All in all, it’s a situation which makes whoopey for the few in the short term – which is the only term that counts in finance and politics, where, of course, the 5% live, work and don’t give a fart – and will lead to another crash in just a few years.

I have previously said I think ETF’s will be what accelerates and amplifies the next blow out but not its trigger. I think the trigger could be so many different events it is almost unnecessary to try to guess. In a tinder dry forest, in a long depressing heat wave does it ultimately benefit you to guess from just where the spark will come?

So a good next question would be where will the first fire storms take hold? I think one candiate must be the Insurance industry.

The Insurance industry has just seen the publication by the FSB of the list of Globally Systemically Important Insurers, G-SIIs.  I wrote about the G-SIFI list of banks, and what it meant in Twilight of Justice.

The G-SII list contains nine companies with the expectation that others could be added. The list has, of course, been greeted with a chorus of ‘unfair’ and ‘unnecessary’ from the industry.

These companies will now – unless the unthinkable happens and the plans are eventually watered down after successful lobbying from industry experts – I know, I know only a conspiracy nut would even think it – but if that doesn’t happen then these firms will be expected to hold more capital to buffer any ‘unexpected losses’, be more ‘prudential’ in their management of risk so that these systemically important companies don’t cause a chain reaction of collapses. BUT at the same time they will also be expected to work out a ‘living will’, AKA a plan for how to shut them down in a way that would prevent a chain reaction of contagion when  – sorry  – if, they ever did go bust.

Of course the idea of living wills was dreamt up by our fearless regulators in order to make safe the G-SIFI Banks. In my opnion the Living Will idea is a fatuous creation of the intellectually flatulent – Otherwise known as Congress and Parliament.

The first such Wills were delivered to the FDIC who promptly said – “Err, even we can see these won’t work”. And indeed the plans left out so much essential detail that they  amount to a D-Day battle plan which says, “We will land on the beach and then win.”  The battle plan analogy isn’t just for cheap comedy. The very name ‘Living Will’ is, I think, misleading. Calling them ‘Wills’ is designed to make it seem that resolution of a bloated and unstable bank can be made neat and safe, cut and dried; a series of postumous wishes to be quietly carried out. No such thing will ever happen. You only need read the over all US/UK bank resolution strategy to see it won’t happen.

Instead of calling them nice orderly, ‘living wills’ it would be more more accurate and honest to call them, ‘battle plans’. That would at least convey the truth, that like any battle plan it will be a nice bit of paper you stuff in your pocket whilest you stumble and run through a landmine strewn fog of confusion and mayhem.

But back to the insurers. Since we now know which of them are considered so big that they must not be allowed to fail, perhaps it would be good to see how safe they already are. After all they are the people who are supposed to be so prudent and safe that when disaster does strike, they will be the ones who will defnitely survive so they can be there to help us recover. That is, after all, what we pay them for.

Sadly, if that were true we wouldn’t be needing to discuss living wills for them would we? As it turns out insurers, while not perhaps as wired for disaster as the TBTF banks, are not safe. The Insurers have in fact been rather busy buying some of the risk which previously made the banks collapse. The trade is often called Regulatory capital relief. It is a way of selling the risk associated with an asset, but keeping the asset iteslf. In this case the banks keep their risky assets but get someone else to take on the risk of the asset blowing up.

Who has been keen to buy such risk? Hedge funds and Insurers. I wrote about how it works and who is involved some time ago in, “Where has all the risk gone?”

The thing to keep in mind about the Hedge funds, is that when they buy bank risk they are doing so in order to sell it on to others as an investment. They are not the end investor. So who is?  The Insurers.

This is a quote from an FT article from 2011.

Axa Investment Managers has launched a closed-end fund that will provide junior protection on banks’ loan portfolios. The investment arm of the French insurance group has already raised €80m and is aiming to increase that to €150m by January next year. Axa has previously done deals with some of Europe’s biggest banks.

Alexandre Martin-Min, AXA’s head of structured credit investment, said: “There’s a need for capital for the banks and an incentive for them to do these kind of trades.

“For Axa, it gives us access to a wider universe of investment-grade debt.”

You might notice AXA is one of the too Big to Fail, or Globally Systemically Important Insurers (G-SII).

The interest in this risk trade has only been growing. In 2012, Risk.net reported,

Hedge fund enables insurers to capitalise on bank deleveraging

Hedge fund manager Tenax Capital has raised €250 million (£197 million) from insurers in a fund that invests in corporate bonds and loans that banks are seeking to offload.

And that €250 million has already been snapped up by European insurers. Yet it is just a relatively small sum, you might think, in the grand scheme of the billions we have become used to. But then again, from the same article,

The International Monetary Fund (IMF) predicts that de-leveraging by European banks could see their balance sheets shrink by as much as $2.6 trillion (£1.6 trillion). This could result in €1 trillion of corporate debt coming to market, Tenax estimates.

As the article explains, the insurers want to diversify away from sovereign debt, which they have a great deal of, and stocking up on a bit of bank risk would pay them well. Just so long, obviously, as the risks never actually materialize and turn in to a financial losses.

So we seem to have a brisk trade in Insurers buying bank risk. Oh wonderful.

A trillion in risky assets, the risk from which the banks would love to sell on to an insurer who feels they can ‘manage’ the risk of a loss better than the banks. And the big insurers like AXA, who are the G-SIIs will be among the big buyers. Which means if they did, heaven forefend, get it a tiny bit wrong and blow themselves up – being a G-SII (Too Big to Fail Insurer-style) means we would have to bail them out in the next crunch. Sounds just fine.

Of course Insurers are big and buying bank risk is still more a marginal indicator of where they are headed, and the kind of risks they are flirting with, rather than the core of their prudent business. Which as the article I quoted above mentions, has been very much tied to sovergeign debt – which as we all know is risk weighted at zero…..?!

Yes, that’s right. That was my reaction too. So I had a little look at how exposed insurers are to some of the riskier European sovereign debt and …it’s not great.

It is one thing for an insurer to say , we are prudent, we invest in sovereign debt which pays us very little but is safe, when that sovereign debt is German. But Insurers have been playing the same game as the banks. That is, buying up sovereign debt which is risky – from countries which are in trouble and have to pay a good coupon/interest rate on their debt – but because it is ‘sovereign’ debt, is still classed by the regulators as 100% safe and therefore risk weighted zero.

The figures are from a study entitled Impact of the Eurozone debt crisis on Insurer solvency 2011. So they are slightly out of date (2011), but they’re still broadly accurate so far as I am aware.

According to the study,

Although the rating agencies suggest that the insurance sector may feel only marginal impacts associated with orderly defaults of Greece, Ireland and Portugal, the risks associated with Spanish and Italian defaults are significantly greater and their consequences more unpredictable. Exposure to vulnerable assets and the possibility of contagion is certainly a key concern.

So it is Spain and Italy’s health and the insurers exposure to their debt we should look at.

So how is Spain doing? Well unemployment in Spain is near 28% and expected to rise. 12% of those unemployed have been so for more than a year.  16% of of households now have no wage earner. The length and depth of the recession mean unemployment is now digging down to effect even those better educated 30-50 year olds who are the most likely to have a mortgage. In other words delinqencies are still going to rise.

Which is especially bad news for Bankia, Spains fourth largest bank but its largest holder of property assets at €38 billion. Bankia was formed in 2010 by sewing together parts from the the corpses of 7 dead or dying Caja. The re-animated monster breathed only re-expire a few months after first groaning to life, requiring a transfusion of €19 billion. This lasted it a few years but then it needed billions more and had to be re-bailed, but this time by trying to sell shares to the private sector. No insitution would buy. So the government – members of the Spanish 5%-  told ordinary Spaniards the shares it was offering in Bankia were a perfect and safe investment. Those who listened have now lost 99% of their money. Bankia shares are worth little more than half of one euro a piece.

Italy? Well officially unemployment is a mere 12%. Though among the young it is 28%. So hope is in the air in Italy. Industrial production has shrunk every month for 15 consecutive months and is 25% lower than it was in 2008! Italy’s debt to GDP which the Trioka uses to estimate how much austerity will need to be enforced, is around 130%. And the economy is forecast to shrink at 1.8% next year. On top of which there is an almighty mess at Banca Monte dei Paschi di Siena over its use of derivatives as a way to hide its real financial state which went horribly wrong. Only an idiot would assume this is an isolated case. I think it is very likely there are many other institutions in Italy, both private and public,  feeding tumors of similar origin. They have just not yet erupted.

So are any of the newly annointed G-SIIs exposed to the actual risks inherent in Italian or Spanish Debt and if so how badly? Here are the insurers most exposed to Italian and Spanish debt. As you’ll see some of them also happen to be G-SIIs.  The figures are from page 8 of the 2011 Willis report on Insurer solvency.

Allianz   – also a G-SII

23% of its total sovereign debt holdings is in the PIIGS – which we are now encouraged to call GIIPS. 90% if which is concentrated in Italian and Spanish debt. This amounts to 70% of the total shareholder equity (which means it total assets minus total liabilities, or what its worth to its owners. The figures are gross not net, which would be lower – see the original chart – , BUT I think gross gives you a better indication of real risk, unless, that is, you believe in the netting out fantasy, which I do  not) So a default or re-structuring, even a big bail out, of Italy in particular, would cause a 7 point earthquake at Alliance HQ in Munich. And this doesn’t take in to account that Allianz also owns PIMCO the worlds largest bond manager .

AXA  – also a G-SII

16% of its sovereign debt is in GIIPS. Over 60% of which is Italian and over 30% Spanish. Which amounts to 65.9% of Total Shareholder Equity. Very simialr to Allianz. AXA is a French conglomerate.

Now it gets serious –

Generali  –  alkso a G-SII

44.7% of its sovereign debt holdings are in GIIPS. Of which about 90% is Italian and 5% Spanish. Amounting to 354.5% of Share Holder Equity – or three times all the money they have from their share holders. A re-structuring of any kind, any write down at all and …poof! No more Generali. No more pensions.  Generali is Italian. In 2010 it was the second largest insurer in Europe. Only AXA was/is larger. Mediobanca owns 13% of Generali. So if Generali were to have a seizure, it would be a matter of minutes before Mediobanca followed.

Groupama

Did not provide figures for its total sovereign exposure nor therefore the percentage of that exposue accounted for in GIIPS. But the value of those GIIP bonds as a percentage of Share Holder Value is provided as 304.2% gross, 69% net.  Groupama is French. It is far smaller than AXA, Allinaz or Generali but is one of the largest mutual insurers in the world.

Mapfre

Mapfre is similar in size to Groupama. A collosal and suicidal 75% of its sovereign bond holdings are GIIPS. Of which the bulk is Spanish. In 2011 it was 130% of share holder equity. It is the leading insurance company in Spain.

Zurich

19% of its sovereign holdings were in GIIPS. 50/50 Spain and Italy. Coming to a mere 37% 0f shareholder equity.

So  if I’m right and insurers would be among the fires to be ignited in another credit/bad debt blow out, we now have a first few place names on our map of contagion.

We have a list of 9 G-SII insurers considered too big to be allowed to fail. Of them three appear on our other list of insurers disasterously exposed to Spanish and Italian debt to a degree that it threatens their solvency. Put them together, as we have, and you can see where the fires will appear and who you will be required to bail out teh next time we have a debt/credit blow out.

Of course these TBTF insurers just like the TBTF banks will be required to write ‘living wills’. But like the banks the Insurers’ wills will be a long while coming and they won’t work.

On the list of badly exposed Insurers, Generali and Mapfre are the real dangers simply because they are so hideously exposed. Mapfre is not a G-SII but is still too big for its own nation to bail out. So it may not be on the TBTF list but it will still be bailed. Generali is a G-SII and is therefore not only a ticking time bomb for Italy but for all of us, which means the ECB or some other EU ogre would be called on. Whether they could do it in time is another matter. And whether the German tax payer would agree to pay up to save Spanish and Italian pensions is another again. How do you spell ETHNIC TENSION?

So what does this really tell us? Well, now we know some of the people who ‘will be damned’ if they are going to let the people of Italy or Spain ever chose to restructure. Those companies alone will decide FOR the Spanish and Italian people that austerity is the ONLY choice for them.

You might think no people would chose to let their own pension companies go bust. But who says the only way to protect pensioners and their pensions is to first bail out an insolvent gambling company?

Just as we need banks but not necessarily the failed ones we are being forced to bail out, so the same is true of pensions and pension companies.

Just as with the banks, once an insuramnce company is declared too big to Fail it can then gamble more recklessly than before because it knows it will be saved from its own actions if necessary. Of course regulations will be there ‘to stop excessive risk taking’ – but we can already see risks are easy to accumulate as long as you can convince some stupid regualtor to call a risk, not risky.

I am not saying this will happen. I am saying it is there waiting to happen. And thus it forms part of what our leaders are shackling us to. The list of Globally Systemically Important Banks and now Insurers is a measure of how much of our democratic control of both the Market and the State has been taken from us. The number of institutions from your country on the lists is a direct measure of how much control over vital financial decisions is no longer in your hands or even subject to the rule of law.

Sound over the top? Consider the sudden appearance of ‘technocratic governments’ in place of democratic ones. Consider that MarioDraghi, once of the Bank of Italy and Goldman now of the ECB, is mired in allegations of corruption and mis-management from his time at the Bank of Italy when the mess and possible fraud at Banca Monte dei Paschi di Siena was being incubated and was known about. Will any of the allegations reach him, even if proved beyond doubt? I strongly suspect not. The order of the day is stability comes above the law. If the experts in charge broke the laws or need to again, that is what will be done. Much like paying tax, obeying the law is being increasingly seen by the elite as a voluntary option for them and only really to be applied rigarously to us. They are tools of control now.

I think this point is being made very clearly in Spain. Even the  BBC has noticed. A BBC headline reads,

The EU’s curious silence over Spain’s Rajoy

Mr Rajoy is Prime Minister of Spain. He believes in and enforces the austerity programme required by the Troika. But as the BBC reports, Mr Rajoy is also,

 …facing serious allegations of corruption. The former treasurer of his party alleges that they ran a slush fund fed by illegal donations from construction companies. Some of that money, he says, was passed to Mr Rajoy and other party leaders. He has testified that 25,000 euros (£21,500; $33,000) was handed to Mr Rajoy as recently as 2010.

The article goes on,

The treasurer, Luis Barcenas,.. has provided a detailed record of these transactions which have been published.

These and a host of other squalid allegations with seemingly very strong evidence to back them up – strong enough to get you or I suspended if not in custody – are piling at Mr Rajoy’s door. Yet, as the BBC notes,

Mr Rajoy has dismissed the allegations and seems irritated that questions are being asked. He has repeatedly said he will not stand down. To date he has seen no need to provide a detailed explanation.

And why should he, he is Too Big To Question. No European leader has said a word – The BBC ‘s curious silence. They don’t care that he is in all likelihood a criminal, because he is one of them doing their work – making sure things remain ‘stable’ so that the wealth and power of the top 5% is maintained. You and I obey the laws, they do not. They are a self assembling super elite for whom laws are a laughable formality.

They are above the law, and they are deciding who else, which senior executive positions in which global businesses are likewise above the laws, all laws .

Welcome to your future.

It’s funny isn’t it, how the terms we use, or are encouraged to use, have such an influence on how an analysis unfolds. So much of the eventual conclusion is already encoded in them. Especially the terms we are encouraged to choose as our starting place. Our leaders and the bankers have been so very concerned that every analysis begin and end with liquidity. But I think it is becoming clearer by the month that collateral is a more revealing term.

When Lehman Brothers and AIG collapsed was it just a shortage of liquidity? No of course not. That’s like saying a man with the plague died of a high temperature. Certainly he had a temperature when he died but it was a symptom not a cause. Both Lehmans and AIG were running out of collateral and without collateral for the oxygen of repo and short term funding, they began to suffocate. Once those two began to choke, the money ran out for others. The collapse of Depfa and Hypo in Germany/Ireland, for example, was a direct result of them not being able to get the funding they relied upon from their sugar-daddy funder, AIG. That created a domino effect. AIG had run out of assets that it could pledge as collateral. It could not raise money that it could then use to lend to HYPO/Depfa. Hypo in turn had such poor assets they too had little or no chance of anyone accepting them as collateral.

It seems to me we are moving back to a similar situation.  You might ask, out of sheer exasperation, how it could be, given all the tough talk and all the new requirements for capital and risk management? How, after all the bailing outs and now ins, all the endless and global QE, all the new rules and capital buffers, that we do not seem to have really got anywhere?

The image that comes to my mind is of the strange attractors which govern the lives of any non-linear system. And global finance is certainly made of many such non-linear systems.

This is the Lorenz attractor that governs convection in liquids and is thus one of the attractors which makes our weather both unpredictable and relatively stable. And it is this unpredictability within parameters which is one hall-mark of non-linearity.

Within an attractor, trajectories appear to jump around, taking hair-pin turns, reversing and re-reversing without warning, or rhyme or reason. Yet for all their unpredictability they are always orbiting within the shape of the attractor. The attractor is simply a map of all the possible states the system can be in. Each point on the attractor is the state of the entire system at one moment.

It turns out that non-linear systems which are massively unpredictable from moment to moment, are nevertheless still bounded. Map all the possible states the system can be in, and you find a shape. That shape is the attractor. All the system’s many states exist within its bounds. Every trajectory, no matter how alarming in its twists and turns, collapses and recoveries, is some complex orbit within this shape – this attractor. And this, I think, is what we have been following for the last 5 years since that first set of dislocations occurred – another orbit of the attractor we have never left nor attempted to alter or escape from.

Our political leaders and their financial masters have made it clear that they will not really countenance any real change to the system. They were always willing to talk of ‘better’ rules or ‘tighter’ regulations but never of systemic changes. And thus, I would argue, nothing that has been done has changed the underlying nature of the global financial system nor, therefore, of the attractor or coupled attractors which govern it. We, therefore, have been careening round the same attractor as before, mistaking the gyrations and permutations inherent in it, for  signs of change.

Every attractor has a central region where the non-linearity resides. In the Lorenz attractors it is on the central saddle. For the last 5 years we have simply been passing through this region and being flung about as we did so.

Of course a system like the financial one is not governed by a single attractor. There are surely many. I am interested in the role and trajectory of ‘collateral’.

There are conflicting forces pushing and pulling at the route collateral takes. On the one hand everyone is desperate for yield. They want assets which give as high a return as they can find and that generally means assets that are unsafe and full of risk. Such assets are lucrative but, because they are risky, are not easily pledged as collateral themselves, and in fact require a lot of regulatory capital (other assets) held against them.

On the other hand, the same people who want risky assets,  also want assets which are as AAA safe as possible. These are not lucrative themselves but can be used as collateral for short term funding and/or as regulatory capital against the riskier assets.

The more risky the assets you have, the higher your VaR (Value at Risk) and your Counterparty Risk ( the risk that you may lose money because the  businesses to whose fortunes you are linked, via you assets, may themselves lose money)  which are two of the main things that determines how much regulatory capital you need to find and hold.

You may well look at these two conflicting desires and wonder what the problem is. Surely it is just a matter of a prudent balance which can be adjusted as times and needs change? And of course you are right. In the ‘normal’ course of events one person wants to re-balance in one direction, another the other way and the market is there to facilitate.

Two problems arise however when times are not normal. And ours are not.

That neat notion of the market facilitating people wanting to re-balance one way or another presupposes that people’s needs are evenly distributed. Some need more risk others less, some more collateral others less. But what happens to this happy picture if everyone has too many risky assets and wants fewer, all at the same time? Or when everyone wants solid assets to hold as collateral all at the same time? The market is useless at those times because the market is only the pairing of seller and buyer. If there is no balance then there is no market. The invisible hand becomes palsied.

What people really want is assets that are both high yielding and safe enough to pledge as collateral. And where there is a desire the market will provide. And what it provides, seen from the outside, is a bubble. A bubble of unreasoning and unreasonable exuberant make-believe that something that is risky is also safe.

In 2007 risky and lucrative but still safe and pledge-able was mortgage backed securities. Today the same role is played by sovereign debt. Our lords and master did nothing to alter the system and the desires and distortions it demands/creates, they have merely found a new way of satisfying and sustaining the system. That it has jerked and convulsed back to life, they are keen to call ‘fixed’ and ‘recovered’. Re-animation is perhaps better. Nothing has been fixed. Certainly nothing changed.

Where ratings agencies rated any old securitized tat as AAA, today governments and international bail out funds make extravagant claims of being willing to do ‘whatever it takes’ to ensure that government debt is risk free.  This has opened a wonderful world where nations can be kept in a state of permanent poverty and panic, forcing yields on their debt up to very lucrative levels, while also allowing them to be held as risk free and therefore perfect collateral.  How quickly do you think the banks want to see those nations ‘fixed’? I would hazard that they would prefer that nations are held in this perfect state of fiscal impotence for as long as it takes to arrange the fire sale of its real assets.

All of which, to my mind, describes where we are. A seeming victory for the banks and financial class.

And yet…

As I have written before, the real risk of assets cannot be magicked away. It can be traded, as it is being, in magic sounding new trades to new people, who assure you they can contain and manage the risk in your assets in return for a fee. You keep the assets, they take the risk.

Believe the soothsayers of regulatory arbitrage, and the risk which used to weigh upon your balance sheet, disappears out of sight out of mind. Gone to some mathematical null space from which we are told it cannot escape. But we all know it can and will.

Where is this regulatory capital trade putting the risk really?  As far as I can trace it, it is being bought by hedge funds. And who owns those hedge funds (owns their shares)? Pension funds. Ooops! Once again the market’s answer to those who say too much risk is systemically suicidal, is not to reduce risk but to put it where the regulators are not looking.

At the same time as risk is once again accumulating out of sight and mind, collateral too is once again becoming a problem. The problem is no one is creating new assets which really are safe and solid. They aren’t because everyone is labouring under such an overhang of debt and bad debt that the organic growth of wealth producing activity (researching and developing and then making and selling stuff) is too slow.

Everyone wants yield now, if not sooner. And when I say everyone, I mean the financial world and those Treasury parts of businesses which are more a part of the financial world than they are a part of the manufacturing company whose name they carry.  Think of the financial arm of GE or GM.

Everyone wants collateral. They want it in order to pledge to central banks in order to get those AAA rated sovereign bonds. They want it to pledge for short term funding so they can keep breathing at night. They need it in order to be declared safe with adequate capital held against their loans.

But no one wants it really, not from the yield point of view. Better to say they are forced to ‘want’ it. If they can find a way to have collateral that is somehow also high yielding they would much rather have that. Which is at least part of why Cypriot and Greek banks held so much Greek debt and why MF Global kept buying Greek and Italian debt rather than safe German debt, till it all blew up and everyone but Joe Corzine got hurt.

Collateral is getting scarce. What truly is safe, has long ago been pledged mainly to the central banks. The rest has been ring-fenced into covered bonds and other super-safe investments. None of it also pledged elsewhere or re-hypothecated onwards to prop up other loans – honest! Even the central banks have had to relax and further relax their rules about what they  will accept as safe enough to act as collateral for a central bank loan. Once it was genuinely AAA rated assets. Now if you have a beach towel from a Club Med holiday you once took, it’ll do.

Once we had fiat money. Today we have super fiat. ultra fiat and super ultra zero-content fiat.

Why do you think China is buying more and more gold? I wonder if China isn’t preparing for a contingency of a currency implosion and is making sure it has the necessary gold reserves to market the Yuan as the only ‘gold’ backed global currency.  Just a thought.

Anyway, I shall bring this ramble to a close. This is what happens when I don’t write for a while. My apologies.

Peak collateral is just a notion. The notion that at the time we want yield and growth we are running out of collateral which is supposed to underpin the high yielding assets and loans. Such a shortage would cause the ponzi-like growth that is necessary to sustain a bubble, to stall and then implode. I think our lords and rulers know this and have decided that it must not be allowed. And this – the need for collateral – is the reason for the endless QE. If this is even close to the mark, then recent murmurings about the Fed tailing off its bond buying will prove to be hollow. The Fed will quickly find it cannot exit QE without precipitating precisely the disorderly collapse, to which it was supposed to be  the solution.

The replacement for AAA rated, yet very risky/lucrative mortgage backed securities is AAA yet junk sovereign debt that can never default but sometimes does.

What all this is enabling is the looting of those nations that are already upon the debt rack. Will it sustain? No of course not. But what does that matter to those enriching themselves in the mean time.

Sorry this has been such a ramble.  I just needed to write something, anything, to prove to myself I still can.

Whether I still should is another matter.

At the behest and on the authority of Prime Minister Samaras and President Papoulias, an amendment to Greek law was drawn up last week. There was no debate in parliament, the vote is still to be purchased. But unless this amendment is challenged or changed, the change it will bring in will alter the future of Greece and its people every bit as much as the day Greece joined the Euro, perhaps even as much as the day Democracy was re-instated after the long rule of the Generals. Only this change will be a giant step away from Democracy and towards subservience to an unelected elite.

You can read the law in its original here. Here is a translation of the key part.

«The Beneficiary Member State, the Bank of Greece and the Hellenic Financial Stability Fund each hereby irrevocably and unconditionally waives all immunity to which it is or may become entitled, in respect of itself or its assets, from legal proceedings in relation to this Amendment Agreement, including, without limitation, immunity from suit, judgment or other order, from attachment, arrest or injunction prior to judgment, and from execution and enforcement against its assets to the extent not prohibited by mandatory law».

The law says, should any future Greek government try to default in any way on its debts – by setting up a debt commission or by any other means, even one accepted by international law and precedent, then Greece chooses to relinquish all claims on the assets of the Greek people and the nation and equally relinquishes all legal protections from its creditors/bond holders. In other words, if a future Greek government tries to default, Mr Samaras and Mr Papoulias have guaranteed that the Greek people will forfeit and lose any and all rights to their nation’s assets including its national companies and natural resources and the law will not protect them. All those assets will be open to seizure by Greece’s bond holders. The vulture funds, vulturecrats and all the bond holders have been handed a loaded gun and a license to loot.

No nation has ever done this. The question is why are Greek politicians trying to do it and why now?

For the last two years two questions have echoed round and round Europe and occupied the elite who rule/own it – how to stop Greece defaulting and how to recapitalize its banks – so that neither can pull down the things Europe really cares about – Germany’s and Frances’s banks?

I believe passing the above law is an important part of the answer to both those questions. In fact, if passed in to law, it will, I think all but complete a Troika formulated policy begun with the much talked about but little understood, partial Greek default and bond swap, that was the first station of Greece’s cross. What is that policy?

Stop Greece from Defaulting.

There has been and continues to be much talk about ‘helping Greece not to default’. In actual fact there is very little real ‘help’ at least not for the Greek people. The intent of Troika’s policy for Greece has been far more directly to simply ‘stop’ Greece defaulting no matter what harm it does to Greece or its people. The policy has actually been to crucify Greece if necessary, and to deny her, no matter what, the release of default.

I believe this new proposed law is intended to put beyond all reach the release of default.

But first lets clear this law is not a one off. It is a continuation of a policy that the bond swap began. The bond swap dealt with only one part of Greek debt closing off only one potentially open door to default. The present proposed law closes off all the other exits in one stroke.

So let’s start by clearing away some of the misdirection that the mainstream media has so helpfully piled in our way concerning the debt swap that Greece undertook in March 2012 and about which so much has been written. First the debt being swapped was purely Sovereign debt that was held privately. I. E. by banks. So it did not cover sovereign debt held by other nations or central banks, nor any private debt, such as that issued by Greece’s banks. Only sovereign debt held by banks and other financial institutions.

Needless to say the debt/bond holders of those institutions have used every column inch they could buy or influence to tell the approved story of how they, the ‘wealth-producers’ of the world, as they like to style themselves, have been robbed by a nation of feckless, work-shy,’socialistic’, tax-avoiding, recidivist crooks. What actually happened is nearly the opposite.

Certainly, Greece did default/restructure this debt. So on the face of it it cannot be denied that the bond holders took a loss.  But as I have pointed out before, private companies default all the time. Default is not a crime against business, it is part of it. Neither restructuring debt nor defaulting it is  a crime.  Let’s look at the case of Chrysler – again. The management simply did the mathematics and knew that unless they could reduce their burden of debts they would not be able to get out from underneath them in order to make a profit going forward. Given that situation the management (Who by the way were the culpable ones for piling up that much debt) simply said – if we do not reduce this debt then the business is dead. Better to default some of our debt and allow a business that can make money to emerge.

That is all default is. A sensible way out of a disastrous situation.

Now when Chrysler defaulted they forced a settlement on their creditors of 29 cents on the dollar. According to the BIS (Bank for International Settlements)

In February 2012, the Greek government launched an offer to exchange €206 billion of bonds held by private sector investors for new bonds with a face value of about €100 billion.

So Greece offered very nearly 50 cents ‘on the dollar’. To me that’s a bail out in all but name because it is above what the bond holders would have got had they been selling in the open market. The Greek government made no attempt to get the best deal for their people, but instead offered the open hand of generosity for their banker friends while beating down on ordinary Greeks with a closed fist.

But the settlement with the bond holders was never simply about money ‘now’, it was perhaps even more about altering the future. This was a ‘restructuring’ with one purpose – to make future default or restructuring impossible. The bond holders got paid 15% of the face value of their bonds in cash up front. The important point, however, is that the rest of their 50 cents on the dollar came in the form of new bonds issued to replace the old. The important point, perhaps the main point of the exercise was that the old bonds, which were ‘Greek Law’ bonds were replaced by ‘English Law’ bonds. The difference between Greek law and English law bonds is important and valuable to those holding them.

In Greek law bonds there can be are what are called Collective Action Clauses which allow the government to impose on the bond holders an agreement which is binding on them all so long as a majority votes in favour. Thus in a restructuring the government can dictate terms and as long as a majority of the bond holders agree, however reluctantly, the rest have no choice but to acquiesce. This is what Chrysler did. This is exactly what the Greek government did to debt it had issued under Greek Law. In English law these clauses do not appear. Which means that individual bond holders, of debt issued under English law, can hold out against imposed restructurings and refuse to settle. The effect is to make it very difficult for a government to force a settlement on bond holders. Hold-outs can always block it and force a higher price.

What the Greek government did, with the blessing of the Troika, was use the collective settlement not only to offer the holders more than they would have got in the market – which mean as far as the markets were concerned that the banks were better off after the default than before – but to replace all the Greek law bonds which allow restructuring with new English law bonds that make it impossible. The deal made this restructuring the last Greece would be able to do.

So while the mainstream press obediently peddled the ‘poor bondholders being forced to accept default’ story – the real story was that thanks to English law bonds for the old Greek law ones, no future Greek government that was not convinced of the merits of destroying Greece for the sake of Europe’s big banks, or wanted to re-negotiate – like a possible left wing, Syriza government –  no such government, no matter what it promised those who voted for it, could ever again impose a collective default settlement upon the new debts.

The bond settlement was not just about giving to the bond holders it was about taking away from the citizens of Greece. Taking away from them their ability to chose certain futures.

Foreclosing the future 

Now let’s look forward to what might happen if the present coalition were to lose the next election and Syriza were to gain power. The Syriza leader, Mr Alexis Tsipras, has already called for a debt commission, and in any election that call or something similar, will be a central promise of Syriza to the Greek electorate.

But now consider what the chances would be of making good on any such promise. If Syriza were to take exception to the generous deal given to the bond holders and if they tried to change that deal in any way, it would be a technical default and the English law clauses would prevent any new deal being forced on the bond holders. The clause would stop any attempt by Syriza to reduce Greek debt by that route. That avenue was closed when the present government signed its generous restructuring deal.

So much of the ‘poor bond holders’ story. But the bond story only dealt with one part of Greece’s debt. It left untouched the part of Greece’s Soveriegn debt held by governments, central banks like the ECB and Fed, and by other international funders such as the IMF or the various European bail-out funds like the EFSF etc., and did nothing to ‘save’ Greece’s banks from the mountain of bad private debts they still held or which they had pledged as collateral to the ECB. These debts are what new law is for.

The New Law.

On the surface the new law pertains only to the debts of the Greek state and its institutions. And on their debts the proposed new law is rather clear. It says, should any new future Greek government, no matter the mandate given to them in an election, try to default on any of Greece’s remaining sovereign debt, now held mainly held by other governments, central banks and international financial bodies, then the Greek state and the government of the day would have no protection in law against suits brought against them nor even against injunctions served to restrain their assets prior to an actual judgement. This means a Greek government would not even be able to fight such a case because while they were trying to fight, all their sovereign assets would already be frozen.

IF a Greek government tried to default not only would it not be able to force a settlement on its English law bond holders, but nations and central banks to whom it owed money would simply be able to claim and then seize Greek national assets. They could start with those already held by them, such as Greece’s gold held abroad, but also claim ownership of any other asset such as Greece’s infrastructure of roads, rail, power, water, oil and lands.

In one fell swoop the new law would radically alter the situation of those institutions, such as the ECB, who are sitting on billions of Greek government bonds pledged as collateral by Greek banks. Up till now a default would have left the ECB, like everyone else, holding worthless paper and heading for the nearest court to file suit in the hope of eventually getting a judgement in their favour. Whose court and what judgement  no one has been clear about. In short the EBC and everyone else were holding debt that was not secured against any specific claim against Greece’s assets. They were, in effect, unsecured bond holders. The ECB would not like to see it that way but I think that is how it is.

The new law changes this. And I think the European poweres are well aware of this and it is why they insisted on this law being written. For let us be clear this law was created by the Troika for the precise purpose I have outlined. The law, or the idea of it, was there in the 400 pages of the memorandum that was drawn up to govern the Greek bail out back in February. The eventual adoption of the law, is there in the fine print as one of the preconditions for the bail out to be fully released. And now the Greek quislings have done their master’s bidding.

Because if the law is adopted, then suddenly, in a default, every one of the Troika institutions could point to Greek law and say, by your own sovereign law the Greek bonds/debt we are holding are secured against your national assets. Any default and the ECB could claim whatever it wanted to cover the value of the bonds it held. My guess is the ECB might fancy Greece’s financial sector, thus making the running of Greece’s economy from Frankfurt much easier than it is now.

Of course a Greek government would not have to roll over and agree. A Greek government could still alter the law and say we are still ‘the will of the people’ and we will not surrender any assets no matter what your claim. But in return Greece’s gold would be seized as would any other Greek sovereign assets held abroad. Greece would also find suits imposed on any banks that tried to do business with them. The suits would all be based on the new, proposed law.

Taken together the earlier bond settlement, replacing Greek law bonds with English law bonds, plus the as yet to be voted upon new law would make it almost impossible for an any future Greek government, to ever again default or restructure sovereign debt. Together they are, I think, how the Troika plans to stop, prevent, and outlaw Greek people determining their own future..

This is how the Troika intends to crucify Greece.

But as if this wasn’t enough I want to suggest one more deeply unpleasant thought that came to me when I was thinking about the purpose of this new law. This is speculation because it is based upon an interpretation of the law and I am not a lawyer. But I want to put it to you because if I am in any way correct it makes the actions of the leaders like Mr Samaras an even more horrid betrayal.

Private debts in Private Greek Banks.

What I have not yet looked at is the immense pile of bad private debts held by the insolvent Greek banks.  This would seem to be outside the scope of the proposed law. And this is a problem, because if those banks collapsed, the ripples of the event could spread and to where no one is quite sure: Commerzbank, Deutsche Bank, Unicredit, The Bundesbank itself, Credit Agricole, Soc. Gen. No one quite knows. No one wants to find out. And what of the elite of Greece? The elite families of Greece, and there are only a few, who own its banks and its oil companies, and whose sons have provided Greece with her Generals as well as her Prime Ministers  would face ruin if the private debts in their banks were to implode.

Of course this should be a private affair and nothing to do with the government and its debts. But, since 2007 we all know that such private debts have been made government business. That is the new world we have been brought to. Greece’s banks will require further assistance. Everyone is clear about that . So what if a future government decided, while it might not be able to restructure its sovereign debt, it could at least refuse to take on any more debt for the sake of ‘saving’ the private banks? A more left wing government could still allow banks to default. It could clear their debts, force their bond holders, whoever they were, to suffer the losses, and then nationalize whatever assets were left, and at least Greece would have a clean banking sector. Good for Greece. Not so good for the families whose wealth and power would have just burned down.

But now think what this new law would have to say about that. On the surface nothing you might think. So might Syriza. Private banks defaulting on private debts . Nothing the government could be sued for, even under the new law,

Sadly I think the new law is there to make sure the government could be sued even for allowing private banks to default on their private debts. How?

Think of how a bank, a systemically important bank, one large enough to cause a domino effect, has to be wound up. You cannot simply let it fall apart. That would be what is known as a disorderly insolvency. What has to happen, is an orderly insolvency that ensures the bank still fulfills its socially necessary functions as a bank for ordinary people and other businesses.

In an orderly insolvency, like Chrysler’s. or Northern rock’s,  auditors must be appointed whose job it is to sort out the parts that are still viable from those that are not. The viable ones are put in one business and allowed to emerge from bankruptcy while the dead parts are put in another financial entity which is overseen by trustees while its affairs are wound down.  For most companies this happens as an entirely private matter. A company like Chrysler simply stops making cars for a while until the legal and financial sums are done. But for banks it is different. People have to have access to their money. And for big banks their operations need to continue for the sake of lots of other businesses which rely on them. So in the case of banks the government usually steps in. In the case of Northern Rock or Bradford and Bingley in the UK or the Caja in Spain or hundreds of banks in America, the government takes over the failed bank. It becomes the temporary owner and the bank’s debts appear on the government accounts. AND THERE is the key.

For as soon as a bank failed and the Greek government stepped in, as it would have to, to make sure the default was done in the orderly fashion that would protect ordinary people and the wider economy, then the bank and its debts would become sovereign. And as soon as that happened I think any sharp lawyer, expert in corporate and international law, would be able to argue that the default was ’caused by’ or at least ‘overseen and controlled by’ the government and, as such, was a sovereign default.

If the government chose not to ‘save’ the bank and its debts but instead allowed the bank to default, then the new law would empower the banks former owners and its creditors to seize sovereign assets.

It might seem incredible, and it surely is, but if I have read the law properly I think there is a very good chance it would also be the case. Just think of the way the law allows Vulture funds to sue nations even for losses on loans the Vulture fund never had any interest in until it bought them up specifically so it could sue. Tell me my scenario is impossible.

If think there is a horrible chance that the proposed law would mean that any future Greek government would have no choice but to keep bailing out the private banks. It would makes the Greek private banks and those whose wealth and power is tied to them, invulnerable. They could not be allowed to default. the proposed new law, combined with the ‘English law’ bonds would prevents any future government from being able to do anything at all to change the debt burden of the Greek people.

This law, if passed, and I think it will, would make the wealth of the 1%, untouchable even in default. The law would says either they are bailed out or they have the right to take whatever assets they wish in lieu.  The new law, could, if I am correct, be used to recapitalize a defaulting bank by simply plundering the assets of the nation.

If this speculation, and this is all it is, is correct in any way, then one of the elite, Mr Samaras, framed this law knowing it would protect his fortune and power and that of his family and his friends and their families. A law by the elite for the elite. And one that would spell the end of any meaningful democracy in Greece.

It also means this. If the Greek people vote for Syriza and the promise of reducing their burden of debt and austerity, this law and the Bond changes will ensure those promises are all broken. If that happens the voters would turn against those who promised and failed. The Left will be seen as worse liars and rogues even than those they replaced. Many Greeks might then swing violently from left to right, in to the arms of far right nationalists.

And that would be the perfect excuse for suspending democracy and bringing in a ‘technocratic’ government, a dictatorship by another name, perhaps of outsiders, backed by the military if necessary. A bankers paradise. A paradise of the elites. Vote left, swing right. The future of Europe.

This law is the end game. It must be stopped. And it can be. The Greek parliament can, and in my opinion must, vote it down decisively. If not then any incoming government seeking to turn away from enforced austerity, examine the nations debts, to reject that which was found to be odious and to restructure the rest, would find the steel jaws of a carefully constructed trap snapping closed upon them. At which point the only option would be something very close to revolution.

But it would be that or and end to democracy and economic crucifixion.

It focuses on the moral weakness of trumpeting the rule of law and how we treat people equally, but only doing so, only applying the laws and principles, selectively, to the cases where we expect to benefit and then suspending our interest in cases that might go against us.

Sub-level Four

One of the things Judge Griesa, in his ruling against Argentina, lamented was the way it had taken 10 years to finally force Argentina to pay up.

Oh, what it must be like to have the moral high ground.

Back in 1993  the indigenous people of Ecuador filed a lawsuit against the American oil company Conoco alleging that the company had polluted and despoiled their land and water. It was, in fact, the case that the area had been heavily polluted, especially the rivers. It was the case that in those areas Conoco had been a major and sometimes the only large industrial concern. It was also the case that the pollution that had occurred was typical of oil drilling and oil production activities. In 2001 Texaco who had bought Conoco admitted that its operations had dumped 16 billion gallons of the highly saline and toxic water, that is a by-product of drilling, in to the forest’s rivers.  When the oil company left the area, it left behind around 900 open and untreated  waste pits.

The case filed against Conoco alleged the company had knowingly used sub-standard equipment and practices, including waste treatments which the  company knew were so inadequate they would have been illegal in the USA.

For over 10 years Conoco denied guilt or liability and refused to pay recompense. When it was clear that a case would be filed against them Texaco/Conoco lobbied hard – spent hard cash – to make sure the case was NOT heard in an American court but in Ecuador. Cynics at the time suggested this was because the company had calculated that buying an Ecuadorean court and judge would be easier and cost less than buying the same back home. It is certain that a US court battle would have cost more than one in Ecuador.

But then the unthinkable happened. In 2011 the court in Ecuador found against Texaco/Conoco and ordered the company to pay $18.2 billion in costs and compensation. The company rejected the ruling and appealed. The Appeal Court rejected the appeal and upheld the original ruling finding against the company again.

Texaco/Conoco’s response  was to refuse to pay and instead to declare,

“The Ecuador judgment is a product of bribery, fraud, and it is illegitimate … We do not believe that the Ecuador judgment is enforceable in any court that observes the rule of law,”

If Texaco/Conoco had lost in an American court would they have been so quick to assume and declare, they could ONLY have lost because the court must have been bribed and the process corrupt? It seems to me this is rather blatant racism. If the white man loses in a brown people’s court then..well… you know those brown people , corrupt and on the take. Unlike Western Oil companies obviously.

Now where has been the moral indignation over Conoco refusing to obey a court decision?  In the financial and even popular press Argentina is cast as morally in the wrong for refusing to obey a lawful ruling, but in those same papers I have read hardly a word about Conoco.  Is this Pari Passu?

Well in one rather fun aspect it is. The problem for the Vulture Fund was finding a way to enforce its home court ruling. It was the same problem for Ecuador. When Conoco left Ecuador it made sure it left no valuables, no assets behind. Nothing for Ecuador to seize.

The break through for Elliot Associates in getting its money was to find a way to tap in to Argentina’s assets as it tried to use them to pay the bond holders it had settled with. The trick was to find that those assets would be passing through a NY bank and get at the bank.  So in a delicious parallel Ecuador has found a way of getting at an oil company which is richer than it is. And it has done it with Argentina’s help. As reported in CorpWatch

Adrian Elcuj Miranda, a judge in Buenos Aires, has ordered the seizure of Chevron’s assets in Argentina, to force the company to pay a $19 billion penalty for polluting the Amazon in Ecuador.

You’ll note the ruling is against Chevron. Chevron bought Texaco/Conoco a while back. Chevron is now the second largest U.S. oil company after Exxon. The report goes on,

If Elcuj’s ruling is enforced, Chevron may forfeit as much as $2 billion in Argentine assets and also lose roughly $600 million a year in revenue from ongoing operations in that country, according to estimates by the plaintiffs.

Why Argentina is doing this may not be entirely simple or altruistic. But it does at least have a certain Pari Passu about it, does it not?

As one of the plaintiffs said,

“We have fought now for almost two decades to correct the injustice created by Chevron in Ecuador,” commented Pablo Fajardo Mendoza, the lead lawyer in the lawsuit, who grew up in the oilfields polluted by Texaco. “While Chevron might think it can ignore court orders in Ecuador, it will be impossible for Chevron to ignore court orders in countries where it maintains substantial assets.”

It seems to me the parallels could hardly be clearer, with two exceptions. Elliot’s case against Argentina is for the benefit of a Vulture fund only and to the detriment of a nation AND the rest of its creditors. Ecuador’s case and its Argentine extension is for the benefit of a nation and its people, and to the detriment of a polluting global corporation. And while Argentina’s original default is unfortunate, it is accepted  that default can and does happen in the normal course of business. Massive despoliation and pollution, on the other hand, is NOT an accepted facet of doing business.

If we in the affluent countries of the North wish to lecture others on moral probity and the rule of law and rub terms like Pari Passu in their faces then perhaps it might be a good idea for us to actually live up to what we preach? The trumpeting of Pari Passu rings rather hollow to me when it is only applied very selectively.

Striking back from the bottom up

For those feeling this has degenerated in to an anti American rant please bear with me. The American government – some parts of it at least – argued against Elliot’s Vulture tactics. The American courts have also not been terribly friendly towards Chevron/Conoco/Texaco’s sudden enthusiasm for a new trial in the USA after they lobbied so hard to avoid a US trial in the first place.

My argument is not with ‘America’ as if it were one single entity. My argument is with American corporate power and how it uses the courts, and fears little or no criticism from the press. Which by now is largely corporate owned or advertising dependent anyway.

If you remember I wrote a couple of articles called The Eurofiscal Corruption contest. Consider this an honourary US entry.

When BP polluted the Gulf Coast of The USA there was widespread outrage at BP’s corporate arrogance and guilt. And quite right too. BP deserved everything thrown at it and more. But where was the outrage and press campaign over Conoco? Or for that matter over Union Carbide in Bhopal. Thousands died in Bhopal and the US response, governmental as well as corporate, was to fly the Union Carbide chief out of the country and stonewall all enquiries.

Now however US corporate power, led by financial power, is bringing those habits back home. The rule of law? What happened to the robo-signing fraud?  Swept aside or talked till it died. What happened to all those threatened court actions from all those State Attorney Generals? Not a lot.  What happened to the cases brought against Citi, or Goldman or JPMorgan or Wachovia or even HSBC?  Mostly token fines and no-admission-of-guilt settlements.

For decades too many citizens of the United States and Europe have turned a deaf ear to injustices as long as they happened to someone else and might have benefited ‘our’ interests. But those ‘interests’ have become used to being above the law and are importing their habits back home. Now it will be the American and European people who find it is one rule for the global companies and banks, and another for ordinary citizens.

I think perhaps Americans and the rest of us should look to Argentina for both a warning of what could happen to us – I think this is particularly true for countries like Greece who are on the cusp of the same exact path, but also for inspiration of how nations and their people can strike back.

What I like about the Argentine ruling to sequester Chevron/Conoco assets and profits is that it points how global companies, even banks have assets and assets can be seized. Argentina has been using the idea quite a lot.

Only a few weeks ago the Argentine government nationalized the formerly national oil company, YPF, which was sold off in the era when Argentina was being looted by its creditors. The oil company  ended up owned by Spain’s Repsol oil company. Spain is now furious.

The chairman of Spain’s Repsol told a Spanish newspaper he still hoped for an agreement with Argentina,

“to compensate us for that which belonged to us.”

“That which  belonged to us”? You could not make this stuff up. Irony? Whatever the intricacies of the legal arguments about nationalization I surely can’t be the only one to find a wonderful, poetic justice in hearing Spain cry about how someone stole treasure FROM them in S. America. That’s not a crime that’s Karma for all those tons of stolen gold and silver.

Argentina is showing that what companies can do, so can nations. They use the courts to sequester assets. So can we.

Of course you could ask will fighting back, as Argentina is doing, work? Won’t such action backfire on Argentina? Won’t companies and nations simply refuse to deal with a nation that plays that way? Well actually not at all.  Argentina has shown that if a U.S. court tries to sequester its assets and force bankruptcy then Argentina can strike back and seize the assets of a U.S. company. I suggest this was more Argentina’s motive than solidarity with Ecuador. But they have said, as reported in this informative FT article that the hold on Chevron’s assets will stay till the company pays what it owes to Ecuador.

But having sequestered $2 billion’s worth of assets belonging to Chevron and its subsidiaries what has happened to relations with Big Oil? Actually they have never been better. How can that possibly be? Simple, when Argentina nationalized YPF they did so knowing the company was sitting on,

approximately 774 trillion cubic feet of shale gas in the Vaca Muerta basin…

This is a large and potentially very lucrative asset. Enough to revolutionize Argentina’s fortunes. What has Big Oil done in response? It has formed an orderly line at their door asking if they can be partners. Waiting politely in line are …Chevron, Exxon and Apache. In fact Chevron has already signed a memorandum of understanding with YPF!  Presumably ‘understanding’ that Argentina may have sequestered their assets but doing more business is better than doing none.

So Argentina nationalizes YPF, sequesters $2 billion of Chevron’s assets saying they will NOT be released until Chevron pays the $18 billion it owes Ecuador and STILL everyone wants to do business with Argentina. Where is the – ‘You can’t mess with the bond holders – you can’t default, the sky will fall in’ scenario in all this? Other countires should pay attention and learn from what Argentina is doing. Greece should NOT sell its assets. Greece should grow some balls, organize its own ‘chapter 11’ default and bankruptcy protection and then sequester whatever it bloody well takes. Instead of cringing in the gutter like Germany’s whipped dog.

Companies and banks can flit from one jurisdiction to another so can nations. If a court in Manhattan rules to enforce upon a NY bank then move banks. Use banks in Luxembourg or Hong Kong to simply move the money where it cannot be touched. Who says Argentina even needs to tell the USA or anyone else who their agent bank is? Insert a confidentiality clause binding upon the bank and the bond holders that no one can reveal where  the funds are being paid.  Why should we pay fines to companies when they won’t pay taxes to us?

It seems corporations expect nations and their tax payers to pay them but refuse to pay when it is their turn.  We bail them, they screw us. We should pay fines when we owe them but they walk away from their guilt? And they have to cheek to invoke Pari passu? I don’t think so.

Banks and private capital want bankruptcy protection and confidentiality for them but not for us. I say Pari bloody Passu to that.

If people, ordinary people in every country, rich and poor, creditor and debtor, core and periphery alike do not wake up to the way private capital is trying to shift power from us and our vaguely democratic institutions to their entirely undemocratic institutions then we will all be the losers in the end. They will come for the rights and freedoms of the Argentinians and the Greeks first but they will come for yours eventually. Don’t kid yourself otherwise.

Without carrion eaters the world would be strewn with corpses. Vultures eat the dead. Vulture funds, however, eat the still living.

Argentina defaulted on its debts. It borrowed money, said it would pay it all back, signed contracts binding it to that promise and then reneged. It forced its creditors to agree to get back only a few cents out of each dollar they had lent it. Argentina simply said, ‘that is all we are going to pay. Accept or get nothing at all’. The creditors, the bond holders, agreed. Except of course for the stealthily circling Vultures who bided their time.

Surely, despite the sordid stink of what was done to Argentina, how she came to default, on another level Argentina has also done wrong to those who lent to it and must therefore pay?  Well on one level sure. But before we wag a moralizing finger lets take a step back.  Borrowing and then not paying back, defaulting, is not a crime against God and Nature known only to the  dregs of statist madmen. Companies default. They take on debts, sign contracts to pay it all back and then default on their creditors. When they do it is often due to mis-management, stupidity, greed and even fraud. Whatever moral case we might think Argentina has to answer it is not peculiar to them or to the  bloated and corrupt governments which loom large in the minds of fervent Libertarians.

Lets take a recent example, Chrysler . In 2007 Chrysler had revenue of $49 billion. That makes it larger than many nations. It defaulted. The company had knowingly, not forced to by IMF inquisitors, but of its own free-market will, taken on debts that it could not pay. Did statues bleed, or horses give birth to monsters? Did the very heavens cry out at the crime? No they didn’t. It’s business. Just business.

What Chryser did do was use the sheer size of its possible default to force its creditors to accept cents on the dollar on what they were owed. Sound familiar? And the US government itself weighed in on their side to force the creditors to accept. Why? Because, they said, it would be best for the nation. And then the critical bit, (From “The Evolution of Modern Sovereign Debt Litigation: Vultures, Alter Egos, and other Legal Fauna” Duke University School of Law)

Once Chrysler negotiated the terms of a sale with the majority of its creditors, it entered bankruptcy with a prepackaged petition, and, shortly thereafter, a new Chrysler entity emerged from the process as a going concern, no longer burdened by billions of dollars of debt.

A ‘going concern’ because it was now no longer crippled by an unpayable weight of debt. That is what Argentina had hoped to do.

Although a minority of creditors challenged the Chrysler sale as a draconian invalidation of their contract rights, those efforts failed under the debtor-friendly rules of Chapter 11.

So, for private companies the free-market has debtor-friendly Chapter 11. But not for nations? What Crysler did the Law upheld even as it pursued Argentina for doing the same thing.

And what are some of those debtor-friendly provisions of Chapter 11?

Once a private company or individual enters bankruptcy, debt service and litigation against the debtor is automatically stayed pending the completion of a mandatory restructuring plan. Bankruptcy rules also allow for a post-insolvency market for “superpriority” (debtor-in-possession) financing, which the debtor can access to jump start its reorganization.

So why is this a good ‘free-market’ idea for companies but not for nations? Why should something of the like not be available to nations?  There is no good reason – excpet one. Suing nations is lucrative AND it is part, I believe of a far broader wresting of power from nations states in favour of ‘The Market’. An ideological desire to elevate private over sovereign power. Or to put it another way to reduce nations to actors within a global market framework instead of markets and companies being required to act within a framework of soveriegn, nation state power.  The question is what levers can ‘free market’ ideologues use to force this change?

Pari Passu

The key to the Elliot Associates case against Argentina, the point of law used by them and ruled in favour of by Judge Griesa, and one of the levers that can be and has been used to attack nations, is what is known in law as Pari Passu – to treat equally.

I do not intend here to deal with the argument over whether nations need to borrow at all. I have some thoughts on this subject but they are for another article. All I wish to note here is that it is an odd thing, perhaps a legacy of the time when princes borrowed gold and silver from merchants, that nations who do not have to borrow, given that they can print instead, should chose to borrow. What is not at all odd is that holders of private wealth and creators of private credit, should be delighted to lend to them. Why is this not odd? Because nations are very large borrowers and, most of the time, very good payers.

The only down-side to an otherwise wonderful trade is that IF a nation should decide to default – how can a private creditor take an entire nation to court? The answer for centuries was they couldn’t. The old, English Common Law of Champerty prevented it.

Champerty is –

an English common-law doctrine that precluded the purchase of debt with the intent and purpose to sue upon it. (P.49)

A clear law which makes the very notion of a vulture fund impossible. At this point it is worth taking a moment to remind ourselves that the laws which codify what we mean by debt: who must pay what to whom and under what conditions are not natural laws. Debt and its laws do not spring from the fabric of reality like Gravity. Debt and its laws are human conventions that is all. We can see it one way or we can see it another.

Champerty said you cannot buy up a nation’s debt, when you know that nation has or soon will default, for the express purpose of then suing the nation. Champerty says the nation and its creditors are the only interested parties and thus they alone must be left to work it out for themselves. And since most of the lenders were the largest banks and other nations who  generally had long term and lucrative relations with the debtor nations, the lenders would generally feel obliged to swallow the losses.  And that reality ‘tended’ to give the lenders some pause for prudent thought when it came to how much they lent and to whom.

So for years Champerty did prevent nations being sued AND helped concentrate the minds of the lenders. But then along came the first Oil Shock/Crisis and the subsequent South American defaults of the 80’s in Mexico, Argentina and beyond, and the eventual game changer – The Brady Plan.

Each of these things, like everything else in this article,  can be seen in two entirely different ways. What you see depends on what you are told to look for, what you expect, what you want to see.

Sorry to introduce all these elements but I think it helps to know why things happened not just that they did happen. So to take them one at a time. The first Oil Shock was a crisis at the pumps but a bonanza at the well-heads. Suddenly the world was flooded, literally flooded, with petro-dollars (Oil was traded in dollars). That money belonged to the oil nations but it flowed to the world’s banks. Suddenly they had more cash than they knew what to do with.

So it was not a coincidence that a long list of nations who wanted to borrow suddenly found the taps opening for them. I’m not saying nations didn’t borrow or banks lend to them before. They did. But go back and look at the growth in lending just to Argentina – from $8 billion in ’76 to $43 billion in ’83. An increase of over 400% in just 7 years .

But then,

 A subsequent rise in interest rates and a global recession resulted in a string of defaults on these loans,starting with Mexico in 1982. (P. 50)

The banks let the  influx of cash go to their gonads and lent too much to ‘sub-prime’ borrowers, content to let them get deeper and deeper in to debt paying the banks more and more interest. The scale of the bad loans was sufficient to cripple if not bring down at least some of those banks. Sounding familiar at all?

Cue the Brady Plan. Officially a plan to save S. American nations (one way of seeing it), but equally, or perhaps more, to save the U.S. banks who would have suffered/collapsed if  widespread defaults had been allowed to go ahead. The Brady Plan repackaged the defaulting debts in to new bonds imposing some ‘hair cuts’ but off-setting even worse possible losses by various means AND, critically, allowing the new bonds to be sold to a far wider set of financial institutions. The idea – again stop me if any of this rings any bells with you – was, by allowing the new bonds to be sold more widely it got the risk off the bank’s books where it had been concentated  and ‘spread’ the risk more widely across the market.

Seen one way, the official way, the plan was to save the countries from default and ruin. Of course the countries were considered to have defaulted and their credit rating suffered. Which does seem to me to take the shine off the official version. But no matter. Moving on. The un-official way of seeing The Brady Plan is that it was a way of  preventing nations from defaulting and entering any sort of ‘Chapter 11’ restructuring and re-thinking of their borrowing and instead kept them firmly attached to their banks and their habit of debt dependency. Debt dependance is what was being saved along with the pushers who profited from the dependancy. The banks profited financially. The U.S. profited politically.

Of course both ways of seeing are there in the picture. Both have to have some basis in fact. I suggest my way is far more relevant than the usual story allows.

The point of this diversion is that this was the event which launched the modern market in the trade in sovereign debt which is such a boon to countries today. It was the birth of the era of sovereign debts as we now know them, the  place where the old order and old power structure of nation states and their citizens confronts the new and rival power of  the global Free-market and of nearly-but-not-quite stateless capital.

This was the arena where Mr Singer of Elliot Associates had his good idea – the idea that if he could somehow get rid of or find loopholes in the old law of Champerty, then he would be able to buy up debt when it was cheap – for a few cents on the dollar when a nation defaulted – but then sue that nation for the full 100 cents on the dollar. Elliot Associates are a law firm their expertese is in twisting the law to suit themselves. ie they are lawyers. Mine might be an unflatering description of what lawyers do for a living but I think it is nevertheless accurate.

Elliot set about challenging Champerty and to cut a long story short they succeeded. The key case for them was against Peru. Remember Champerty says it is illegal to buy a nation’s debt for the purpose of suing. Elliot’s argument, up-held in U.S court was that when they bought the debt (defaulted debt), their “intent” was simply “to be paid in full”, nothing more. There was no ‘intent’, no plan from the outset, to sue. This was depsite Elliot and the court accepting, as the court said in its ruling

“Elliott knew Peru would not, under the circumstances, pay in full.”

And yet the court accepted and agreed that Elliot hadn’t bought the debt with the express ‘intent’ of suing, only of somehow being paid in full. And they resorted to suing only when their original intent was thwarted. And that is how you get round Champerty.

That, to me, is a fine example of the law and lawyers at work. It has been described as ‘the narrow interpretation’ of the law of Champerty. I think that is the sort of narrow, like the eye of a needle,  that a camel would not be able to pass through.

But just to be doubly sure Elliot and Mr Singer also lobbied the New York State Legislature , the government of  New York State, to amend the laws of New York State  to remove the defence of Champerty. Which they did. Suddenly there is no defence of Champerty in N.Y. state, which means there is no such defence in Manhattan or in its courts and the Southern District Court of Manhattan is Wall Street’s court where Elliot Associates are suing Argentina.

However, it is one thing to win it is another to enforce. Elliot had found the means of suing, but for enforcement they needed Pari Passu.

They have used it before and it is what Judge Griesa has used to clobber Argentina. It is simple really. Pari Passu says all creditors owed by Argentina must be treated equally. Argentina cannot chose to pay some and not others. It cannot play favourites. Which is lovely. To which Argentina replied – yes but what makes you think a US court in Manahattan has any jurisdiction over Argentina?

As the Economy Minister, Hernan Lorenzin put it,

“To pay the vultures is not only unfair but illegal in terms of our internal rules,”

To which the Argentine President Cristina Fernandez added that her country would not pay

 “one dollar to the vulture funds”

And now we come to the rub of Judge Griesa’s ruling. He has said the obligation to treat all creditors as equal – pari passu – applies not just to Argentina but also to any agents working for Argentina. By which he means the banks who handle Argentina’s money and make its payments.

When a nation pays its creditors, the creditors don’t call round to Buenos Aires with a suit case. They go to whichever global bank is Argentina’s paying agent. Argentina’s is Bank New York Mellon. BNY Mellon is perhaps the largest paying agent bank in the world. It handles trillions of dollars in payments.

Judge Griesa’s ruling says BNY Mellon must also treat all Argentina’s creditors equally or the bank will run foul of his ruling. In other words though the court cannot get at Argentina directly, it can enforce its ruling upon Argentina’s bank. The court ruling prevents the bank from paying those creditors that have settled with Argentina unless it also pays the vulture fund. And moreover the bank must pay the Vulture funds the whole amount. If they don’t then it is the bank which will find its assets seized and actions taken against it. Thus the bank will have to do nothing.

Is this Pari Passu? Well certainly not as it was originally intended. The judgement in fact jeopardizes anyone getting paid at all. If Argentina tries to pay anyone through BNY Mellon it must pay them all. If it doesn’t want to pay the vulture fund the full amount demanded by Mr Singer then BNY  Mellon cannot pay anyone. If it does, obeying Argentina’s instructions over the ruling of the court, then BNY Mellon will suffer. So BNY Mellon will not release any of Argentina’s money to pay any creditors. In which case the ruling will force Argentina to default again. This will punish the other bond holders. Thus the judgement is not very Pari passu at all. In fact it is a ruling specifically favouring the rights and welfare of Elliot Associates OVER the rights and welfare of all other bond holders. Which is what their lawyers argued in court,

“It is far beyond the bounds of equity to seek to enforce the rights of one litigant by jeopardizing the rights of others,” lawyers representing a group of bondholders who participated in the exchange, led by Gramercy Funds Management LLC.

So although the Elliot case is often written of in terms of Argentina having to pay its debts, it is worth being clear that Judge Griesa’s judgement is not on behalf of the orignial bond holders. It is not seeking to redress any wrong done to them at all. In fact it is a judgement against them as much as it is againt the people of Argentina. This judgement is purely and soley for Elliot Associates, its owners and its wealthy investors. The ruling says Argentina MUST pay Elliot Associates what Elliot wants, which is FULL payment. It is a judgement which says it is an American court in Manhattan which decides who the people of Argentina must pay and how much not their own government.  The judgement punishes everyone except Elliot. It is a judgement for their benefit only. And that, in my opinion, is the essence of what a Vulture fund is about.

Thus this is not about Pari Passu, nor the sanctity of contracts, it is about enriching Elliot Associates. The long term effect will be to make bond holders afraid to settle with a defaulter for fear that a vulture fund will come in later and force themselves to the front of the queue for payment. This judgement seeks to close down the world of compromise, of bankruptcy protection, of helping a bankrupt emerge as a going concern and force us all to live in a new, Vulture World.

I think Pari passu even if it is declared to work as a ‘narrow’ legal argument fails as a broader moral one. And moreover let’s go back for a moment to the idea that debt and its treatment is a social construction not a law of nature. Who does it really benefit to allow nations to be sued?  The people? No. The other creditors? No. Is it even consistent to afford private debtors a form of ‘Chapter 11’ type bankruptcy protection and the chance to emerge as a ‘going’ concern but not to allow anything of the like for nations and their people? No. And does allowing nations to be sued by private entities, push us towards a world of mutual understanding and positive compromises? No. It pushes us towards the  Vulture World at whose threshold we already stand.

We should not allow nations to be sued. Such a simple decision would rid the world of Vulture Funds and close at least this one path to the world of vulture morality. It would also restore the incentive for bankers to alloy their greed for profits with a need for prudence – in this one area at least.

And that is sub-level Three in which I hope to have offered some answers to how suing nations works, why it works, for whose benefit and to whose detriment. I hope I have also suggested how the narrow legal arguments sit inside a broader moral framework.

The next level down takes us further in to the necessary moral underpinning of how nations treat other nations and how they allow private companies to treat them. For it is my contention that legal arguments such as pari passu, treating people equally, while they can exist in isoaltion, and can be applied arbitrarily, only where it suits and not where it is inconvenient, will end up, in that case, being applied by sheer brute power, and will lose much if not all of their moral authority. They will quickly  cease to have the sway of laws which are seen to be morally right, and become just the law that is there simply to enforce the wishes of the powerful. Or to put it another way, the law will become seen as not the guardian of the weak that speaks truth to power but the paid servant of power who says to it, ‘Yes lord, who shall I crush for you today’.

In sub level four we leave NY and its courts but bring in Ecuador and Big Oil to play along with Argentina.

Argentina told to pay hedge funds $1.3bn

Was the headline in the FT on Thursday 22nd November 2012.

The judge who made the ruling, Thomas Griesa, said “After 10 years of litigation this is a just result.”

I’m not so sure. In my opinion the headline and the ruling it reports are just the tip of a shit-berg. Like all bergs the fatal mistake is to think the bit you can see above the water is all there is. In my opinion if you look beneath the surface, almost everything which this article and the case it reports on claim to show, is turned on its head.

The visible tip

Argentina borrowed money, got in to trouble and defaulted on its creditors. What could be simpler? That was back in 2001. Since then the bond holders, or some of them at least, have pursued Argentina through their home courts in America and a judge sitting in Manhattan’s Southern District Court  has finally ruled in their favour. Justice at last for the bond holders. The rule of law, majestic, like a shining island of ice.

Now lets take a peek beneath the waterline.

Sub-level One – Vulture Funds

The Bond holders described rather coyly in the article as an ‘Hedge Fund’are not just any old hedge fund and are not in fact one of the original bond holders who lent the money to Argentina in the first place. The hedge fund in question is what is commonly known as a vulture fund. Vulture funds like most parasites have a very specific niche. Vulture funds go around buying up what is often called distressed debt. Which in their case means bonds which have been or are thought very likely to be defaulted on. Why would they do such a thing? Well the original bond holders, faced with default, will either settle with the defaulter to get back some portion of what they lent – in this case they settled with Argentina for 30 cents on the dollar  – or if a circling vulture fund settles next to them they may sell to them instead. The Vulture funds will say – ‘You never know how much Argentina will offer you but we will offer this much to you  right now’. The original bond holders generally want as clean an out as they can. They will have lost money but that is the the nature of lending it is it not? You win some you lose others. Exactly like lending on a mortgage or buying stocks and shares – the value of your investment can go down as well as up. You pays your money in the hopes of a reward and accept that there is an accompanying risk.

I do not mean to make light of bond holders losing their money, nor imply that a country defaulting is a mere bagatelle. I want only  to remind that lending is always a risk – an accepted and normal risk – which is part of what the interest on a loan is for. Potential default is part of the risk that is priced in to the bonds as we hear every day when we are told of a county’s borrowing costs going up.

So back to the vulture fund. In this case called Elliot Associates. To be more precise, for the happiness of the corporate PR men reading, the  case concerns NML Capital ( A Cayman Island registered fund) which is part of Elliot Capital Management which is part of Elliot Associates. Elliot Associates and its subsidiaries together make up one of, if not the, biggest vulture fund. It is certainly the most aggressive. It is based in New York and its founder and CEO is Mr Paul Singer. I do not know Mr Singer. He may be a wonderful person. But it is my opinion, that if there is something more repulsive than a scaly necked corpse-eater spattered with the gore of some unfortunate beast – if there is something more repulsive – it is what Mr Singer’s business does. Vulture funds Buy to Sue. They feed upon misery for their profit.

Vulture funds do not buy bonds as a form of lending. They do not lend. They are not there to help. They wait until a country is on its knees,  buy its bonds while they are cheap and then use the law to insist, that in its moment of pain and misery, the government, instead of using whatever it has left to get its house in order and help its citizens, must instead pay the Vulture fund, its owners and its investors.

Now supporters will say – but it is the law. The country owes and must pay. What then is the difference between this icy attitude and the cold heartlessness which put families out in to the cold and children to the Workhouse? Debtors prisons and work-house morality. The morality of fat men and their lawyers lecturing the poor and the huddled who owe them money.

Histrionic nonsense! What about the rule of law?  We are not cruel men nor heartless, but we  insist the law be observed. Yes indeed.  The law. Before which all men, all nations must be equal. Is that it?  Yes! Yes!  And what of probity and taking responsibility for ones mistakes and paying for them?

Sub Level Two – How Argentina came to default

Every level is larger than the one above it. It is 1976. Isabel Perón is gone, the military dictatorship led by General Jorge Rafael Videla, Admiral Emilio Eduardo Massera and Brigadier-General Orlando Ramón Agosti now rule.  (All the following quotes are from a very good piece from the Argentina Independent which was founded and is staffed by British journalists. You can read about it here)

On 2nd April 1976, just over a week after the military coup, newly appointed economy minister José Martínez de Hoz, launched a deep restructuring of the economy, based on the principles of neo-liberalism. In his landmark speech that day, he announced a fundamental move “from stifling state intervention to make way for the liberalisation of productive forces.”

In a short space of time, wages were frozen and new labour laws (in favour of companies) were introduced, the banking sector was deregulated, and obstacles to international trade and investment flows were eliminated.

The Neo-liberal experiment had begun. For those close to the military junta, for the corporations and the already wealthy it was the time of what became called plata dulce (Sweet money). The deregulated banks opened up to cheap money and international funding. Sound familiar? But not all boats were lifted.

Just one year into the dictatorship, acclaimed writer and journalist Rodolfo Walsh wrote in his famous open letter to the military junta: “the economic policy of this government, rather than a justification for its crimes, is a greater atrocity that punishes millions of human lives with its planned misery.”

While the few prospered, real wages for the many were crushed by 40%. Child mortality and poverty rose.  Did it stop the ideologues of the free market? Of course not. Mammon is Great! Mammon the all merciful. When did fundamentalists ever pay attention to the real world sufferings of those they disdain? Turban or T-bill, fundamentalists are always certain. Certain that they deserve all they have and so do you.

Like virtually all those free-marketeers who came after them in Washington and in every nation where they were installed they talked about shrinking the state but didn’t. The Generals spent. Their bankers approved. In 1976 before the military and their neo-liberal experts took over, Argentina’s external debt was $8 billion. After 7 years of their financial prudence and free-market can-do the debt was $43 billion. And not a socialist to  in sight to blame it upon.

Not that it dented the zeal of those latter-day crusaders for Mammon and money – the IMF. With Argentina now in serious debt and poverty and inequality rising it was time for the IMF to insist on its special medicine – of more ‘market liberalization’ and more austerity to pay for it. Naomi Klein has written brilliantly about the wider, shameful and wicked experiment in her book The Shock Doctrine.

By 1991 the free-marketeers had been forced to dispense with their dictator. But all was not lost. Argentina’s debt had swollen like a boil to $61 billion which was earning $ 3 billion a year in interest for those who had advised them and lent to them.  And better yet. this time the Argentine people voted the right way, and when Domingo Cavallo was appointed minister of Finance he embraced the free-market, neo-liberal ‘Washington concensus’ with all his stony heart. He was after all a former World Bank President. He was one of us. Not one of those left leaning radicals.  No need for regime change in Argentina. Not this time. That would come later, in another country that had something Washington and the West wanted.

Cavallo embarked on more liberlization, more deregulation and more privatizations. The result was economic contraction. The IMF and the bankers offered more loans and ‘helped’ with more selling of state assets. Argentina sold off one of its crown jewels, its oil company, YPF (remember the name)  at prices critics cried were corruptly low and seemed bidderless, gifts to the powerful and connected. But it was a ‘concensus’ right? It was the 90’s when ‘the smartest men in the room’ were just rolling up their power-dressing sleeves and inventing all the insanely wonderfulf financial things that we have learned about since 2008.

By 1996 Argentina’s debt had now nearly doubled to $110 billion. Cavallo resigned amidst widespread claims of corruption throughout President Menem’s government. But Menem held on for three more years in which another $35 Billion debt was added. No one was to worry though. The IMF had a plan and as long as Argentina continued to follow it, the IMF would smile upon her leaders as would the banks who were getting so very rich from all the interest.

1999 Menem fell.  Fernando De la Rúa took over. But the real power, behind the presidential throne did not blink or close its eyes. Not for a second. Greed and evil don’t sleep. After nearly three decades of neo-liberal policies, away from the golden lives of the urban elite, of Polo matches and private banking, there was no better future coming for the mass of Argentinians, there was recession. But Argentina had become used to turning whatever trick her pimps told her to. So when the IMF said the answer was another loan the new President, much like the old one, got to his knees to give special thanks.

In December 2000 he wiped his mouth clean and addressed the nation.

“[the IMF credit line] is a guaranteed fund so large [$40 billion] that it clears any doubts or threats over Argentina’s future…Argentina has no more risk,

And now it is Greece which will have ‘no more risk’ just like Ireland or Portugal, as long as she can have a big enough hit of that crystalmeth bail out goodness. Now it is Greece that must do what it is told for another tranch of funding Just one more bail out and one more round of austerity to pay for it and Greece, like Aregentina who blazed down this the path before it, will be fine.

‘Greece will not need another bail out’. Of course not. ‘Spain isn’t Greece’. And Spain’s banks are secure and funded and their debts are under control. And Italy isn’t Spain and France isn’t Spain and no one wants to be reminded of Argentina. After all that was then and this is now and now is different. Isn’t it?

Argentina is safe and transparent, and can now grow in peace…2001 will be a big year for Argentina”.

And it was. Argentina continued to follown the IMF dictats of government spending cut backs and austerity. But the country’s economic decline and contraction accelerated. De la Rúa lost control.

Cavallo was brought back, this time with extraordinary powers to force through whatever the IMF said.

A patchwork collection of new taxes, spending caps, debt swaps, and cutbacks (including a 13% in pensions and some social payments) only deepened the country’s social problems and turned more people against the De la Rúa government.

September 2001 another $8 billion loan brought Argentina’s debt to somewhere around $193 billion. And then on December 5th 2001 the music stopped. The IMF felt it had done enough to help the ungrateful and said ‘no’. Argentina defaulted. And the bond holders were, as they are now, outraged.

The echoes of history are, to me, chilling. And I wonder can we really be the only ones who hear them? I cannot believe that those echoes do not whisper through the marbled walls of the Central banks and along the carpeted corridors of the IMF. And yet the lunacy and greed roles on from country to country, from people to people. Always the same true believers burning our hopes, blighting our lives, before they walk away, with a shake of their perfectly tanned heads, to their private jets to return to the place where there is no want and despair does not go.

This is the story of Argentina’s default, so crisply summarized by Judge Griesa in his judgement, when he wrote that, “at long last…Argentina must pay the debts which it owes.”

Sorry to break here, given that most of this has been background, but I have been working more slowly than I had hoped I would.  Part two, in which I hope to get to my conclusions, begins –

Sub -level Three. Vulture world

Without carrion eaters the world would be strewn with corpses. Vultures eat the dead. Vulture funds, however, eat the still living.

When our leaders embarked on their policy of bailing out the banks’ private debts, even those of us like me, who believed our rulers were hideously wrong to do so, still harboured a hope that they were at least sincere; that they really were, as they claimed, trying to fix things for all of us. I find this impossible to believe now. If any of the bankers, their experts and our politicians ever were sincere when they claimed we would all be in this together, it now seems terribly clear that none of them has any intention of being with us in what is being forced upon us now.

Just this morning George Osborne and his lick spittle coalition partners have agreed to another £10 billion in cuts to welfare, health, education and the rest while saying that imposing any further taxes on the wealthier will have to wait. They promise to look at that …soon. Promise.

The problem with discussing why we are bailing out the banks is that in the 5 years since the bank debt implosion began, ‘saving’ the banks has now become enmeshed in – and in the headlines replaced by – what the banks and our rulers absolutely insist is an entirely separate ‘crisis’.  The financial world and their political friends in all parties have spent two years trying to brainwash us, that the problem is no longer the banks but is a ‘crisis’ of public, sovereign overspend and indebtedness. Putting money in to the banks is now seen as a technical matter rather than anything the public should concern itself about. Indeed there is a desire to return to the idea that the public must stop feeling they should be entitled to have a ‘concern’ about things too technical for them to comprehend ‘in the right way’. The ‘right way’ is to understand that the proper concern of the public should be cutting what the financial experts tell us is the terrible debt problem caused by too much public spending.

The ‘right way’ makes no further mention of public money still supporting the banks nor of the billions more being printed up right now so yet more public money can be lent to them. In fact the right way insists there is no connection between the huge sums nations have pumped in to the banks and the sudden ballooning of sovereign debt in those nations.  The ‘right way’  means refusing to see any connection whatever between policies of  cutting public spending in the real economy and a shrinking of that economy. No connection at all…obviously.  Any economic Phd can see that.

5 years on and more people are more confused than ever. People cannot understand how the same politicians can insist it is essential to keep ‘helping’ the banks with ever larger sums (trillion is the new billion) regardless of what debt it incurs, while with equal fervor insisting it is absolutely imperative that we cut spending on anything other than the banks – because we are in debt. And so with their certainties chained to our legs, we are sinking in to a mire of suffocating confusion, lies and fraud.

Sometimes in a world of increasing confusion it is good to ask simple questions. Why are we bailing out the banks?

In the Beginning.

We have been given various answers in the years since the ‘save the banks’ policy began in 2007. Yes, the first one was back then. From the beginning of  The Debt Generation,

On July 19, 2007 the Dow Jones average closed the day at its highest point ever.

Three weeks later, on August 9, the huge French Bank PNB Paribas suddenly closed three very large subprime US mortgage funds. The European Central Bank (ECB) was forced to pump €95bn into the market to steady nerves, but the shockwaves had already spread and it wasn’t enough. The next day central banks around the globe were drawn in. The ECB pumped in a further €156bn, the US Federal Reserve, more commonly known as the Fed, put in $43bn and the Bank of Japan a trillion yen – all to try to steady global markets.  Those markets held their breath.

Just think about those numbers.  A quarter of a trillion in Euro liquidity pumped in to the banks from the ECB alone – on day one. And ever since, the torrent of liquidity and ‘investment’ provided to the banks has not ceased. The promise was that this was a crisis of bank funding not bank solvency and therefore the solution was not to wind them down in an orderly fashion but to pump money in to them. This would, we were assured, stabilize the banks, allow them to start lending again, first to each other and then later to the rest of the real economy.

The result? Well, 5 years on and the banks are stabilized in the sense that they are still alive but not stabilized in any meaningful sense. They are only alive because they continue to rely on massive injections of cheap loans from the public purse, they still rely on  state guarantees/insurance for  vast amounts of their rotten and valueless assets/loans and would not survive a day without the continuation of the policy of nearly zero percent interest rates which gives the banks cheap loans from the Treasury but is killing savings and pensions. So by any measure at all the policy, followed for 5 years, has not done what it was claimed it would. It has not worked.

And yet our leaders refuse to change. 5 years on and instead of trying a different policy, the Fed is now looking at an open ended QE 3 in order to pump  yet more money in to the banks(read – canular now stitched to your bruised and bleeding vein), the ECB/EU is in the midst of widespread calls for LTRO3 (LTRO is euro speak for QE – cheap lending to the banks) to follow the trillion Euros worth of LTRO 1 and 2 already pumped in, the BoE is sticking at a mere £345 billion in bond buying and £1.4 trillion committed over all to the financial system (Gov.’s own figures) and finally The Bank of Japan just a week ago squeezed out another ¥10 Trillion. That brings Japan’s bank stimulus ‘policy’ to over ¥80 trillion which is about $1 trillion which is about a fifth of Japan’s GDP. And then just to round out the policy triumph, just a few days ago a Bank of Japan Board member, Mr Sato, was reported as saying, that because the global crisis is, quite inexplicably, still not fixed,

We [The Bank of Japan] won’t hesitate in taking additional monetary easing steps….

Which eerily echoes both Mr Draghi’s now infamous ‘Whatever it takes’ pronouncement from the ECB and the Fed saying it could ‘do more’ if necessary. More of what? The same? In 2008 sub-prime was contained, in 2009  the crisis would be over by Christmas. The actions taken were ’emergency’ and ‘temporary’. Except that now, those temporary, ‘extraordinary government measures’ have been so ‘successful’ that now they have to be open ended. Does this sound like a disease responding to the appropriate treatment?

Whatever your view the fact remains that we are now in a world where we simultaneously have money being printed by all the central banks, so that it can be put in to the private banks, while also being told we must cut spending in the public sector in order to reduce ‘public’/state debts. 5 years on we have confusion being heaped upon failure. We are told the cuts are necessary because we must bring down sovereign debts, while also being told we must continue to bail out the banks even if doing so increases sovereign debt.

I am aware that MMT takes a radically different view of  sovereign debts and the mainstream’s insistant belief that nations must borrow to repay them. I will come to that later.

To most people, however, especially those facing the cuts, the seeming paradox of cutting spending to reduce debt while bailing out banks which increases it, seems to be a straightforward case of bail out the banks, AKA the wealthy who own them and work in them, while impoverishing the poor. Seen that way  the answer to why we are bailing out the banks is simple – we are bailing out the banks because it suits the wealthy. In which case something is very, very wrong, with our our political system as well as the economic theories that seeks to justify it. Is it right to see it that way? Is this why we are bailing out the banks?

Well I think there are good reasons for thinking this simple view is actually correct. Lets quote some well known figures and then look a little closer.

In the UK , according to the Office for National Statistics’s wealth survey, the top 10% own 46% of the total privately held wealth; £4.5 trillion out of the total of £10.3 Trillion. And they have actually increased their share and the rate at which they are aquiring it since the bank crisis began. In contrast the bottom 50% of GB households have only 10%  of the nation’s private wealth. In the US the disparity between rich and poor is even starker. In America the top single one percent own 35% of all the wealth. The top 5% own 63.5%. Of the rest, the vast majority of americans, 80% of them own just 12% of all of America’s wealth.

And it gets worse for Americans. A very good article in The National Journal points out that from the 90’s onwards,

“It wasn’t just that the top was doing better than the rest, but that the very top was    absorbing most of the economy’s growth. This was a more extreme and dynamic  kind of inequality than the country was accustomed to.

According to a recent Congressional Budget Office report, those in the top 1  percent of households doubled their share of pretax income from 1979 to 2007; the  bottom 80 percent saw their share fall. Worse, while the average income for the  top 1 percent more than tripled (after inflation), the bottom 80 percent saw only  feeble income growth, on the order of just 20 percent over nearly 30 years. The  rising tide was raising a few boats hugely and most other boats not very much.”

Land of the shat upon and home of the craven or blind.

These figures are for total wealth and income.If, however, we look at financial wealth the disparity grows even larger. These pie graphs are taken from an article by Prof. Domhoff of UC Santa Cruz.

Think of your own situation. How much of your wealth is held in the value of your house and how much in stocks and bonds? Almost all my wealth is contained in my  house.  The super rich, the top 1-10% hold much, much more of their wealth, vast bulk of it, in financial form. That huge increase  in ‘wealth’ from the 90’s onwards was concentrated in financial wealth. That is the kind of wealth that made and still makes the super rich, super rich.

What these two graphs tell us is that if the big banks had been wound up 80% of Americans would have lost almost nothing. Whereas the top 5% would have lost the vast bulk of their wealth and therefore their power.

It will be countered that we would have all lost  from the decline in our pensions. True. But there is still no getting away from the above charts. The wealthy have most of the pensions. In fact they own most of the pension companies. The poorer you are the less pension you have to lose. Many of those at the  bottom have no pension at all. That is what these charts say.

But wait, as the saying goes, there is more. In America there is about $1.6 trillion in printed dollars and deposits for which currency backing exists. That is state printed, state backed money. This is the stuff that you and I get paid in and have in our bank account.  However there is another $5.4 trillion in unbacked ‘money substitutes’ and somewhere around $53 Trillion in credit. For credit read debt backed assets and derivatives of all sorts. These are the forms of ‘money’, electronic, banking money in which the wealthy have most of their wealth. These are also what would be wiped out if the banks were not continually bailed out but were to be wound down instead.

This is what frightens them and what has dictated that the banks be bailed out. Unlike us in the 80%, the financial class hold most of their wealth in financial and ‘paper’ debt-backed form. If the present crop of huge banks were to be wound up, what would virtually disappear would be that thunder cloud of debt/credit-held, derivative wealth.

This is the size of that credit/debt and derivative cloud relative to the real economy. The black line is the total credit/debt and derivative cloud. The red line is GDP.

Your wealth is tied to your house and your job They are both part of GDP. But the total ‘wealth’ now based upon, I would say parasitic upon your house and in fact the entire real economy of stuff and jobs, is far greater than you will ever know. Your mortgage was securitized and sold to another bank you’ve never even heard of. But that bank long ago hypothecated that security to yet another bank as collateral for a loan. And that bank re-hypothecated it to another bank and so on 40 times over. Along the way other banks created derivatives  based on the security in which your mortgage was packaged and sold. The derivatives do not produce employment nor add to the world”s stock of food or shelter. They are a form of paper wealth much like a betting stub on a horse race is wealth. If a punter losses his betting stub it does nothing to the health of the horse. Our present policy is to starve the horse in order to protect the value of the betting stubs and the business and wealth of those who trade in those stubs.

If the phantom economy were to be wound up, there would still be factories, people to work in them and even people with dollars, euros and pounds to spend. Our nations would still have the means of producing goods and services. It has been argued that if the banks went down it would destroy our currencies. But is this threat real? I think it is not. In a world where credit backed assets are worthless, state printed money becomes more not less desirable. Just take a look at how the banks are desperate for nations to print more of their state backed money.

If the banks were to be wound up it is their credit/debt backed ‘money and the assets held in it, which would burn to ash. not our state backed currency.  The $53 trillion in credit/debt backed wealth would largely dissapear, not the 5 trillion in state backed money. The super rich would be the massively disproportionate losers.  This they would not and never will countenance. Instead they have engineered the saving of the form of ‘money’ in which their wealth is held and the institutions which control it, and done so at your expense rather than theirs.

So the simple reason our rulers insist on bailing out the banks is that by doing so the wealthy and the powerful are simply bailing out themselves and guaranteeing the continuation of a system which suits them perfectly.

So is that it? Just selfishness? Actually no. While I believe this simple reason is true , such naked selfishness could never have survived for 5 years were there not a covering of legitimating  theory to confuse critics and lull the unwary.  That is what we will look at in part 2.

Part two of this series ended talking about Recourse and Non-recourse loans. Noting that Spanish mortgages are recourse. Meaning that if  the borrower defaults the lender/bank has recourse to not only the collateral on the loan, i.e. the house, but also all the borrower’s other assets as well. From this one fact I think we can glean a little clarity.

Unlike the situation in America, for example, you cannot walk away form a mortgage in Spain. Thus people haven’t. The Spanish will do almost anything to not default on their mortgage because they fear losing all their assets not just their house.

But at the same time Spain has and has had HUGE unemployment. At present the unemployment rate is a socially destructive 25%. That is 4,630,000 people not earning any money, not paying any taxes. It has been over 20% for a couple of years now. Youth unemployment is over 50%!

How are those 4.63 million Spanish people paying their debts? If many of them have a mortgage, how have they been paying it?

Well we might note that capital has been leaving the Spanish bank at an alarming and accelerating rate.

An article at Zerohedge notes,

Spanish financial institutions suffered the largest deposit outflow on record in the month of July when a whopping EUR74 billion, or 5% of the country’s entire asset base, picked up and left

This is a huge acceleration. In the first three months of the year the outflow was already alarming but was ‘only’ €97 billion or 10% of the nations GDP.  Predictably, it gets worse. CNBC today reports,

On a three-month rolling basis, portfolio and investment outflows from Spain totaled 52.3 percent of the country’s gross domestic product (GDP)

So when we take in to account all kinds of assets, we find capital flight of pretty serious proportions. The article quoting Bank of Spain figures breaks this flow down to find that,

…foreigners were large sellers of Spanish securities in the latest quarter, which generated an outflow of 19.4 percent of GDP.

While a further 16.7% of GDP was Spaniards pulling their money from Spanish Banks and putting it in foreign banks. Pure capital flight. But those figures do not account for all the money being pulled from Spanish banks. Nor for the money that was pulled before.  I have a feeling – its just a feeling, I have no figures – that many, many Spaniards have been pulling money from the banks, from their savings in order t pay off their recourse mortgage. I wonder if many of them are now coming to the end of that road?

You see I think the financial world and our rather wealthy and privileged leaders take so little notice of the lives of ordinary people that they think that ‘people will manage’ without ever wondering ‘how?’ If people have ‘managed’ so far, our leaders cease to think about them – it’s a strain to think about people you never meet, and frankly don’t care to meet – and assume they will continue to ‘manage’ for as long as they are required to. Much like grass is green and will continue to be green so ‘The People’ in the minds of those who rule over us, are just another part of the natural world to be taken for granted and used for profit.

But people cannot ‘manage’ indefinitely. At some point, like over fished seas, polluted rivers and melting ice-caps there comes a point where something gives. I wonder if we are now at that point in Spain.  I think an increasing number of people in Spain, but elsewhere across Europe as well,  are simply beginning to run out of the savings with which they have been keeping their families afloat. Don’t forget money taken from saving to pay for mortgages won’t re-appear back on the bank’s books because the banks did not hold the mortgages. They were securitized and sold on.

If I’m right then capital will leave the banks not just from capital flight but simply as accounts run dry. Is this not inevitable when unemployment runs at 20%+ for year after year? Regardless of my speculation, what is not speculation is that the Spanish Banks are running our of money. And this has rather profound knock on effects for the government. To wit, Spanish banks, which the Spanish government has relied upon to buy Spanish debt/bonds are now not buying but actually selling Spanish sovereign debt/bonds.

As reported in International Financing Review, (IFR)

Spain is beginning to lose the support of its banks as last-resort buyers of government debt, with lenders selling out of their holdings at the fastest pace in more than two years in July….The sales are a blow to Madrid, which was increasingly reliant on domestic banks to buy its debt after an exodus of foreign investors.

Since just March this year Spanish banks have sold €17 billion of Spanish government bonds.

In July alone, domestic lenders reduced their holdings by €9.3bn, in part to meet an outflow of deposits, signalling that money is now too tight to support the sovereign.  (My emphasis)

Banks are running out of money. They have no more assets to pledge to the ECB. The Caja’s assets are too rotten for a dung beetle to bid for, capital is leaving by every door, ordinary people are out of work and have been told they are unlikely to find any this year or next (unemployment is projected to go up in Spain in 2013, not down) and other banks will not lend to Spanish banks at all.

Translate the capital flow from percentage of GDP in to a percentage of bank assets and,

Since June last year, clients have withdrawn €233bn or 13% of the total….

Or in graph form,

That isn’t good.As the IFR piece says,

A need to raise cash to meet those withdrawals may have prompted the recent bond sales, as other assets owned by banks – mainly loans and mortgages – are far less liquid.

Spain’s banks have long since been the buyer of last resort for Spain’s sovereign debt. The same is true in Italy and many other nations. When no on else will buy your debt you can still get your banks to dig their hole a little deeper. Till the day they say no. In Spain it is that day. Then you’re stuffed.

Spanish mortgages are turning bad at a faster rate than ever. The Caja have been retaining and hiding the worst of those non-paying loans. The caja and other banks are finding people, foreigners and Spaniards alike pulling what money they have left, out of Spain’s banks. Without those deposits the banks just don’t have the cash to pay their day to day costs let alone have money left over to keep Spain afloat by buying its debt/bonds. In fact the banks are in such a state that they are now selling those bonds for cash, making it even harder and more expensive for Spain to sell more debt. And sadly Spain has a LOT more debt it has to sell.

Spain’s official ‘plan’, I use the word very lightly indeed, is to sell €6 billion a month every month. €3 billion of which will be old debt re-issued/rolled over and €3 billion of new, extra debt. (These figure are from a UBS note published over at Zerohedge.) Then, in 2013, if all goes according to that famous plan, Spain will, when you add in Regional debts that are crashing and burning, need to issue up to and possibly in excess of  €120 billion.

YEAH…RIGHT! Phone call for Mr Draghi!

So what will our lords and masters do about this riot of failure and incompetent neglect? Will they think that possibly they should draw a line under ‘saving’ insolvent banks and corrupt developers? Will they close the banks, sell their assets and recapitalize some clean banks? No of course not. Will they make those who made the stupid loans and who own the losses take them? Never. Will any of those who have ruined a nation ever be made to face a court? No of course not. Don’t be silly.

What they are planning is what they have done so far. Pump more and more money in to failed banks, create new bad banks so they too can be given public money that disappears when they too fail, and then turn around and tell the tax payer that the nation has spent too much and the government will, with crocodile tears in their eyes, have to close some hospitals, cut wages, ‘liberalize’ the work place, fire thousands of lazy, good for nothing public service workers, and then wonder why tax revenues are going down and banks are seeing money leave.

They will pump money in to the one sector of the economy which is NOT going to help any sort of recovery, and absolutely refuse to spend money on any sector that might, and then when all fails they will proceed to sell off the sovereign assets of the nation that are not theirs to sell.

Greece is already planning to sell national assets and now so is Italy. Both governments intend to sell-off businesses particularly utilities. Privatization is about selling stuff that WILL make a profit. The argument is always that the business is ‘badly run’ when in the public sector but will be ‘reformed’ and ‘rationalized’ when taken private. No one ever asks why things were been badly run or sets about reforming and rationalizing them while retaining them IN the public sector. It can be done. The NHS in the UK delivers very good health care for far less per capita than Private health care in the US for example. It is a very efficient system despite its many faults.

But all such arguments are denied and ignored in favour of the chance to asset strip a nation. And that is where we have arrived.

Privatization targets utilities because they are monopoly businesses whose services people cannot do without. If you sell water you are the only supplier and no one can say no. Same with electricity (the grid that is) and the roads, the trains, the ports etc. All built up over decades with tax payers money. Now those assets and the profits they can generate will be privatized. Of course it is quite true that in the case of Spain and Greece much of the rot was not only in private banks, but in regional and even national government. But does that make the looting of a nation somehow better? So the ordinary people were betrayed by a small subset of wealthy and powerful  people who ran local banks and local government. Certainly the ordinary people are guilty of laziness and a willingness to believe the vapid blather of the bankers and the politicians. But even so, does that justify stripping the assets owned and paid for by the citizens of a nation and selling them at recessionary prices to the wealthy few, in order to better bail out those same wealthy few?

The whole rationale for the bail-outs is that the banks need cash but should not , must not be forced to sell-off their own ‘assets’ to raise that cash. And why not?  Because in a recesssion they would not get a good price for them.  But the assets of the people, apparently, MUST be sold now, right now, in the recession at recessionary prices. And who advises this so adamantly? The banks.

And then there is the land of  the nations itself. I find it sad that wars have been fought to protect it, but now the traitorous few are simply going to sell it to their friends. Who needs tanks when you have banks? Greece will sell or long lease islands. Italy will sell beaches and historical landmarks.

And the people, us, what will we do?

First, €30bn is a joke because it is not enough and the Spanish central bank and the government know it.

Second, 30bn of what? The Spanish banks don’t have 30bn of anything worth setting aside.

According to a Bank of Spain presentation quoted in an article by Bloomberg, the bad  debt provisions of  Spanish banks so far

would cover losses of between 53 percent and 80 percent on loans for land, housing under construction and finished developments.

The additional €30B announced today

 would increase coverage to 56 percent of such loans,..

The tiny little problem here, as Bloomberg points out, is that this additional sum is still ONLY for covering losses on land construction and finished developments.  Which means even this ‘new’ rescue, like those before it, has no provision in it ,

… to absorb losses on 650 billion euros of home mortgages held by Spanish banks or 800 billion euros of company loans.

That’s €1.4  trillion in residential mortgages and business loans for which the Spanish banks have made….no provision.

Now it is true that default rates have been lower in Spain than in Ireland for example. But while Ireland has unemployment of about 14% Spain’s unemployment is 24%. Very nearly 1 in every four of the workforce has no official job. Even if they are working in the black economy that still leaves the state with a vast shortfall in tax revenue. No matter which way you look at it it is impossible that Spain’s Caja’s are not going to find huge ‘suprise’ losses on their residential and business loans. Of course those losses are already there but being held off the books with central bank complicity. Why else would the central bank and government simply not make provision for such losses unless they knew they were hidden? The problem is how much longer they can be hidden.

Taking the  likely losses on those residential and business loans in to account,

…banks would need to increase provisions by as much as five times what the government says, or 270 billion euros, according to estimates by the Centre for European Policy Studies, a Brussels-based research group.

I take that estimate with a pinch of salt because, although I do not know the Centre for European Policy Studies, it does look to me, to be fairly mainstream if not right wing. Even so I think the figures are clear that Spain’s latest bail out of its banking system is as doomed to failure as those which preceded it.

Then there is the second and more fundamental problem which is that the  Spanish banks simply don’t have €30B they can set aside as further provision for bad loans. How can I make such a stark claim? Actually its not hard.  And this is why.

This chart from Reuters shows that Spanish debt – you remember those successful bond auctions – was NOT bought by the bond market at large (non-resident holders), it was bought by Spanish banks (domestic holders). Similarly Italian debt has been bought by Italian banks.

According to data from the Spanish Treasury quoted by another Bloomberg article, in just December 2011 and January 2012 alone Spanish banks and other domestic lenders increased their holdings of Spanish debt by 26% to €220. Which means they bought over €40 billion. So exactly how successful were those Spanish debt auctions?

Similarly Italian banks increased their holdings of Italian debt by 31% to a massive €267B in the three months ending in Feb. 2012.

The graphs make it starkly clear that neither Spain nor Italy has had any truly  successful bond auctions in some time. What they have had is a suicide pact with their own insolvent banks.

Spain and Italy have desperately needed to claim that they were not locked out of the bond markets and could fund their borrowing. At the same time the largely insolvent private banks desperately needed cash and capital. Cash for day to day running and capital to meet minimum capital adequacy rules. Which just means the base of capital upon which their massive loans sit.

The solution was called the ECB’s LTRO (The Long Term Refinancing Operation), the brain child of the ECB’s new President, Mr Draghi. The LTRO was another means for the banks to borrow from the ECB but it was also intended as a back door way of the ECB bailing out the Soveriegn nations, via their banks. This was a major departure for the ECB. The banks asked for loans which the ECB granted at a nominal 1%. To give you some notion of the size of the operation to keep Europe’s banks in business, banks in Italy, Spain, Portugal, Ireland and Greece  between them borrowed 489 billion euros on Dec. 21 2011 and 530 billion euros on Feb. 29. 2012. A trillion so far. I say so far because there is every reason to suppose the ECB will decide the only way to avoid a collapse in the banks they seem determined to keep from their maker is to pump yet more money in to them (LTRO3).

The banks that took the money then used it to do several things. First and foremost they bought sovereign debt as per the plan. That way the sovereigns could claim all was well with them and the ECB could claim it was not bailing them out (not directly at least). { In the original I got the explanation of how the ECB bailed out the naitons via the LTRO exactly arse backwards. I wrote that the ECB was not supposed to bail out banks which is completely wrong. It is the nations the ECB should not bail out directly. The ECB and the Nations used the LTRO as the means of getting round this. My sincere apologies for getting this so wrong. It did not, however, affect the point of the piece.} After all they could show suprisingly ‘buoyant demand’ for their debt/bond auctions, which rather marvelously kept down the interest they had to offer. The result was that the private banks were then in possession of sovereign debt that would have paid them between 5-6%. So, money they borrowed at 1%, bought bonds that paid them 5%. That is a straight bail out from the sovereign’s tax payers of 4%.

Think about it. The sovereigns could have gone to the ECB themselves and borrowed money themselves from the ECB for 1%. Instead the sovereigns let the private banks borrow from the ECB at 1% and then the sovereign borrowed from the private banks (remember when a sovereign sells bonds/debt the buyers of that debt are lending to the sovereign) at 5%-6%.  Why? Answer – so they could say, ‘We’re not having to get bailed out by the ECB. No, we are selling our debt successfully to the market, who love us.’ It was a lie but it made it sound as if the ‘reovery plan’ and the unpopular austerity policies must be working. And at the same time it allowed the sovereigns to bail out the private banks without having to tell the people they were doing so. Two lies for the price of one.

If we now take stock for a moment of who ended up with what, the picture becomes rather ugly. The insolvent private banks pretend to be solvent, but in fact what they have is a vault full of IOUs/bonds from their nations. The Nations claim to be selling their debt but have in fact sold it only as far as down the road into banks who are only alive at all because they are being bailed out.

And what of the ECB? Well former ECB board member Juergen Stark said recently in an interview with the German newspaper, Frankfurter Allgemeine that,

 …the balance sheet of the euro system, isn’t only gigantic in size but also shocking in quality.

The ‘shocking’ quality of the assets is because the ‘assets’ in question are the bad loans that Europe’s private banks couldn’t get anyone else in the whole wide world to accept as collateral. EVery tie the ECB bails teh banks out, each time it ‘extends loans’ it has  to acceot as collateral for those loans  whatever the banks have left. Which means the ‘assets’ that the ECB wouldn’t accept last time.

All that has happened is that an elaborate debt laundering two-step has been put in place so that banks can be bailed out by nations who can be bailed out by the ECB. But it is done in such a duplicitous way that the banks appear to be merely getting a loan, the nations appear to be selling their debt as per normal and the Tax payer, who is actually footing the bill for both, is completely in the dark about the whole thing. THAT is the ECB and our European rulers in action. Feel shafted and lied to? You should.

Now however, the lie is unravelling. You see the key is that the private banks’ bad assets, those that no one believes have any real worth, are taken out of the private banks and ‘pledged as collateral’ at the ECB who in return give them loans. The ECB of course reveals no details so no one can prove a thing. The private banks then use then loans they got from the ECB buy sovereign debt with that money. (Some, the really terminal, also use it for repo in order to keep breathing day to day). The result of this gyration, from the point of view of the private banks, is to replace worthless their assets with one’s that are backed up by the sovereign nation. The ratings agencies will then look at those assets and say – this is proof of how much support the sovereign is willing to give to their banking system. They call this ‘sovereign uplift’ and add this as a positive factor in establishing the solvency and credit worthiness of the private banks. And of course the sovereigns are also being helped by the banks who are buying their debt.

In a sense the idea is to get two cripples to lean on each other. As long as the two cripples stay very still you can see them as propping each other up. But if ever one or, heaven forbid, both start to wobble then the previously positive relationship suddenly looks very negative. Instead of propping each other up they look as if they are pulling each other down. And that is where we are now. If the banks look like falling over the sovereign will be left with a massive collapse which it will, as with Spain’s recent nationalization of Bankia, try to foot the bill for. That will hugely increase sovereign debt. But who will they sell their debt to now? Even the banks who haven’t yet collapsed are badly affected because they and their ratings rely on the perceived ability of their sovereign to support them. Which becomes more and more questionable with every bank that the sovereign has to save. As the sovereign is seen as more and more vulnerable , with larger and larger debt which it seems less and less likely to be able to sell, then the banks who have bought all their sovereign’s debts are perceived as potentially being back where they started – with a vault full of dubious IOUs.

If it all seems head spinningly circular, that is because it is. It is a cycle of lies and debt  re-branding. As long as the momentum of the lie and of public belief is in the ‘forward’ direction then all seems to be well. Everyone is selling their debt, no one is being bailed out and no one is aware of who is paying. But if the lie and the momentum of belief goes into reverse then all the players start to look more not less vulnerable and at risk.

What has happened in the last week with the election in Greece and the unravelling of the lies and hidden bank insolvency in Spain, is that the momentum of the grand lie has started to reverse. If that reversal is not halted and the truth not quarantined  then I believe there will be a another clamour raised by Europe’s insolvent banks for the  ECB to announce yet another emergency funding programme.

The fog of burning acidic financial lies that have been rained down on us for  four solid years is finally meeting political reality and opposition. Suffering can be ignored and met with the police baton but it cannot be erased forever. We have yet to see what if anything M. Hollande will do in France  and what will happen in Greece and in Spain. But the momentum of their lies is, for now at least, running against our oppressors.

Officially?  Nothing whatsoever.  In my opinion? Everything.

But it requires reminding ourselves how we got to where we are now.

Back in 2008 the big banks were in fear for their lives, weighed down as they were with hundreds of billions in loans that were defaulting and assets that were losing value as the markets for them plunged and then closed.  The bank’s bad loans meant they had no cash flowing IN with which to pay their own debts.  And their capital was flowing OUT as the value of the assets they had in their vaults declined along with the markets in which they were valued.

They were running out of cash and needed a ton of it FAST. And they needed to stop their assets losing value, or they would be forced to sell more and more of them to raise capital to replace the value they had lost.

The banks had to find solutions to these two separate but related problems.

The losses from bad loans, the so called ‘Toxic Debts’, they solved by getting Henry Paulson to tell Congress that unless it bailed out the banks, there would be social breakdown and tanks on the streets.  The $700 billion Troubled Asset Relief Programme (TARP) was duly passed by a cowed US Congress on 3rd October 2008.  The banks now had a new source of cash to replace that which they were NOT getting from their stupid loans. And that new source was you and me.

The second problem was trickier.  How were the banks to stop their assets from losing value?  The reason they were losing value was because fewer and fewer people wanted to buy them and those who did offered lower and lower prices because the whole market was in free fall.  Not a good moment for anyone to find they had to sell assets to get a little capital.  Such a sale is called a fire-sale.

The banks knew they couldn’t stop their assets losing value, so they did the next best thing. They got the accounting  rules changed so they no longer had to tell people that their assets were losing value.  If they didn’t have to tell people, then who could say the assets had lost any value.

After a frantic year of flooding lobbying money into the accounts of the relevant Senators and Congressmen and women, Mark to Market rules were suspended on 2nd April of 2009.  They were replaced by rules called Mark to Model by which the banks could “..use significant judgement in gauging  prices of some investments…”

And suddenly the banks were no longer insolvent and some handy bank-designed ‘stress tests’ were subsequently run to prove it.

Now fast forward to 2011.

Today the nations who bailed out the banks by taking the banks’ debts on to the national debt, are in terrible trouble themselves.  Sovereign debt levels are so bloated that nations are being warned that they MUST lower their debt levels and raise some cash.  And who is warning them? Turns out it is the same banks and financial system whose debts we bailed out.

So far we have borrowed money and printed money and both options are maxed out.  Plus we are now not getting as much cash flow IN to the exchequer because our tax base is shrinking due in turn to  rising unemployment. Two years ago cash flow was the banks problems. Now, magically it is ours.

And now our ever helpful and expert friends in the financial world are advising that we absolutely must cut spending on everything non-essential – which means anything that isn’t a further bank bail out and bond purchase.  (Those we are told are absolutely essential to ensure ‘the recovery’ continues and does not stall.)  And they are further advising that we could also raise some badly needed cash – by selling a few assets!

You might remember how this exactly what was suggested to Greece – that it could pay some of its debts by selling the odd island, or how Ireland could sell off its motorways or airports or electricity grid.

In the UK the advice is being taken up with unsuppressed glee. The British Government has just announced that it plans to sell off a quarter of a million hectares of  woodland that is currently owned by the people.

No one asked us, but don’t worry there will be a ‘consultation’ no doubt.

Our government is not selling this land because it’s an intrinsically good idea to not own any forests or because now is a propitious moment to sell. The government is selling because they say ‘we must’, in order to tackle our debts, whether it’s a good moment or not,  And let’s face it, in a recession it’s not a good moment. Thus it is a ‘forced’ sale – a fire sale.

But who I ask will have the money to buy all these forests? Will you?

The banks have cash. And what is more so do the bankers who work there.  Take RBS for example.  In 2009 RBS made a loss of 3.6 billion pounds.  It had no money to pay anyone for anything. But that didn’t stop them because we had put into the banks tens of billions. So the bank, decided to reward the very same bankers who had bankrupted the bank and lost 3.6 billion that year alone, 1.6 billion pounds in bonuses.

The bank did not pay that money. Remember the banks had no money. It had lost all its money. WE paid those bankers.

Now what do you think those bankers will do with 1.6 billion pounds in bonuses. What to buy?  Oh the decisions!  I know how, about a darling little woodland. There are going to be plenty for sale within easy reach of The City.

And for those big commercial forests, well, what will be needed there are some bank loans. So the banks will loan the money, our money, to companies and funds and ‘high net worth individuals’ (other bankers) who want to snap up a forest on sale at fire-sale prices.  And the banks will turn around and trumpet how they are lending in to the real economy!

The entire sale aims, according to the government’s own figures to raise about £140 – 200 million.  The debt we have saddled ourselves with as a direct result of bailing out the banks, according to more of the government’s own figures is somewhere between 800 billion and 1.4 trillion Pounds. 200 million from the forests will be 0.2 billion or between one four hundredth and one seven hundredth of the debt paid off!  Worth it?  A good use of the nation’s forests.

“Every little helps” though, doesn’t it? And those leases will be up in only 150 years during which time we won’t miss them, no restrictions on access will have been introduced and absolutely no harm will have come to them.  Trust us, we’re bankers!

I wonder why Mr Cameron and Mr Osbourne, feel it will be better to get this widow’s mite from selling a half to three quarters of the last remaining open public woodland into private hands rather than squeeze 200 million back from the banks whose bail out caused our debts to balloon as they have?

Are we selling things because it will really help then long term health of this nation, or are we doing so because this is a perfect opportunity to strip the nation of assets at fire-sale prices?  A perfect privatization.  Push the nation into a fire sale which does what the Tories have always wanted  and set up  the banks for their promised recovery by letting them buy up assets at knock down prices.  Two victories for half the price of one.

And in the logic of fire sales, as one nation sells at knock down prices it lowers the value of similar assets held by other nations.  Ireland won’t be able to get more for its forest than we sell ours for. The logic of fire sales, the reason the banks were so appalled at the prospect of their own assets being sold this way, is that fire sales create a downward spiral. Just exactly the buying opportunity banks love when they are fire is burning someone else’s house down not theirs.