Am I a prophet, or what?

On February 21st I wrote about the latest 'bailout agreement' for Greece. Amongst other things, I observed:

The agreement imposing the 'haircut' means that, because Greece hasn't technically 'defaulted' on its debt obligations, the credit default swap (CDS) agreements that provide insurance against such defaults will not go into effect. To put this in simple terms: when you bought your $100 million of Greek bonds, you also bought a CDS - an insurance policy - saying, in effect, that if Greece didn't repay what was owed, the seller of the CDS would do so. However, the seller of the CDS can - and will! - now turn around and say, "Since you're a legal party to the terms of the Greek bailout, that means your losses are voluntary; therefore, I won't compensate you for them." The fact that you're an involuntary legal party to the agreement is basically irrelevant. The bailout agreement therefore nullifies contracts of insurance that private-sector investors relied upon to cover their investment in sovereign debt. After that experience, just how willing do you think such investors will be to purchase more of the sovereign debt of any weaker Eurozone nation in future? (There's also the real possibility that some holders of Greek bonds may insist that they be compensated for their losses, even to the extent of suing the sellers of their CDS's. This might bring down the entire CDS system - and what that would do to all future private investment in sovereign debt, I leave to your imagination!)

Today I was proved to be correct. Business Insider reports:

ISDA — the organization that determines when a credit event has occurred — announced this morning that a credit event had not yet occurred to trigger payouts on $3.25 billion in Greek credit default swaps.

There's more at the link. Karl Denninger explains what this decision means.

In other words, the terms of a contract does not matter; unilateral changes to those terms are not a "credit event" and the "insurance" you allegedly bought to protect against this is worthless.

Who sits on the committee? The majority are the very banksters who have been writing these "policies" and thus would have to pay.

That's kind of like buying homeowner's insurance and then after a tornado occurs having the "committee" (which happens to include the firm that wrote your policy) "determine" that this particular tornado isn't really a "tornado" under the definitions they used (oh, we'll call it "the finger of God" instead!) and thus it is excluded under the "acts of a*****ed off belligerent" clause.

Yeah, you'd be inclined to buy insurance again after that..... and you wouldn't be inclined to find the committee members and hold their heads under water until all of their "witchiness" was excised..... right?

Again, more at the link. Bold and italic print are Mr. Denninger's emphasis.

Yes, that's right. All those investors who bought Greek bonds, and insured their purchases through a credit default swap agreement, are now left hanging in the wind, because the banks that sold them the CDS's (and who control the ISDA, which is the organization that decides when those CDS's must be paid out) have voted not to keep their sworn, legally contracted word.


(8.45 a.m., Friday 3/2/2012 - EDITED TO ADD: The Telegraph adds its perspective on the situation, further confirming what I said a couple of weeks ago:

Bill Gross, co-founder of Pimco, one of the world's largest buyers of debt and the mouthpiece of the bond markets, said the decision set a "dangerous precedent" and that he would be "upset" if he held Greek CDS.

"If insurance for CDS and protection against countries is invalidated, that would be much like taking out an insurance policy on flood insurance and then having the companies basically say that it was rain as opposed to flood damage that produced the carnage," said Mr Gross. He added that the market would be looking closely at the "interpretation" of the law governing the contracts.

. . .

For those not intimate with the finer details of derivatives contract law it seems odd that despite investors being asked to write off more than half the value of their holdings of Greek government debt, this should not be thought valid grounds to claim on insurance contracts written specifically to protect the value of holdings in the bonds.

The legal case for this rests on two principles. Firstly, Greece, despite all its financial problems, has continued to make interest payments on its debt. This puts the country in a position somewhat like a homeowner who is struggling to keep up their mortgage payments, but who has not actually missed a payment.

Secondly, the Greek debt restructuring deal as currently envisaged is based on voluntary haircuts in the value of investors' holdings through the use of "collective action clauses". Because of this, legally Greece is not forcing losses on its bondholders and therefore under the ISDA contracts that CDS are sold, there are no grounds to declare a "restructuring credit event" that would allow claims to be made.

Again, there's more at the link. Worthwhile reading for the background to this whole mess.)


This affair reminds me of nothing so much as the MF Global scandal. I guess the bankster's attitudes can be summed up like this:

We are the banks and investment brokers. You are the hoi polloi. You are privileged to be allowed to trade through us. We can do what we like with your money - but if we screw up and lose it, or advise you to invest in Greek sovereign debt that turns bad, you can't do a thing to get your money back. We banks are far more important than you piddling little investors.

Or, as George Orwell would doubtless repeat, somewhat cynically: "All animals are equal, but some animals are more equal than others".





Peter