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The Ever Increasing Parallels Between AIG And Greece... And The CDS Puppetmaster Behind It All  Tyler Durden  Zero Hedge

As we look forward, we ask, who now determines the variation margin on Greek CDS (and Portugal, and Dubai, and Spain, and, pretty soon, Japan and the US), the associated recovery rate, and how much collateral should be posted by sellers of Greek protection? If Greek banks, as the rumors goes, indeed sold Greek protection, and, as the rumor also goes, Goldman was the bulk buyer, either in prop or flow capacity, it is precisely Goldman, just like in the AIG case, that can now dictate what the collateral margin that Greek counterparties, and by extension the very nation of Greece, have to post on billions of dollars of Greek insurance. Let's say Goldman thinks Greece's debt recovery is 75 cents and the CDS should be trading at 700 bps, instead of the "prevailing" consensus of a 90 recovery and 450 spread, then it will very likely get its way when demanding extra capital to cover potential shortfalls, since Goldman itself has been instrumental in covering up Greece's catastrophic financial state and continues to be a critical factor in any future refinancing efforts on behalf of Greece. Obviously this incremental margin, which only Goldman will ever see, even if the CDS was purchased on a flow basis, will never be downstreamed on behalf of its clients, and instead will be used to [buy futures|buy steepeners|prepay 2011 bonuses|buy more treasuries for the BONY $60 billion Treasury rainy day fund].

In essence, through its conflict of interest, its unshakable negotiating position, and its facility to determine collateral requirements and variation margin, Goldman can expand its previous position of strength from dictating merely AIG and Federal Reserve decision making, to one which determines sovereign policy! This is unmitigated lunacy and a recipe for financial collapse at the global level.

In essence, through its conflict of interest, its unshakable negotiating position, and its facility to determine collateral requirements and variation margin, Goldman can expand its previous position of strength from dictating merely AIG and Federal Reserve decision making, to one which determines sovereign policy! This is unmitigated lunacy and a recipe for financial collapse at the global level.

This is yet another AIG in the making, with Goldman this time likely threatening to accelerate the collapse not merely of the US financial system, but of the global one, in order to attain virtually infinite negotiating leverage. Of course, the world will not allow a Greece-initiated domino, allowing Goldman to call everyone's bluff once again.


And of course this is just another Zero Hedge overstatement of the case. See David Fiderer's piece from HuPo, originally published on the Huffington Post, which continues probing the topic of Goldman and AIG and which "Tyler" references.

If there is an agency of the European Union that acts to protect Union members from financial fraud and predation, it could do Greece, the EU and the world a giant favor by declaring the whole CDS market corrupt and unenforcable. That would greatly lessen the pressure on Greece, Ireland, Spain and Portugal AND, as a feature, not a bug, possibly blow up Goldman-Sachs. But I dream.


"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Feb 8th, 2010 at 10:53:07 PM EST
[ Parent ]
Well, wouldn't the EU or even Germany stepping in to guarantee Greek debts blow up Goldmans,then?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Feb 9th, 2010 at 05:44:23 AM EST
[ Parent ]
We can only hope.

Isn't it perhaps not completely wise to advertise a short position when it would be so easy to subvert it?

I suppose it would be criminal of the ECB to take a counter-stake and then announce a debt guarantee.

Incidentally, doesn't Goldman's position and media campaign meet the definition of economic warfare?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Feb 9th, 2010 at 10:16:00 AM EST
[ Parent ]
I suppose it would be criminal of the ECB to take a counter-stake and then announce a debt guarantee.

A word here and there to European banks in need of a shot of vitamins combined with an appropriately sized counter-stake taken on the quiet, then, when enough have their positions in place, announce the guarantee. Also, can one buy puts on a CDS?

doesn't Goldman's position and media campaign meet the definition of economic warfare?

Call it economic terrorism. Warfare, properly, is between sovereign entities. It could also be called piracy, but I think several nations have new, rather draconian laws on terrorism.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Feb 9th, 2010 at 11:19:04 AM EST
[ Parent ]
wouldn't the EU or even Germany stepping in to guarantee Greek debts blow up Goldmans,then?
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Depending on Goldman's position it could damage them, but Goldman may no longer even hold the bonds, it may just have the CDS's. And if the valuation of those CDSs is left in Goldman's hands then they can still tighten the garrote. The best action that could be taken would be to declare CDSs un-enforceable except by the holders of the bonds around which they are written. But, as a point of fact, what EU agency has the authority to take such actions?


"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Feb 9th, 2010 at 11:10:36 AM EST
[ Parent ]
Financial regulation is largely vested with the individual states.

However, if the Commission suspects that Goldman or any other player has cornered the market, or is attempting to do so, it is perfectly within its mandate to bring the competition and inner market hammer down, like it did on Intel and Microsoft. Given the - ah - less than perfectly transparent, shall we say, nature of these instruments, it is possible that simply making vigorous noise about punitive measures will suffice to stimulate a run on the target.

That might be a more productive venue.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Feb 9th, 2010 at 06:37:04 PM EST
[ Parent ]
if the Commission suspects that Goldman or any other player has cornered the market, or is attempting to do so, it is perfectly within its mandate to bring the competition and inner market hammer down, like it did on Intel and Microsoft
There is a better example - I think it may have gone under your radar when it happened...

Times Online [UK]: Citigroup agrees to pay £14m over bond scandal (June 29, 2005)

Last August Citigroup sent shockwaves through the eurobond market after executing a series of huge bond trades, which destabilised the market and for a moment sent prices plunging. By exploiting the price moves and the ensuing panic, Citigroup traders made profits of £9.96 million in the course of the day. The bank's reconfigured computer program, designed to stun the market with a blast of 188 simultaneous sell orders, was known by the traders as "Dr Evil".
Also here:
The market was thrown into confusion on 2 August 2004 when Citigroup pushed through EUR11 billion in paper sales in two minutes over the automated MTS platform. As the value of futures contracts fell and traders moved to cover their positions, Citigroup re-entered the market and bought back about EUR4 billion of the paper at cheaper prices. The strategy was dubbed Dr Evil, after the Austin Powers character, in an internal e-mail circulated by the traders.

Immediately afterwards MTS moved to impose temporary limits on the value and volume any one dealer can push through the system at a time. MTS also suspended Citigroup from trading on its bond network for one month after finding that the UK bank breached certain market regulations.

The UK's Financial Services Authority later fined Citigroup £13.9 million following its investigation into the controversial trading.

Unfortunately the Commission did nothing about that particular incident...

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Tue Feb 9th, 2010 at 06:42:30 PM EST
[ Parent ]
What is it with trading desks and code names? Enron had memos floating around about schemes with such attractive names as "Death Star" and "Fat Man."

I'm sure these traders have a lot of fun at their job, but shouldn't it occur to them that what you're doing might be a shade on the grey side of acceptable behaviour when the most apt pet name for the scheme makes reference to a wave-motion gun or earth-shattering kaboom?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Feb 9th, 2010 at 07:24:47 PM EST
[ Parent ]
What is it with trading desks and code names?

Run amok testosterone is my guess. We could probably get ourselves into a regime of stability by banning males from all aspects of trading. :-)

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Feb 9th, 2010 at 09:14:04 PM EST
[ Parent ]

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