Musings Report #5 01-29-12 Greek Default and Dominoes Falling
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A Quick Note on Greek Default and the Importance of Words
Here is a brief summary of the situation in Europe:
1. Greece is poised to default, the end-game everyone anticipated in 2011.
2. That default will trigger credit-default swap contracts, derivatives known as CDS that protect the owner from events such as default.
3. This will implode the shadow-banking system and the visible banking system, as those who sold the CDS (financial institutions) do not have enough cash or assets to pay the owners of the CDS.
4. The general idea is that sovereign default is very unlikely, so you can sell protection (CDS) against that possibility for a low premium, and cover that bet by buying your own protection from another player.
5. If that player (counterparty) can't pay you off, then you can't meet your obligations on the CDS you originated and sold.
6. So the failure of one counterparty can trigger a systemic failure akin to a row of dominoes being toppled by the fall of one domino.
7. To avoid such a CDS-triggered collapse, the European Union and its proxy agencies (European Central Bank, etc.) are attempting to call a default by Greece something other than "default."
8. This will theoretically keep the first domino--a credit-default swap--from falling. In other words, if we call a default by some other name, then it isn't a default.
9. Those absorbing the losses caused by a Greek default will want to cash in their insurance, i.e. the CDS they own against default. They have every incentive to demand a default be recognized as a default. If they accept the official plan to avoid calling a default a default, then all the losses will be theirs and none will fall to the counterparties who sold them the CDS.
10. How is this fair?
11. The official response of avoiding default is focused on self-preservation, not fairness, justice or the rule of law.
12. The system can be likened to a pool of $100 bets leveraged off $5 in cash. If every bet is covered perfectly, then it's somewhat like $95 in bets being paid by passing $5 around--much like the famous email that depicts all debts in a small town being paid by the same $5.
13. In the real world, somebody's bets and insurance will not be perfect and their obligations will exceed their cash on hand. In other words, they will end up with $3 and owe $5. They will default and the dominoes will start falling as everyone down the line doesn't receive their $5 counterparty payoff.
14. Empires tend to fall when the interests of their Elites diverge. We are at such a point in the global financial Empire.
15. "Extend and pretend" has "worked" for almost 2 years. If Greece defaults and it is recognized by even one player as a default, then the system will quickly unravel and cash/dollars will be king.
From Left Field
Greeks reject German plan for EU budget commissioner (via Joel M.). The idea here was the unruly Greeks could be brought to heel by an EU commissar who could impose the proper level of austerity needed to pay back German and French bondholders.
To-Do Lists Don't Work (Harvard Business Review) Actually, they work very well for me when they're focused on the next few hours or days.... there may be a time factor at work here as well as personality types...
Paying Far More Than 13.9%: A Taxpayer’s Lament: "Mitt Romney released his 2010 tax returns that showed he paid federal income tax of just over $3 million, 13.9 percent of his adjusted gross income of $21.7 million, or 17.5 percent of his taxable income of $17.1 million."
This is my lament too: I pay 25% Federal rate plus 15.3% self-employment tax, plus 6-7% to State of California and $12,000 in property tax to the county and city....
Thanks for reading--
charles
