First: The Financial Bailout of Greece is failing.
The bailout is “failing” by this measurement – Greece has been buying Credit Default Swaps or CDS to “insure” its national debt. The cost for Greece to purchase the “insurance” or CDS is skyrocketing ……..
THE RETURN OF THE CDS – WHY YOU SHOULD BE CONCERNED
Remember, Credit Default Swaps or CDS, were one of the culprits behind the “toxic mortgage scam” that brought down the US economy.
At the behest of their Democratic political masters Fannie and Freddie “provided” mortgages to millions who could not pay. Then Fannie and Freddie sold the “toxic mortgages” as investment securities with the help of the likes of Goldman Sachs. Finally, AIG “insured” the “securities” by selling Credit Default Swaps to back up the worthless mortgages and put the US taxpayer on the hook for paying off the “toxic debt”. While most of the parties made billions – the US taxpayer got stuck with bill.
Fannie & Freddie → Toxic Mortgages → Toxic Mortgage Securities
→ Credit Default Swaps → Collapse → Bailout
Fast Forward To Greece
Is AIG creating a Greek Debt Bubble – just like the “housing bubble” AIG helped create?
Greece, which is broke, obtained an international “bailout”. More on that “bailout” below.
Greece is purchasing Credit Default Swaps (CDS) to insure its national debt.
If the ‘Greek Bailout” was working – the cost to buy the “insurance” that the CDS provides should be going down …. it is not …. the cost to insure the Greek debt is skyrocketing ….. http://www.businessinsider.com/europe-bailout-fail-2010-5
“Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, and prices decline as perceptions of creditworthiness improve. A basis point equals $1,000 annually on a contract protecting $10 million of debt.” http://www.businessweek.com/news/2010-05-11/bank-swaps-libor-show-doubts-on-europe-bailout-credit-markets.html
“Soberness is returning quicker than most market participants had expected as investors start to evaluate the long-term consequences of the bailout measures,” Stefan Kolek, a credit strategist at UniCredit SpA in Munich, wrote in a client note. http://www.businessweek.com/news/2010-05-11/bank-swaps-libor-show-doubts-on-europe-bailout-credit-markets.html
Credit swaps on Greece dropped 44 basis points to 541, after tumbling 329.5 basis points yesterday, the biggest decline since March 2005, according to CMA. http://www.businessweek.com/news/2010-05-11/bank-swaps-libor-show-doubts-on-europe-bailout-credit-markets.html
“Thus markets aren’t quite buying the latest bailout, since they price-in a higher chance of default than just a month ago. Moody’s isn’t buying the bailout either. Which is odd, because theoretically Greece has been just provided a life-line that should at the very least allow it to meet its current outstanding debt obligations. It’s as if markets don’t believe the European bailout fund will actually happen to the full extent as it’s described to.” http://www.businessinsider.com/europe-bailout-fail-2010-5#ixzz0oCde77uo
A Greek Credit Default: AIG – CDS & US Taxpayer Liability
AIG & The Bailout Of Greece – The Return of Credit Default Swaps (CDS) – Are US Taxpayers “On The Hook” Again?
Please, tell me it isn’t so!
First, in case you missed it, the country of Greece is dead butt broke ….. flat busted. The BBC has announced that Greece will receive an initial bailout of $146 billion US dollars from various parties, http://news.bbc.co.uk/2/hi/business/8656649.stm , while the Euro Zone sets up a $1 trillion US dollar bailout fund. http://www.business-standard.com/india/news/germany-okays-trillion-dollar-euro-zone-bailout-plan/94028/on , http://money.cnn.com/2010/05/10/markets/dollar/?eref=aol .
Reminds me of AIG – really – an intial bailout – with a huge amount of “follow-on” cash a few weeks later.
The initial cost of the Greek bailout to US Taxpayers is being estimated at something between $56 billion and $170 billion dollars. The estimates are based on the fact that the IMF or International Monetary Fund, will contribute $284 billion to start and may commit up to $1 trillion dollars. http://money.cnn.com/2010/05/10/markets/dollar/?eref=aol
At present the United States Taxpayer provides $54 billion annually in IMF funds. http://www.house.gov/jec/imf/11-18-03.pdf The US pays, at a minimum, 17% of the IMF’s debts. 17% of $1 trillion is $170 billion.
Wait, this isn’t the worst of it.
The American Taxpayer maybe assuming the entire national debt of Greece.
Sounds crazy doesn’t it. I hope to heck it is crazy and not true. America simply can’t afford it!
AIG and the Greek Bailout
Enter AIG, the former international insurance giant currently owned by the American Taxpayer, thanks to the US Government and the US Government’s bailout programs.
AIG, American Internation Group, the international insurance giant was ”nationalized” in September 2008 and given an initial infusion of $85 billion in taxpayer cash. http://online.wsj.com/article/SB122156561931242905.html
Additional taxpayer cash was provided to AIG and at present the total amount “fronted to AIG” is at least $135 billion taxpapaer dollars. http://www.propublica.org/ion/bailout/item/how-big-is-aigs-bailout-really707 http://online.wsj.com/article/SB122627437470412029.html
The amount “fronted” to AIG may be in excess of $180 million, it is hard to tell because the US taxpayer has not had a recent accounting of how much additional cash has been funnelled to AIG. http://www.propublica.org/ion/bailout/item/how-big-is-aigs-bailout-really-707
AIG used much of the money to pay off French & German banks who had invested in “toxic mortgage securities” or related securities sold by AIG called “Credit Default Swaps” or CDS. http://www.businessweek.com/the_thread/economicsunbound/archives/2009/03/german_and_fren.html
In the initial payoff, French and German banks received $36 billion in US taxpayer funds, paid through AIG by the Obama Administration. The payout to the French and German banks took place in March 2009 during the first 3 months of the Obama Administration under the direction of Obama Treasury Secretary Geithner. http://www.businessweek.com/the_thread/economicsunbound/archives/2009/03/german_and_fren.html
Almost $60 billion dollars of the initial US Taxpayer payout to AIG went to foreign banks. http://www.businessweek.com/the_thread/economicsunbound/archives/2009/03/german_and_fren.html
You might remember that Neil Barofsky, the Special Inspector General for the $700 billion financial bailout, reported to Congress that the Obama Administration had mismanaged the intial payouts, resulting in billions more than necessary being paid out to foreign and US banks and brokerages. http://www.chinadaily.com.cn/world/2009-11/17/content_8984419.htm
The whole issue of paying out US Taxpayer dollars in satisfaction of AIG’s debt was so “mucked up” that current Treasury Secretary Geithner first refused to disclose who got what and when, in the deals. Inspector General Barofsky faulted Secretary Geithner and the Federal Reserve for refusing at first to reveal which banks had received the billions of American taxpayer dollars supposedly intended to save AIG. Geithner and the Fed released the banks’ names and the amount of their payoffs only after the American Public demanded greater transparency and the US Congress responded to that demand. http://www.chinadaily.com.cn/world/2009-11/17/content_8984419.htm http://www.marketwatch.com/story/geithner-paulson-defend-182-bln-aig-bailout-2010-01-27
Is AIG at it again?
The international press has reported on how President Obama is pushing for a bailout of Greece’s new Socialist Government. http://www.businessinsider.com/now-obama-is-making-emergency-calls-to-merkel-over-greek-aid-2010-4
For years the Socialists in Greece’s Government have fudged the numbers concerning the Greek National Debt. “To keep within the monetary guidelines of the European Union, the government of Greece has been found to have consistently and deliberately misreported, in other words falsified, the country’s official economic statistics. In the beginning of 2010, it was discovered that Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees (CDS fees or “premiums”) arranging transactions that hid the actual level of Greek borrowing. The purpose of these deals …. was to enable them to spend beyond their means, while hiding the actual deficit from the EU overseers.. http://en.wikipedia.org/wiki/2010_European_sovereign_debt_crisis
“Speculation in the CDS market began after 4 October 2009, as the Greek Socialists celebrated their election victory. Two weeks later the newly-elected government informed its Euro-partners that the deficit for 2009 was going to lie at 12.7 percent of economic performance (GDP).” “The new estimate for the budget deficit called onto the stage the first hedge funds, reports a London CDS-dealer working for a large American bank.” http://www.eurosavant.com/2010/02/21/cds-just-another-evanescent-bubble/
Speculation in the CDS market?
Now the Eurpoean Press is reporting that AIG is selling CDS or Credit Default Swaps once again. Only this time, AIG is “insuring” Greece’s debt with the instruments not “toxic mortgage securities”.
“In any case, the CDS-wager has gone up because more and more true-believers in the Greek State have come to feel the need to insure their holdings. This rapidly-rising demand for insurance has been set off by the escalation of the debt crisis. But it is past Greek governments that have to answer in the first place for the exhausted budget situation. The higher demand for insolvency protection that has driven up the CDS price follows from the evidently poorer estimation of Greek credit-worthiness.”
Greek banks as insurers
On the other hand, whoever expected Greece’s rescue by Europartner countries would have had to position himself on the CDS market as an insurer, that is, as a seller of payment protection. The take in premiums from insurance protection sold provides increased revenue. But it’s on the seller-side that the weak points of the CDS market become evident. It’s still unclear who has sold insurance protection for Greece. In one study analysts from the major French bank BNP Paribas referred to market-rumors that Greek banks had insured a large sum by CDS. If this is correct, then the payment protection they have provided is worth nothing. Greek banks hold State debt of over 40 billion euros. This corresponds roughly to the entire amount of equity in the Greek credit market. A bankruptcy of the State would lead to a collapse of the banking system.”
“London investment bankers name AIG as a further CDS-seller. That company had to be nationalized during the financial crisis due to its having written insolvency insurance on American mortgages. This debt-load would have led to the collapse of the world’s biggest insurer. Prior to the financial crisis AIG is said to have widely held State credit-risk. If yet-larger insurance positions on Greece exist, then the American government would have a strong interest in preventing that country’s insolvency.”
Read the full article in Germany’s Frankfurter Allgemeine Zeitung GmbH, the German equivalent of the Wall Street Journal. The original article, in German, can be read here: http://www.faz.net/s/Rub645F7F43865344D198A672E313F3D2C3/Doc~EC22CF3FE26F8487A9B4E8E99B0DA384E~ATpl~Ecommon~Scontent.html
The english translation here: http://www.eurosavant.com/2010/02/21/cds-just-another-evanescent-bubble/
What might this mean to the US taxpayer? Well that will depend on several things.
First, Greece’s total National Debt is a bit of a mystery. The Politicans in Greece have been fudging the numbers for so long, that it is hard to accurately estimate the total debt and without knowing the total debt, it is nearly impossible to estimate how much may have been “insured” by purchasing CDS and how much of the CDS business may have passed through AIG.
Surprisingly similar to the “financial collapse” isn’t it?
A Greek Debt bubble, insured through AIG with CDS.
What is clear is this, if AIG is selling CDS to “insure” the Greek National Debt, the American people have not been told exactly why this is being done, nor have we been told how much we are on the hook for and who is making a buck off the deal. Two of the “usual suspects” are on the sceen, AIG & Goldman Sachs, two large and powerful players in the international financial scene and Democratic to their cores. You can bet on one thing, the average Jack or Jill Taxpayer isn’t going to make a dime on these dealings.
Meanwhile the Greeks Socialists and Anarchists are rioting in the streets over proposed and desperately needed budget cuts and the US is agreeing to bailout Greek workers while US workers run out of unemployment benefits.
Contact Your Congressperson today and insist that they investigate these reports. The US Taxpayer should not be “on the hook” for the Socialist Greek Government’s mismanagement of the Greek economy. Lets put our house in order before we try to prop up foreign Socialists Governments and their failed welfare states.
Lets practice saying “NO” to California by saying “NO” to Greece first!
Revisit the March 2009 post on AIG’s collapse: https://mcauleysworld.wordpress.com/2009/03/18/the-story-behind-aigs-collapse-bad-mortgages-credit-default-swaps-accounting-irregularities/
Filed under: Bailout, Banking Crisis, Economic Crisis, Financial Crisis, Greece, Greece Financial Crisis, Politics | Tagged: AIG, American International Group, CDS, Credit Default Swaps, Greece Bailout, US Taxpayers at risk? |