N.B.:
“So, what does this mean? Well, it should be assumed that Goldman is well hedged for its exposure, at least on academic basis. The problem is its academic. AIG has taught as that bilateral netting is tantamount to bullshit at this level without government bailout intervention. If there is any entity at risk of counterparty default or who is at the behest of a government bailout if the proverbial feces hits the fan blades… Ladies and gentlemen, that entity would be known as Goldman Sachs.
http://goo.gl/N5iht

Very good synopsis John!

Michael Lewis opens Boomerang with an account of a meeting he had with a hedge fund manager who was buying up Greek debt CDS at the end of 2008 from firms like Goldman*, JPM and Morgan Stanley – all institutions he assumed Too Big To Fail, and therefore tacitly underwritten by the US government. At that time he could purchase CDS on $1 million of Greek bonds for 0.11% – i.e. $1,100 pa.. He assumed a70% payout in the event of default, which would net $700,000 for every $1,100 invested/bet. It’s not hard to see why a Greek default would start to look very attractive.

It makes perfect sense for you to insure your house against fire, but if you were to find that a lot of other people had taken out fire insurance on your house, you might get a bit concerned. And that’s the flaw at the heart of the CDS market, it’s created perverse incentives for failure. And while fire insurance companies are required to hold capital to cover payouts, CDS issuers like AIG weren’t under the same obligation. So if a lot of big financial institutions have been handing out default insurance on sovereign debt on the assumption that they would be unlikely to have to make a payout . . .

*It’s alleged that Goldman Sachs helped the Greek government massage its debt figures to smooth entry into the Euro, so it would be ironic if they were to be hoist by their own petard.

Charles -couldn’t we just headline it as -World Ponzi Scheme in Intensive Care – Treatment Costs Threaten Humanity.

Wall Street spokesman declares; “We must save funny money in order for the world to exist.”

”If Greece goes ahead with the referendum, its citizenry would most probably reject the plan, creating a wave of instability in the region. In response, the EU would probably cut its lifeline to Greece, forcing the nation to default on its debt. That would cause all of the major Greek banks to collapse, as they are the largest holders of Greek debt. But at the same time, it would cause several European banks to take billions of euros in write downs, as they too hold significant amounts of Greek debt.

It doesn’t end there. Since the Greeks were forced into default, credit default swap contracts on Greek debt would be triggered. That means the banks and hedge funds that were short Greek debt would now be owed billions of euros in insurance payments by those that were long Greek debt. It is widely believed that the large banks, which issue and sometime hold on to all those CDS contracts, have not set aside enough capital to payout claims. This could lead to an AIG-style meltdown of many financial institutions. That explains why bank stocks around the globe fell hard yesterday, especially those that play big in the CDS market like Bank of America and JP Morgan Chase in the U.S., which were both down around 6%, as well as those in Europe like Societe Generale, which was down over 16%.

This CDS chain reaction is one of the major reasons why the Europeans have kept Greece on life support for so long. The total collapse of the Greek economy would be a sad event, but a confidence crisis in the word banking system, three years after the fall of Lehman Brothers, would be a catastrophe. One of the major planks of the latest fix-it plan was to get the banks and other major holders of Greek debt to agree to take a 50% haircut on their bonds. Since such a cut would be voluntary “soft default,” it would not trigger the CDS contracts, therefore limiting the fallout to those banks that physically held Greek debt.
…
The banks have balked at taking a larger haircut, but the threat of a hard default may scare them into accepting a greater loss.”
http://goo.gl/S99Iv

Devices sold ostensibly to dilute risk have effectively chained all the major players together – with each default threatening to pull the rest over the edge.

Right. I can see that being popular with the masses. And will they try to reverse the referendum decision? That would go down like a lead balloon.

I offered another one: the chance to make money by moving the markets. It is not insider trading if a Greek does it?

Dork raises another interesting point: the American and European interests are divergent. Pap is more closely aligned with America who will have foreseen or triggered the very scenario now playing out. Damaging the Eurozone weakens a competitor and also enables a business model! This crisis is a splendid opportunity to teach basic finance to Europeans who should have been forewarned by what we all saw on 9/11.

This is not a sporadic collapse, it is well known who are weakest and I do believe Greek finances were familiar to GS?

Wise up, guys?

Cyclical crises are predictable…. did I leave out any islands?

The first countries out of the Gold Standard recovered fastest, the same will be true of globalisation. Embrace the change it’s coming fast. It won’t be pretty but life will go on.