Oh Look! The Market LOVES Fraud! (Europe) in [Market-Ticker]

Posted 2011-10-27 07:19
by Karl Denninger
in International

Oh Look! The Market LOVES Fraud! (Europe)

I'm not surprised, of course. After all, it was Paul Kanjorski's effective extortion of FASB that literally marked the bottom in the market in 2009. All you have to do is put a gun to someone's head (and have the power to pull the trigger, as Congress does) and voila - it's all ok, right?

Well, as we saw, no, it's not ok. But it is good for 100% rally in the stock market.

This morning we're going to see big moves in US banks - BAC is up pre-market something like 8% and the others are also up big. Europe is up huge across-the-board and our futures are up about 2% as well.

Why? Because "Greece is Fixed!"

Wait: It's not.

The "agreement" is that bondholders will take a 50% chainsaw, er, "haircut" on their Greek debt. In yet another stunning "agreement", this will somehow not trigger credit default swaps - in other words, they're not really default swaps any more, now they're "whatever we call thems when we want them to be whatevers."

This is a huge problem up and down the line; if you bought this "protection" you now got nothing for it, which means this market's functional purpose is now a zero.

Here's the hint folks: Watch the spreads.

I don't think this is going to work. Drinking yourself sober never has, and this will be no different. It obviously has and will, however, provide a short-term lift, exactly as we got one in the US after the first "go-around" with TARP and such.

If spreads do not come in and stay in, however, this will be short-lived. I expect we'll have some more ups and downs, but the the principle of gravity has not been repealed, and what goes up on the slow boat will come down on the express elevator. It will not be long before the speculators attack Portugal or (more likely) Italy, and it will be quite interesting when they do, as there's nowhere near enough firepower to repeat this game with them.

For today (and perhaps for a few more days) enjoy the rally. Oh, and while you're at it pay attention to oil and the bonds - there goes BenDover's "Twist" effectiveness (incidentally that's thrice now he's said he'd "keep" bond yields low, and that's thrice he's been wrong. Why do people put up with him again?)

Discussion below (registration required to post)

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User Info	Oh Look! The Market LOVES Fraud! (Europe) in forum [Market-Ticker]
Alfgldbrg Posts: 28 Incept: 2011-04-04 Banned	I'm trying to figure out how this "voluntary" thing really works. What I'm really curious about is this: since presumably it's only the European banks who are agreeing to take this 50% hit, what happens to private investors who happen to own Greek bonds? For instance: let's say I buy myself a 2-year Greek bond at 40% of par today (assuming that's still what they're selling for). Will I get paid off at par in 2 years, assuming Greece hasn't defaulted by then? From what I've read so far, I can't see why not. The EU can only pressure the big European banks to voluntarily take the hit, right? And if there's no default, then the bonds should mature as scheduled. So why shouldn't we all go out and buy 2-year Greek bonds today? Seems to good to be true, but I can't find anything written about this on the web... 2011-10-27 07:43:00 Permalink
Oldno7 Posts: 2138 Incept: 2008-11-14 RECALL STATE USA	Everything is OK till it's NOT. I'm waiting till it's NOT. It's just a matter of time according to the math. ---------- IT'S THE SPENDING STUPID The US must become less a government of men, and more a government of LAW. When people lose everything and have nothing left to lose they lose it -Gerald Celente 2011-10-27 08:00:21 Permalink
Myopia Posts: 83 Incept: 2010-09-16	It won't work because it does not address the fundamental issue - currency union cannot work without fiscal union. It's just a repeat of the "too little, too late" sticking plasters we've seen before. We are, I suspect, approaching a point where only "too much" will sate the markets, then it's game over. 2011-10-27 08:01:11 Permalink
Heffalump Posts: 131 Incept: 2008-04-05	More important than speculative attack on Portugal and whoever else is the question: If Greece is threatening to default and gets 50% of its debt written off as the result, why should anyone else (especially other PIIS) bother trying to pay THEIR obligations? ---------- "If rate I raise, burst, the frothy bubble will. If rates I lower, inflation will I get. Unclear, is the housing market." 2011-10-27 08:01:38 Permalink
Randy123 Posts: 5785 Incept: 2008-09-24 Earth Online	Can kicked. I say 2 months ---------- China is the Enemy. Wake Up. New Normal. Same As The Old Awful. 2011-10-27 08:02:56 Permalink
Eighty6thebs Posts: 4183 Incept: 2007-06-26 It's contained to sub-prime!	I say 2 hours. ---------- "Sounds to me like you guys a couple of bookies" - Billy Ray Valentine "No I am not scared, and neither should you be!" - Iraqi Information Minister 2011-10-27 08:07:46 Permalink
Resistance Posts: 6162 Incept: 2008-09-26 Banned	Wash. Rinse. Repeat. For ***s sake! I can't believe people are still falling for this cheap trick. Suckers. ---------- "Why must political experiments always be in the direction of more government? Why not give the free market a county or even a state or two, and see what it can accomplish?"Murray Rothbard - The Fallacy of the Public Sector 2011-10-27 08:13:00 From PDA* Permalink
Mangoelvis Posts: 1727 Incept: 2009-07-11 Las Vegas, NV	Wait, so a default is not a default if you call it a "voluntary haircut"? All you have to do is change of the name? Doesn't this stiff all the Greek CDS holders? I'd be****ed. If I loaned someone $100 and they paid me back $50 it would sure feel like a default to me. ---------- Evolutionarily speaking, sloths must taste terrible. 2011-10-27 08:18:39 Permalink*
Pj Posts: 1211 Incept: 2009-12-07 Putnam County, New York	What kind of idiot cheers a plan that 'reduces' Greeks debt-to-GDP to 'only' 120%--- by 2020? WTF!!?! They're paying down the principal from 140% today to 120% in 8 yrs. This sounds like it's basically an interest-only mortgage for the next 8 yrs. And then what? How long are we going to play Extend & Pretend after that? This pump won't last. The bond market is not going to go along with this for eight months, let alone 8 yrs. ---------- When the Athenians finally wanted not to give to society but for society to give to them, when the freedom they wished for most was freedom from responsibility, then Athens ceased to be free and was never free again. Edward Gibbon 2011-10-27 08:19:06 Permalink
Bearshort Posts: 4484 Incept: 2007-09-13 NYC Online	Bond market not impressed with 50% haircut, Greek 10 year Tsys trading $34.6 up 1 7/8's big deal. Greek 2 year Tsys trading $41.5, up a 1/4 point! Not much help from the bail-out for bond holders. ---------- "How long to the point of know return?" Enemies of the State: Bernanke, Geithner, Frank, Dodd, Greenspan, Paulson. 2011-10-27 08:19:29 Permalink
Splashdown Posts: 556 Incept: 2010-04-05 Central Illinois	50% "Haircut"...i love it - a nice spin. 2011-10-27 08:21:50 Permalink
Leicestersq Posts: 221 Incept: 2009-10-12 UK	Can someone answer some questions on CDS? I have imagined for sometime that most CDS are written by hedge funds and the like, who dont really have enough capital to be able to pay up should a credit event actually occur. A bit like the old insurance scam. The idea is to take the money out of the fund in bonuses, and then just fold when the claims come due. Is this view correct, or are CDS written by reputable companies with enough capital to pay out in the event of say, Italy going bust? I remember how AIG collapsed when a few mortgages went bad, so I cannot see how any large issuer of CDS is going to stand up if nations start defaulting. I have also wondered if there is any value in a CDS trade, after all isnt the interest rate the market value of the risk of the loan in the first place? So if you insure against the loan going bad, the amount you pay in insurance takes away all your profit from the risk? Given that buying a CDS as insurance will include a notional profit for the seller of the CDS, how can such a trade ever make sense, unless one side is defrauding the other in some way? If then, political stitch ups like this on render CDS on sovereign debt irrelevant, isnt that a good thing? Wont it mean no one will take out this insurance anymore, and a useless service will be scrapped, and banks wont be able to use a CDS to claim a bond at full value when it isnt? Please respond, I am eager to learn. 2011-10-27 08:26:57 Permalink
Corn1945 Posts: 4167 Incept: 2009-04-30	I don't understand how the CDS market doesn't implode immediately. They basically said you won't get paid from these things because they'll never declare a default. So now they aren't valid hedges (like they ever were). These things are worthless. 2011-10-27 08:32:11 Permalink
Jpg Posts: 329 Incept: 2009-03-23 MI	Am I getting this right? The banks that loaned money to Greece write-off half their loans, then arrange to loan Greece another hundred gigabucks (at least that's what I heard on the radio). This is somehow a good deal? 2011-10-27 08:35:21 Permalink
Capeman Posts: 3702 Incept: 2007-07-12 San Diego	Quote: "whatever we call thems when we want them to be whatevers." That's worthy of a South Park episode! ---------- "I believe all God's creatures have a soul... except bears, bears are Godless killing machines!" - Steven Colbert 2011-10-27 08:41:09 Permalink
Daniel Posts: 40 Incept: 2010-05-06 Houston	50% "haircut"? More like a scalping. 2011-10-27 08:46:26 From PDA Permalink
Jtmo3 Posts: 679 Incept: 2009-07-31 Missouri	I guess I don't understand. If you "voluntarily" accept this, you get give up 50%. And that's no default? What if you refuse to take a haircut? It seems that you can't call this a default and collect your "insurance". What happens then? Does Greece not pay you? Do you take your chances a at getting the full amount, hoping they don't default before then (obviously, europe will not let them). So, what the hell is the point of voluntarily taking a haircut? Why would you take one when it's so ***ing obvious that the eu community will pull out all stops to keep from anyone defaulting. And why would anyone buy cds's at this point? The whole situation is confusing the hell out of me. It doesn't make sense. 2011-10-27 08:52:40 Permalink*
Debtpie Posts: 534 Incept: 2009-12-17	"I don't understand how the CDS market doesn't implode immediately. They basically said you won't get paid from these things because they'll never declare a default. So now they aren't valid hedges (like they ever were). These things are worthless." When has any insurance "paid" when you really needed it? There's always fine print that excuses them from making good on the "insurance". CDS is just another insurance scam. ---------- A Leader, or an Opportunist? "A leader has the capacity of vision, the ability to see where things are headed before people in general see those things." Mitt Romney --- DebtPie's definition: a leader decides where "things" should head and "leads" us there. 2011-10-27 08:53:59 Permalink
Jubber Posts: 14078 Incept: 2007-07-05 UK	So I guess the Hedge funds who have bet huge on a default are now as ***ed as the people who own the bonds? How can that work ---------- The problem with socialism is that, sooner or later, you run out of other peoples money. Thatcher 2011-10-27 08:56:06 Permalink*
Fraudster Posts: 4174 Incept: 2011-05-10	Serious question Karl. Why do you bother? This is clear indication that the top brass have NO INTENTION of dealing with the debt crisis in a serious fashion. They are just going to continue to play games until it blows up. The calls for change appear to be for naught. ---------- *"Let China sleep, for when she wakes, she will shake the world."* - Napoleon Bonaparte *"Circulation ceases first at the outer edges [Europe and Japan]. It will take a while yet for the decay to reach the heart [America]."* - Foundation & Empire by Isaac Asimov 2011-10-27 08:59:35 Permalink
Mangoelvis Posts: 1727 Incept: 2009-07-11 Las Vegas, NV	The only way this makes sense is if the people who wrote the CDS's don't have enough money to pay them a la AIG. So... a CDS isn't really a hedge then is it? The owners of Greek bonds (among whom are Greek pensions) were given the choice of a 50% haircut or a 100% loss. ---------- Evolutionarily speaking, sloths must taste terrible. 2011-10-27 09:02:09 Permalink
Fraudster Posts: 4174 Incept: 2011-05-10	Quote: So... a CDS isn't really a hedge then is it What kind of confidence can one have in any debt, and in particular, any debt rating, when the insurance behind that debt can be neutralized by decree? ---------- *"Let China sleep, for when she wakes, she will shake the world."* - Napoleon Bonaparte *"Circulation ceases first at the outer edges [Europe and Japan]. It will take a while yet for the decay to reach the heart [America]."* - Foundation & Empire by Isaac Asimov 2011-10-27 09:05:07 Permalink
Salt Posts: 192 Incept: 2010-05-28 NC	It's stunning watching TPTB press on the wall that's been hit. The other side is the abyss and the wall is only so strong. 2011-10-27 09:05:36 Permalink
Splashdown Posts: 556 Incept: 2010-04-05 Central Illinois	So, when is all of this austerity supposed to kick in? When does that contraction going to happen? On one hand, the stock market seems to think that economies are going to continue to grow to new highs, then on the other hand the world economies need to quit spending money they don't have. Tuesday's here and the tab is due for all those hamburgers right? 2011-10-27 09:06:26 Permalink

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