Hold on to your wallets, because you are about to get hi-jacked one
more time by the big banks. And the sad thing is, it's the
same culprit from 2008 ... credit default swaps (CDS).
The difference this time around is that it's not our own bad sub prime mortgage debt that will have Uncle Sam dipping into your pocket. No, this time it will be credit default swaps on European debt, underwritten by American banks, that will have the politicians scrambling to convince you that it is in your best interest to bail them out yet again.
Let me explain …
Over the last year, European banks have quietly been dumping their European Sovereign Debt CDS exposure onto American banks. As a quick reminder, a CDS contract is like an insurance policy on a bond that pays out if the bond issuer defaults. So long as the bond issuer doesn't default, then the CDS sellers can make a ton of money selling their insurance contracts.
But just like any old greedy newbie trader, the US banks have outdone themselves and have piled into this trade with reckless abandon.
For some perspective: American bank exposure to European Sovereign Debt is $181 billion. American Bank exposure to European Credit Default Swaps, however, is at a staggering $787 billion!
Five American Banks underwrite 97% of all Credit Default Swaps in the US. They are JP Morgan (JPM), Morgan Stanley (MS), Goldman Sachs (GS), Bank of America (BAC) and Citigroup (C). If things do not go exactly right for them, each of these American stalwarts could be fighting for their very lives.
Up until yesterday, US banks thought that they were in the clear, because the way that the European bailout of Greece was structured prevented holders of credit default swaps from collecting on their insurance policies! The restructuring of the Greek debt was considered to be "voluntary," and so the CDS's wouldn't be triggered.
(As a side note, you should know that there is a ruling body called the International Swaps & Derivatives Association, or ISDA, that determines if a credit default swap should be triggered or not.)
But guess what …
The ISDA is headed up by ten mega banks, five of which are the world's largest underwriters of credit default swaps! Do you think that they will vote against themselves?
Of course they won't! Greek Bond holders are to take a 50% loss under the European plan, and yet somehow the big banks are able to label it as a voluntary decision by the bond holders and thereby they get to skirt having to pay out on their CDS contracts! It is a totally rigged game, where it's "heads I win, tails you lose"!
However, all of that inside nonsense may be for naught, and the banks could be facing their very own doomsday ...
Power to the People
Papandreou's (Greece's Prime Minister) unilateral decision to hold a national vote on the proposed bailout throws all of the big banks' carefully crafted planning out the window. It opens up the very real possibility of an actual default that the banks will not be able to gloss over. They will have to pay out on their credit default swaps if the Greek public fails to ratify the European sponsored bailout.
This in turn will trigger more weakness in the rest of the so-called PIIG (Portugal, Ireland, Italy, Greece) debt, potentially leading to more defaults that will trigger even more CDS losses.
Should this occur, it will be a staggering blow to the US banking system. Certainly on par with what we saw 2008.
Don't buy it for a second when the banks insist that they are hedged out. Yes, they are hedged, but they are hedged with other banks the same way that everybody was hedged with AIG.
There isn't enough money in the banking system to cover these hedges, and if the Greek vote fails, we could see the entire global banking system collapse.
But of course it won't collapse, because the world's governments will step in there with your money to save all of the banks, sticking you and me and our children with the bill for generations to come.
If by some miracle the Greek vote passes, then the banks may escape this terrible fate. But if it doesn't, then look out below, because the 2008 market lows may look expensive after the market is done revaluing the banks.
The difference this time around is that it's not our own bad sub prime mortgage debt that will have Uncle Sam dipping into your pocket. No, this time it will be credit default swaps on European debt, underwritten by American banks, that will have the politicians scrambling to convince you that it is in your best interest to bail them out yet again.
Let me explain …
Over the last year, European banks have quietly been dumping their European Sovereign Debt CDS exposure onto American banks. As a quick reminder, a CDS contract is like an insurance policy on a bond that pays out if the bond issuer defaults. So long as the bond issuer doesn't default, then the CDS sellers can make a ton of money selling their insurance contracts.
But just like any old greedy newbie trader, the US banks have outdone themselves and have piled into this trade with reckless abandon.
For some perspective: American bank exposure to European Sovereign Debt is $181 billion. American Bank exposure to European Credit Default Swaps, however, is at a staggering $787 billion!
Five American Banks underwrite 97% of all Credit Default Swaps in the US. They are JP Morgan (JPM), Morgan Stanley (MS), Goldman Sachs (GS), Bank of America (BAC) and Citigroup (C). If things do not go exactly right for them, each of these American stalwarts could be fighting for their very lives.
Up until yesterday, US banks thought that they were in the clear, because the way that the European bailout of Greece was structured prevented holders of credit default swaps from collecting on their insurance policies! The restructuring of the Greek debt was considered to be "voluntary," and so the CDS's wouldn't be triggered.
(As a side note, you should know that there is a ruling body called the International Swaps & Derivatives Association, or ISDA, that determines if a credit default swap should be triggered or not.)
But guess what …
The ISDA is headed up by ten mega banks, five of which are the world's largest underwriters of credit default swaps! Do you think that they will vote against themselves?
Of course they won't! Greek Bond holders are to take a 50% loss under the European plan, and yet somehow the big banks are able to label it as a voluntary decision by the bond holders and thereby they get to skirt having to pay out on their CDS contracts! It is a totally rigged game, where it's "heads I win, tails you lose"!
However, all of that inside nonsense may be for naught, and the banks could be facing their very own doomsday ...
Power to the People
Papandreou's (Greece's Prime Minister) unilateral decision to hold a national vote on the proposed bailout throws all of the big banks' carefully crafted planning out the window. It opens up the very real possibility of an actual default that the banks will not be able to gloss over. They will have to pay out on their credit default swaps if the Greek public fails to ratify the European sponsored bailout.
This in turn will trigger more weakness in the rest of the so-called PIIG (Portugal, Ireland, Italy, Greece) debt, potentially leading to more defaults that will trigger even more CDS losses.
Should this occur, it will be a staggering blow to the US banking system. Certainly on par with what we saw 2008.
Don't buy it for a second when the banks insist that they are hedged out. Yes, they are hedged, but they are hedged with other banks the same way that everybody was hedged with AIG.
There isn't enough money in the banking system to cover these hedges, and if the Greek vote fails, we could see the entire global banking system collapse.
But of course it won't collapse, because the world's governments will step in there with your money to save all of the banks, sticking you and me and our children with the bill for generations to come.
If by some miracle the Greek vote passes, then the banks may escape this terrible fate. But if it doesn't, then look out below, because the 2008 market lows may look expensive after the market is done revaluing the banks.
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