Slipping on Greece

If you could buy fire insurance that would pay you big bucks if your neighbor’s house burned down, how happy would you be to watch your buddies-next-door losing everything they own in a spire of licking flames? Who would ever sell you a policy like that? Who would even think of creating “neighbor fire insurance”? Not even AIG. But as Greece struggles under the weight of a failing economic system, desperate to access credit to stay alive, the financial industry has created another wondrous derivative, another credit default swap where investors can bet against the ability of the entire nation of Greece to survive past total economic annihilation.

The February 25^th New York Times: “[A] little-known company backed by Goldman [Sachs], JP Morgan Chase and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust… Last September, the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index, which is based on such swaps and let trader s gamble on Greece shortly before the crisis.” Why is it that when financial misery is at stake, where traders stand to profit on the destruction of human lives or can push credit well-beyond the level of any prudent person – until overleveraging is simply viewed as healthy modern activity – you see the same litany of financial names, almost always topped by Goldman Sachs? Goldman CEO Lloyd Blankfein believes that his bankers are doing “God’s work,” so clearly what his bank is doing must be the essence of goodness. Yeah, right.

These are the same banks that helped Greece mask its mounting debtor issues until they became so overwhelming that they could no longer be hidden… riots and protests in that Hellenic nation blared the obvious: Greece was slipping over the edge. The February 26^th Washington Post: “The Federal Reserve and Securities and Exchange Commission are seeking information about whether Goldman Sachs and other U.S. firms helped set up financial transactions over the past decade that effectively hid the amount of debt Greece was taking on.” The Feb. 25^th NY Times adds: “Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers… If Greece reneges on its debts, traders who own these swaps stand to profit.” Vicious cycle. Destabilizing.

Bottom line, as bets against Greek financial viability rise, the interest rates lenders need to charge Greece fly upwards, accelerating the probability of default as this sliding nation struggles to pay ever-increasing sums to survive. This in turn puts pressure on the entire European Union to institute expensive economic measures to keep Greece alive. And Spain, Portugal, Italy and Ireland are waiting in the wings. “Trading in Markit’s sovereign credit derivative index soared this year, helping to drive up the cost of insuring Greek debt, and, in turn, what Athens must pay to borrow money. The cost of insuring $10 million of Greek bonds, for instance, rose to more than $400,000 in February, up from $282,000 in early January.” The Times.

Regional banks are also slorping at the credit default trough of Greek misery; the Times identified that “European banks including the Swiss giants Credit Suisse and UBS, France’s Société Générale and BNP Paribas and Deutsche Bank of Germany have been among the heaviest buyers of swaps insurance, according to traders and bankers who asked for anonymity because they were not authorized to comment publicly.” I guess you don’t have to wonder why the Europeans are so focused on fixing their financial regulatory schema, drilling down on the particularly pernicious credit default swap. But then you really have to wonder why there really isn’t a parallel movement on this side of the Atlantic.

Even as our President promises regulations to prevent a repeat of depression/recession 2007-????, the loss of all those Wall Street contributions is beginning to hurt the Democrats. Maybe that’s why President, when he addressed a group of senior American corporate CEOs on February 24^th, declared “himself an ‘ardent believer in the free market,’ [and] Mr. Obama challenged a line of criticism that has fueled discontent with his presidency. The policies of his first year in office, he said, ‘were about saving the economy from collapse, not about expanding government’s reach into the economy.’” The Times. Yeah, we’ve got Wall Street to do that for us.

The Washington Post (February 25^th) adds this warning to the mix: “The Obama administration is no longer insisting on the creation of a stand-alone consumer protection agency as a central element of the plan to remake regulation of the financial system… In hopes of quick congressional approval of a reform bill, White House officials are opening the door to compromise with lawmakers concerned about creating a new bureaucracy, according to congressional and some administration sources… The administration may also have to compromise on Obama's recent proposal for a rule to limit risky activities at banks by prohibiting them from engaging in many kinds of speculative investments.”

I’m Peter Dekom, and are you seeing a pattern in all this misery too?