Well that’s one way to solve the nagging problem with the Greek debt restructure triggering credit default swaps: just get the governing body to pretend the whole thing is voluntary.
There will be no payouts to investors holding bond insurance contracts on Greek debt, a committee of bankers and investors ruled Thursday.
The decision by a panel of the International Swaps and Derivatives Association keeps the country — and the euro region — clear so far of the stigma of a “credit event” that would trigger billions of dollars in payments under the insurance contracts known as credit default swaps.
But the ISDA panel cautioned that the country’s situation is “still evolving” and said that a future review may have a different conclusion.
The ruling does “not affect the right or ability of market participants to submit further questions” relating to Greece’s situation, the ISDA said in a statement. “ Nor is it an expression of the . . . view as to whether a Credit Event could occur at a later date.”
Barry Ritholtz makes the right conclusion: “Exactly how brain damaged, foolish and stupid must a trader be to ever buy one of these embarrassingly laughable instruments called derivatives?”
Here’s the situation. A bunch of investors borrowed money to Greece, and then in order to hedge themselves in case Greece didn’t fulfill their obligations, bought credit insurance. And then Greece didn’t fulfill their obligations. And now, the governing body for the credit insurance says, you’re out of luck on this side too.
In any other insurance business, that would be the end. Everyone who bought the insurance and got shafted would tell their colleagues about it. Those with insurance contracts would try to cancel them. And nobody would buy them again. Somehow, the International Swaps and Derivatives Association thinks they can get away with this and just move on.
Incidentally, the governing body of the derivatives market, the ISDA, is also not a governing body. And a default event could still be called. So as a derivatives buyer, you have almost nothing to rely on. According to Charles Forelle, the real question will come later:
Most analysts agree that Greece will need to actually use the collective-action clauses to force at least some creditors to do the exchange. Once that’s done, expect another question for the ISDA committee: Is that fact that Greece forced creditors to accept new bonds with worse terms than the old a credit event?
And you should expect a yes.
Maybe. But the ISDA, according to Ritholtz, is also conflicted, with a stake in the underlying debate. So I don’t know that we can assume that. At any rate, investors are looking at the possibility that they bought worthless credit insurance. Maybe the CDS market will go poof after all. And that would actually be a good thing that reduces risk to the overall system, while forcing prudence on investors. So maybe this incompetence is working out for the best.




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A 70% Haircut is NOT a ‘Credit Event’
So, when my house burns down, Allstate, State Farm
and Chubb can get together and decide that nothing happened?
Or, if I’m mugged by four guys, they can decide that I gave them my wallet voluntarily?
MF global got reamed by these people. They bought the contracts expecting Greece to default. Because none of the major banks could handle the payouts for the CDS insurance, none of the major banks will have to pony up the required money.
It’s is basically trillionaire banks vs. billionaire banks, and the trillionaires are winning.
Odd side note. billionaire is recognized as a word by spell check, but trillionaire is not. The closest match it trillion IRE.
You sound surprised. A bunch of bankers are getting away with mugging homeowners.
The new rule appears to be that the banking sector is the wild wild west and there is no sheriff(long live the free market.)
Ae my questions rhetorical?
The people on the ISDA committee don’t want to find out who wrote the CDS’s, even though the press has been pooh poohing the possible impact because it supposedly nets out to such a small amount. But as Buffett says, it’s only when the tide goes out that you find out who’s swimming naked.
Felix Salmon’s take as also linked by ekhornbeck
From the Financial Times;
So the ISDA says; Hold on there Baba-Louie, there’s no event here, at least this week.
Come back next week and we’ll have a better excuse, hopefully.
It’s about time I quit hearing crickets every time I mention that the CDS market is having a profound effect on the ‘Greek debt crisis’.
The CDS market is making sellers rich and making
sophisticated investorsspeculators salivate at the prospect of reaping gigantic windfalls for no other reason than their willingness to place large wagers based on their not-so-sophisticated understanding that Greece is bound to go into default.So now that the ISDA has finally found its back against the wall, they’ve decided that there will be no pay-out because that would be a really bad thing, and off the top of their heads they say that there has been no actual credit event, so hold onto those tickets folks.
Of course that is pure hogwash, but come back next week and we’ll have a better reason.
The sellers of CDS contracts have sold their products based on all the rest of the worlds shakey sovereign debt, and they’ve sold contracts based on each others default.
If Greece defaults, the rest of dominos will fall also, and in turn all the holders of CDS contracts are going to line up at the cashiers window, and game over, the banks selling CDS default themselves.
The reason they’ve decided to stonewall on paying is not that they think they can ‘get away with it’ it’s because they must ‘get away with it’ they cannot admit the default has occured because they cannot now, and have never been capable of paying off in the event of this sort of situation.
Bill Gross’ statement reminds me of the famous line about why the gambler continues to play in the crooked dice game;
“I know it’s crooked, but it’s the only game in town.”