Sun 2010-02-28 13:27 EST

Janet Tavakoli: Washington Abandons Greece: Beware of Geeks Bearing Grifts

Janet Tavakoli

The European Union (EU) is shocked--shocked I tell you!--that Greece used financial engineering to qualify for admission. Exactly how did they think that weaker countries managed to meet the requirements?...A few years ago, Greece engaged in derivatives transactions which essentially gave it a disguised loan, a gift from geeks. Greece may or may not have had plans to invest the money to create national wealth instead of say, blowing it all on national bling. Either way, Greece used its national credit card in a futile attempt to keep up with the EU Joneses...Today, rumors are that crony capitalists are using derivatives to profit from Greece's misery. There are allegations that investment banks and hedge funds used their knowledge of Greece's hidden debt to drive up its borrowing cost and drive down the Euro. Then these speculators reversed their positions, when they had advance information of a potential bailout for Greece. Other rumors suggest customized trades on the sovereign credit derivatives index also exploited Greece's problems. Still other rumors point to a campaign to manipulate Greek debt prices and knock down the Euro.

Beware; Geeks Bearing Grifts; Janet Tavakoli; Washington Abandons Greece.

zero hedge Thu 2009-12-17 10:37 EST

Is Selling US CDS A Risk-Free Way To Short The Dollar?

There has been much conjecture on whether using CDS is an effective way to hedge against US default risk. Many theoreticians, especially those of the post-March lows variety, have sprung up and are speculating that buying Credit Default Swaps on the US is ultimately a futile and pointless endeavor. The main argument: a US default would likely mean that interconnected dealers won't recognize contracts on a US default event, as they themselves will be out of business. Even if they continued to exist, like cockroaches in a postapocalyptic world, the collateral which backs derivatives is mostly US Treasurys: the same obligations that would end up being massively impaired...the US CDS seller syndicate could easily be one of the key sources of dollar short funding: with sellers pocketing euros and immediately going to market and selling dollars...a dollar-short unwind would probably have repercussions in the US CDS market. Not only would the dollar spike, but paradoxically US credit risk would probably widen dramatically...any unwind at the heart of the prevalent risk trade now: the massive dollar carry, would impact virtually every investment product, quite possibly in self-referential feedback loops. If correct, it merely shows how much more the Fed has at stake in keeping the dollar depressed than merely getting mom and pop to buy Amazon at $130/share. Losing control of the carry trade will be the systemic equivalent of allowing Lehman's book to be marked-to-market: a potentially complete collapse in systemic confidence, which would have such far ranging implications as the $300 trillion interest rate derivative market. And when sudden volatility reaches this product universe which is 6 times bigger than world GDP, the events from last year will seem like a dress rehearsal.

CDS; Dollar; Risk-Free Way; sell; short; Zero Hedge.

Thu 2008-04-24 00:00 EDT

Mish's Global Economic Trend Analysis: Fed Auction Futility

Fed Auction Futility; Mish's Global Economic Trend Analysis.