idea in theory, but what happened is the elite financial world started to gamble on CDS even for instruments they don't own. It would be like if I took out insurance that would pay me huge amounts if you have an auto accident. Then I get you drunk and convince you to drive. 

Since there is nowhere near enough money to make good on all thes promises (for both rational investors and wall street megabanks that have glommed on to this stuff like crack), bondholders are not going to be compensated for their losses (money they expected and may even have booked in accounts), and the mega banks aren't going to get what they expect either, so they have much, much, MUCH less money than they expect.

There is a potential for total systemic collapse. "The Big One."



Anonymous said...

97% of the Credit Default swaps against Europe's debt are held by the top 5 Wall Street banks. When Europe is declared in default, those 5 top banks will collapse when they have to pay those CDS. The International Swaps and Derivatives Association gets to decide whether Europe is in default, but since the ISDA is made up of representatives of those banks, they keep claiming that the write-downs of Europe debt are not defaults and hence the holders of those credit default swaps are being screwed by Wall Street. Greece debt is being paid 50 cents on the dollar but the ISDA says it is not a default. Greece is negotiating to further reduce their debt to 30 cents on the dollar and still the ISDA will claim it is not a default. In short, Wall Street, having screwed the American workers, is now eating its own and all those Credit Default Swaps that made Wall Street CEO's billionaires are utterly worthless. As long as Europe can pay a penny on a dollar, the ISDA will insist that Europe is not in default.

Anonymous said...

Hyperinlation here we come, QE to infinity. Don't worry space aliens will save us along with nesara and St. Germains trust and the Wanta funds(YEAH RIGHT IF YOU BELIEVE THAT). I myself have taken more aggressive measures: Gold, silver, 6 months food supply, and lots of ammo in the .308 variety. May God have mercy on your souls.

Anonymous said...

Looks like all those Wall Street billionaires will soon receive another bailout.

Anonymous said...

john i think it garrentees rv and the new asset backed dollars

Anonymous said...

but but, Obama said no more bailouts lol...