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La eurozona presiona a Portugal para que acepte el rescate en CADENASER.comThe Eurozone pressures Portugal to accept a rescue - CadenaSER.com
La eurozona presiona a Portugal para que acepte el rescate El Financial Times, en su edición alemana, asegura que una mayoría de países de la zona euro y el BCE están reclamando a Portugal que solicite el paquete de ayuda financieraThe Financial Times, in its German edition, claims that a majority of Eurozone countries and the ECB are demanding that Portugal request a financial aid package

Is that criminal, or what?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Fri Nov 26th, 2010 at 06:56:26 AM EST
It's not the rescue that's criminal, but the lack of bondholder haircut.

(Don't you love banker talk? Haircut? While profits continue to privatized, and losses underwritten by the worker bees?)

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin

by Crazy Horse on Fri Nov 26th, 2010 at 06:59:50 AM EST
[ Parent ]
I'm sorry, but forcing someone to ask for a rescue with draconian strings attached so you can rescue their bondholders, two times in a row in the same week, is, well, criminal.

As is spreading rumours through the FT without sources twice in less than six months.

The ECB should be burned down using paper from the FT.de to stoke the fire.

After investigating the German Government, the ECB and the FT.de for market manipulation, that is.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Fri Nov 26th, 2010 at 07:08:24 AM EST
[ Parent ]
You're right, both acts are criminal. As are the leaks.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin
by Crazy Horse on Fri Nov 26th, 2010 at 07:22:24 AM EST
[ Parent ]
Is it really a "rescue package" if you try to force it on them?  And, as you note, we once again have officials sabotaging EU members with leaks to the press.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Fri Nov 26th, 2010 at 07:15:18 AM EST
[ Parent ]
Think of it like the "insurance" sold by men who come into your shop and remark on how flammable it is.
by Colman (colman at eurotrib.com) on Fri Nov 26th, 2010 at 07:21:05 AM EST
[ Parent ]
No, think of it as invading army that uses PR and story-telling instead of tanks.

If the result is that the invaders own your infrastructure, dominate your politics and enslave your population, how is that different from a conventional war?

"The bondholders" have declared independence from the rest of the world. They are now a separate sovereign country, without all of that tedious stuff about constitutions and parliaments and voting.

But they can - and will - beat up the population and government of any other country that tries to get in their way.

The ECB is full of quislings who already work for them.

This may seem metaphorical. But when you have a global player acting like a sovereign in everything but name, it may not be a good idea to assume that they're thinking small-time.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Nov 26th, 2010 at 07:37:57 AM EST
[ Parent ]
No, because we could still put troops on the trading floors, if we choose to. The problem is that we choose not to.
by Colman (colman at eurotrib.com) on Fri Nov 26th, 2010 at 07:40:26 AM EST
[ Parent ]
No, the problem is why we choose not to.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Nov 26th, 2010 at 08:02:17 AM EST
[ Parent ]
So if your pension fund owns bonds, are you an unintentional fifth columnist?

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Fri Nov 26th, 2010 at 07:49:38 AM EST
[ Parent ]
You know my opinion of the morality of investmentspeculation.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Fri Nov 26th, 2010 at 08:18:13 AM EST
[ Parent ]
Portugal already has an austerity package, so what is this really about?

Melanchthon:

Portugal: the next failed eurozone state - eurointelligence
Portugal is the next example of a country to demonstrate that austerity in the middle of a financial crisis is a sure recipe for disaster.


Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Fri Nov 26th, 2010 at 08:29:51 AM EST
[ Parent ]
what is this really about?

Destroying the euro.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Nov 26th, 2010 at 12:19:14 PM EST
[ Parent ]
What, from Frankfurt?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Fri Nov 26th, 2010 at 12:24:20 PM EST
[ Parent ]
by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Nov 26th, 2010 at 12:29:21 PM EST
[ Parent ]
Exactly


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Fri Nov 26th, 2010 at 12:45:35 PM EST
[ Parent ]
I don't know the motivation(s) of "The Man from Frankfort."

We've talked endlessly about how silly this whole thing is from an economic and political economic POV. Taking those conclusions seriously one has to ask, "Who, and Why, is this going on?"

In my opinion, the answer is:

The euro was challenging and winning the battle against US dollar financial hegemony.  

Have to go back and compile a time line.  Off the top of my head the kicker was when Iran started accepting euros for oil quickly followed by "Euro Bad" headlines and then the Greece "crisis."

IF this is correct, and I've by no means proved anything, the major global financial institutions, possibly with support by various agencies and individuals in the US government, possibly orchestrated by the US government, have declared economic war on the EU with allies in the EU, notably the UK, but also various other, unknown to me, actors and entities within the EU as well as national governments comprising the EU.

I submit this hypothesis fits the data fairly well.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Nov 26th, 2010 at 12:39:25 PM EST
[ Parent ]
Or was your comment snark and I got all serious on you?

:-)

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Nov 26th, 2010 at 12:45:04 PM EST
[ Parent ]
Shit, you mean you weren't joking? ;)
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Nov 26th, 2010 at 12:46:26 PM EST
[ Parent ]
I know it's easy to joke around about this.  It may even seem paranoid to the "average" person.  

From Day One I've been trying to tell the EU ET'ers the euro was a threat to the US dollar and to those who rely on the US dollar to maintain their global domination.

With the US economy, and dollar, catching fire the euro - as a potential, now actual, alternative - can no longer be tolerated.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Nov 26th, 2010 at 12:57:20 PM EST
[ Parent ]
No, seriously, now you have to explain the self-sabotaging by euro actors

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Fri Nov 26th, 2010 at 01:04:13 PM EST
[ Parent ]
Well, to steal a good line from you in reponse to TBG (his link below):

Migeru:

Europe's politicians and economic policymakers have either been schooled in neoclassical economics and the efficient market hypothesis, or have been raised in market-worshipping conventional wisdom. They are cognitively incapable of understanding what's going on.

Also, Germany has been making xenophobic noises about the peripheral Euro countries since the 1990s. Now this crisis can be used by them to validate their claims back then that the Euro should not have incorporated the Mediterranean countries.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Nov 26th, 2010 at 01:11:24 PM EST
[ Parent ]
So, is that it?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Sat Nov 27th, 2010 at 08:23:04 AM EST
[ Parent ]
I don't know. There is a certain paradox in supposing they are totally clueless, and also that they are pursuing a long-term policy aim. Not that it's impossible, however.

The euro was a concession extracted by France from Germany in return for agreement on Reunification. There may well be those, not a hundred kilometres from Frankfurt, who have never really accepted it (or have never accepted the definition of the club membership) and now see an opportunity to force undesirable members either to spend years washing the dishes and sweeping the clubhouse floor, or leave.

There's also the defence of bondholding financial interests to be considered: there are two interesting posts by Golem XIV (h/t kukute) here and here.

I think it's possible they are clueless because they're blindly defending interests that have long been an integral part of their world-view and that they cannot see beyond.

by afew (afew(a in a circle)eurotrib_dot_com) on Sat Nov 27th, 2010 at 09:01:19 AM EST
[ Parent ]
H'mmmm.

What about making it an ET project?

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Nov 26th, 2010 at 01:19:24 PM EST
[ Parent ]
ATinNM:
From Day One I've been trying to tell the EU ET'ers the euro was a threat to the US dollar

I know.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Nov 26th, 2010 at 01:05:31 PM EST
[ Parent ]
You mean somebody was paying attention?

(swoons)

:-)


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Nov 26th, 2010 at 01:13:18 PM EST
[ Parent ]
Avidly. Totally. <flutter>
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Nov 26th, 2010 at 01:17:54 PM EST
[ Parent ]
And see also again.

(I'm fairly sure there's a post in the archives from way, way back about how the US and EU are natural enemies, and protracted peace is unlikely. But I can't be bothered to find it at the moment.)

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Nov 26th, 2010 at 01:06:10 PM EST
[ Parent ]
I did write a diary about the Irish bailout with the title 'none darecall it treason'  

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Fri Nov 26th, 2010 at 01:16:11 PM EST
[ Parent ]
Trying to unravel motivations and intents is a real PITA.

Is the current economic governance of the EU treasonous or merely criminal stupidity?

If it's sociopathic "grab everything while the grabbing is possible" it's the former.

If the current policies reflect the central wankers adherence to Neo-Capitalist Economics it's the latter.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Nov 26th, 2010 at 01:24:45 PM EST
[ Parent ]
I think it's criminal stupidity.

But we keep electing criminally stupid people. Just look at the latest German, British and Dutch elections.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Sat Nov 27th, 2010 at 08:22:35 AM EST
[ Parent ]
I don't know if we have a precise timeline and data fit, but that the US/UK have a predominant influence over the global financial sector seems to me clear. That doesn't excuse blindness, stupidity, and arrogance in Frankfurt, but it would be blind on our part to pretend the US has no interests at play in the euro crisis.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Nov 26th, 2010 at 12:52:08 PM EST
[ Parent ]
Without the euro the US can depreciate the dollar, effectively expropriating wealth from the global economy, via the global financial system, to "grab" the flow of funds the US/UK banking and financial system requires to continue to function.  Without a huge supply of wealth the US/UK banking and financial entities are bankrupt, they can't meet their Due and Payable obligations.  If this bankruptcy should be 'realized' the rest of the global financial system, and the national economies reliant on same, all go down in a domino effect.

IHMO, any attempt to shore-up the current dollar-dependent financial system is doomed.  The US (and it's little puppy-dog Air Base One) is, as we say, fucked.  Been over the reasoning fifty million times and see little point in doing it again.  

China has already started backing away from the mess.  

Russia, as much as I know about it, seems to be somewhat protected.

The question is if the EU, minus the UK, is going to follow their example or follow the US/UK into the mire.  The euro is IMO the key.  With it the EU (minus UK) states can protect themselves.  Without it, they open themselves up to plundering.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Nov 26th, 2010 at 01:12:15 PM EST
[ Parent ]
The way the euro is set up and with the people in charge, being in the euro opens them to plunder

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Fri Nov 26th, 2010 at 01:26:41 PM EST
[ Parent ]
Perhaps a mandatory "To-Do List" meeting of Mr. Central Wanker with Mr. Guillotine is indicated?

:-)

I don't see how the EU can turn this around with the ECB's current Decision Makers and adherents, willing or otherwise, to Neo-Liberal political economics as heads of governments.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Nov 26th, 2010 at 01:40:35 PM EST
[ Parent ]
Don't exclude the European Commission (both the college of Commissioners and the Civil Service) from the adherents to neo-liberal political economy.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Sat Nov 27th, 2010 at 08:21:41 AM EST
[ Parent ]
You seem to believe that the people in charge of Germany are less clueless than they appear to be.
by rootless2 on Fri Nov 26th, 2010 at 02:29:29 PM EST
[ Parent ]
I'm willing to give them the benefit of the doubt and start with the assumption they are ignorant rather than malicious.  Example, looking at her wikipedia bio I don't see evidence Merkel knows anything about political-economics, except of the old DDR variety.  

As for her advisors and policy implementers, well - the system works by blokes hiring "blokes and blokettes like us."  The fact NCE is a hilariously inept analysis doesn't enter into it.  NCE is the economic theory being used to guide policy and anyone outside the NCE consensus isn't allowed to "be a bloke."  How much of that is purely structural and how much malicious?  I don't know.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Nov 26th, 2010 at 02:54:46 PM EST
[ Parent ]
i think they are ignorant and also consider themselves uniquely virtuous and superior both by their socio-economic position and by being German.
by rootless2 on Fri Nov 26th, 2010 at 04:11:03 PM EST
[ Parent ]
Right, sure, it's all a US conspiracy-- it's the US that forced EU banks to assume 500 billion in exposure to Irish debt.

It's a US conspiracy that "tricked" Deutsche Bank, Hypo, Northern Rock, into taking positions in the US MBS markets.

It's a US conspiracy, the "bad" US capitalism, the "bad" US financiers that tricked the "good" EU capitalism, the "good" EU financiers into lending long and borrowing short.

This has nothing to do with dollar vs. euro, US financial hegemony or any of that.

Tell you what it is about-- and that is who pays for the mess the good and bad capitalists have made of all of society.  And they don't want to pay anything of course.  Consequently, what the EU, and the US, have done is essentially turn their entire economy into a "bad bank."

Nobody wants a haircut when Sweeney Todd is the barber.

by dmschanoes on Fri Nov 26th, 2010 at 03:30:14 PM EST
[ Parent ]
Remarkably, Germany which is the driver for most of the bad debt in the EU continues to play the put upon virtuous sensible party and to become more and more incensed that it is being dragged into a mess by those irresponsible swarthy types.
by rootless2 on Fri Nov 26th, 2010 at 04:12:55 PM EST
[ Parent ]
Welcome to European Tribune, dmschanoes!

"People only accept change when they are faced with necessity, and only recognize necessity when a crisis is upon them." - Jean Monnet
by Melanchthon on Fri Nov 26th, 2010 at 05:54:34 PM EST
[ Parent ]
I don't buy it.

My problem is that I refuse to believe the European economic establishment is so clueless as they appear. As to what's going on in Frankfurt, there is a segment of the German establishment that has never liked the Euro since it became clear it wouldn't be limited to Germanic-speaking people plus France.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Sat Nov 27th, 2010 at 02:49:43 AM EST
[ Parent ]
Schuldenkrise: Massenflucht aus spanischen Staatsanleihen | FTD.deDebt crisis: Massive flight away from Spanish state bonds - FTD.de
Einen Zahlungsausfall Portugals haben viele Anleger schon eingepreist. Doch wenn Spanien fallen sollte, stünde die Euro-Zone vor einem massiven Problem.Many holders have already priced in a default by Portugal. However, should Spain fall, it would be a massive problem for the Eurozone.


Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Fri Nov 26th, 2010 at 09:05:23 AM EST
[ Parent ]
Financial Times Deutschland online poll:

Was halten Sie von einer "Kern-Euro-Zone" ohne die PIGS-Staaten? | FTD.de (What do you think about a "core Euro zone without the PIGS States?)

Possible answers:

  • Only chance for the Euro
  • At least worthy of discussion
  • An extreme risk for Germany
  • A political catastrophe for Europe

[Note that Italy is not included in the PIGS, as they have a Mafia/EPP government.]

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Fri Nov 26th, 2010 at 09:08:05 AM EST
[ Parent ]
The austerity package is already here, aid or no aid.

The budget deficit in Portugal was reduced from 9.4% in 2009 to 7.3% in October of 2010 due to increased income on the back of a small GDP recovery. Up to the end of this year it should reduce further, close to 7.0%. But state expenditures are still uncontrolled and the 2011 budget should tackle that with salary cuts to public workers up to 10% and by scrapping a number of public institutes. The deficit target for 2011 is 4.3%, which in light of the recent evolution and with a 2% hike of VAT should be accomplished. The problem is the expectable recessive effect of such a budget, which has an unforeseeable impact on state income.

So, effectively, the 7% yields being asked on 10 year Portuguese bonds are much more a speculative move against Europe than the state itself. For sure, a public debt of 90% of GDP and a 1/10 of the budget to pay interests on it isn't a good place to be, but the imminent default being called by the so called "markets" is a bit further down the debt road (e.g. compare Portugal to the US).

From this perspective I don't see it as a terrible idea to tap the ESF if these yields go on into 2011. The foolishness is thinking that somehow that shall prevent the "markets" from going after Spain, which obviously they will.

As I wrote last March this could all have been avoided if an European Treasury had been set before this storm. But as long has as the EPP is at the helm that's not going to happen, at least before some blood is spilt.

luis_de_sousa@mastodon.social

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Fri Nov 26th, 2010 at 09:32:03 AM EST
[ Parent ]
<rant>

7% interest rates?!?

Are you INSANE?

You're letting your countries be plundered.  You're giving them exactly what they need to continue to dominate.

When will you stupid idiots STOP FEEDING THE BEAST?

</rant>

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Nov 26th, 2010 at 01:32:19 PM EST
[ Parent ]
The people in charge have taken every opportunity in the last 9 months to reassure up that the market knows better than they do how much a euro sovereign bond is worth or how sound the public finances of the euro states are.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Fri Nov 26th, 2010 at 01:39:13 PM EST
[ Parent ]
Ah yes.  The Market.

Those same people who thought is was a nifty idea to lend money for mortgages to people having no hope of paying it back, didn't bother to file the necessary paperwork, turning the loans into CDOs, then slicing and dicing the CDOs eleventy million ways from Sunday, and are now discovering most of those mortgages underlying tens of trillions of dollars of CDOs aren't legal.

THOSE people?

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Nov 26th, 2010 at 01:46:47 PM EST
[ Parent ]
Yep, those people.

Clearly, The Market knows better than the central bank what a € bond is worth.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Nov 26th, 2010 at 02:17:55 PM EST
[ Parent ]
You are overreacting, no one is paying 7%, yet, that's a figure from the secondary market. The Treasury is not going to issue any more debt this year, so the secondary market is presently secondary. Right now the average interest on Portuguese sovereign debt is 3.6%, but this will climb fast if the yields remain at these levels when the primary market is effectively called upon.

Hence my reasoning, if these yields last into 2011, when the Treasury shall have to issue more bonds, then the ESF (or EFSF) starts making a whole lot of sense with the 5% figure. Besides that, the austerity is already here and the budget deficit is already closing down.

A default would only make sense to avoid the austerity package; but in such case the onus would be on other institutions and citizens inside the Euro-zone (about 80% of the Portuguese debt is owned by the French and the Germans).

Beyond all this, a reduction in government spending could be a good thing if directed at shaving all the fat from a public administration stained by corruption. But that's a different story...

luis_de_sousa@mastodon.social

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Fri Nov 26th, 2010 at 04:07:10 PM EST
[ Parent ]
Media here are talking about 7% on the EU/IMF money, which would be laughable. Don't know what the source of that is though.
by Colman (colman at eurotrib.com) on Fri Nov 26th, 2010 at 04:16:52 PM EST
[ Parent ]
Assume I'm a sleaze ball with Investment Company A and Investment Company B.

A purchases sovereign bonds at par giving 4%.

The price drops so the bonds are now paying 7%.

Company A OTC sells these bonds to Company B and takes a loss.

Company B is now getting 7% return off the investment.

So what have I done?

I've transfered the bonds from one corporate entity to another, taken a small loss minus the tax benefits, and am now getting 3% more, per year, for my money plus the difference between the discounted and par value of the bond.

A nice little profit for, effectively, doing nothing.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Nov 26th, 2010 at 05:29:45 PM EST
[ Parent ]
ATinNM:
A nice little profit for, effectively, doing nothing.

Welcome to Planet Rentier

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Nov 26th, 2010 at 05:43:45 PM EST
[ Parent ]
That looks more like a tax shelter than a get-rich-quick scheme to me, at least if you hold both companies on your balance sheet.

Now, if you've pawned off the equity in company A to some unsuspecting sucker, on the other hand...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Nov 26th, 2010 at 06:25:16 PM EST
[ Parent ]
The people who do that sort of thing are already rich.  What I outlined is a way to get richer.

The following numbers aren't accurate but they are in the ballpark and demonstrate the point.

Look at it this way, instead of getting $1.5 million/year (boring) on your small amount of money, say $50 million, you can get $3.5 million.  If you're in the club you can now go to your friendly Central Banker and borrow $46 million on which you pay 2% interest based on the $50 million of sovereign 'assets' you're holding on your Balance Sheet.  (If you're not in the club you have to pay more, but the procedure is the same.) Admittedly you lower the total net return by $920,000 to $2.58 million but note you are still getting $1.1 million more than the 'original' investment by Company A.  Plus you are, effectively, getting that return on only $4 million ... manufacturing a 60% interest rate.  (If you had to pay a higher interest rate this return is knocked down, but you're still getting a whopping return.)  

And now Company B has $96 million on it's Balance Sheet (assets and cash.)

Company B sells OTC $75 million of bonds at 5% ($3.75 million/year interest) backed by the $96 million in "assets" it has on its Balance Sheet to Company A takes $50,000,000 of the proceeds and buys (boring) sovereign bonds at 3% getting the $1.17 million needed for the interest payment and a bit more.

voila!

Company B now has $71 million cash free and clear, a "profit," off of the original stake of $50 million.  

BONUSES ALL AROUND!

"Huh?" I hear you say.  "How can that be?"

The trick is done by being able to borrow at a low interest rate, buy at a higher interest rate, and iterate (leverage.)  Granted you have to have the $100 million needed to "make the wheels go 'round" but everybody, who is anybody has $100 mil to play around with!  Right?  

The other part of the trick is ignoring the unpleasant fact somebody, somewhere, actually has to go out and do something to get the money to meet the interest payments.  Since this whole thing is "fueled" by sovereign debt "somebody" is the taxpaying citizens and inhabitants of the country. When the sovereign debt is not used to generate an Internal Rate of Return higher than the interest rate there is a net flow of wealth, eventually, FROM the country TO the bond holders.  Doing things like funding a Real Estate Boom (Iceland, Ireland) or buying tanks (Greece) or bombing brown people (US) doesn't hack it.  So to get the money "austerity" programs must be instituted to pay the interest on the money the taxpayers and citizens of the country so foolishly borrowed.

 

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sat Nov 27th, 2010 at 02:47:02 PM EST
[ Parent ]
Yes, but you originally stipulated that he bought the bonds from Company A, which he owned himself. Company A can't buy 50 mil worth of bonds at 3 % and then sell 50 mil worth of bonds at 7 % to company B. Because at 7 % those bonds are no longer worth 50 mil.

If you own both Company A and B outright, the proper way to look at it is to look at the consolidated balance sheet. And on the consolidated balance sheet, buying and selling between A and B doesn't matter, except possibly for calculations of tax liability (hence my comment that this is a tax shelter, because A incurs an accounting loss when it sells the bonds to B).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 27th, 2010 at 03:08:37 PM EST
[ Parent ]
Company A takes a loss (minus the tax "benefit") of the $50 million par minus the discounted price.

I used $50 million, rather than $42.692 million (or whatever it is) just to keep things simple.

You're right the proper way is to construct a consolidated Balance Sheet.  But I don't have to, and being a sleaze ball don't want to, since, legally, Company A and Company B are independent economic entities and all transactions take place, legally, at arms-length.  

Further by keeping Company A a separate legal entity I can go whining to the financial press about having to take a loss on my sovereign debt holdings and how I'm going to go bankrupt & yadda-yadda-yadda if the national government doesn't bail me out.

And be very, very, quiet about Company B.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sat Nov 27th, 2010 at 04:32:03 PM EST
[ Parent ]
Well, yes, if you can get some other sucker to obtain the common stock of Company A (and/or bail it out), then you have a get-rich-quick scheme.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 27th, 2010 at 06:42:21 PM EST
[ Parent ]

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