United States banks have “more than $80 billion of exposure to Italy, Spain, Portugal, Ireland and Greece”. As outlined in an earlier article, the true figure is $616 trillion when derivatives are included. Technically $616 trillion is more than $80 billion. However, we are told that the exposure will be limited in the event of any default(s) in the Eurozone through the use of credit default swaps.
Is this true? Yes and no. The article below outlines the “theoretical” limitations to the “Big Five” banks. It is true that these banks have bought “insurance” on their debt. And now for the but: the credit default swaps are only paid out when an “event” happens. The conditions for this “event” should have already been triggered but the fine print or a last minute deal that never materializes has always stopped payment.
The keys to the future again are shown in our recent past: AIG and MF Global.
“American International Group AIG nearly collapsed because it could not make payments on its side of its swaps contracts”
Why did AIG not collapse? The full faith and credit of the US government took over. In fact the record of the government’s takeover, control and manipulation of the banking/investment community has played a major role in our and the world’s economic collapse. Remember Dodd Frank, TARP and Fannie Mae/Freddie Mac/Community Reinvestment Act? But then along comes MF Global who (don’t forget that corporations are people too so “who” is appropriate) played the same game as the Big Five banks but got caught (or trapped by JP Morgan). What was the end game for MF Global without “insurance“? The people lost their assets (transferred to England) and Jon Corzine was indicted. Wait, Jon Corzine was not indicted and there one big key to the puzzle.
Jon Corzine knows how to game the system (except with European derivatives) AND he knows how to bring the house of cards down. If an event does trigger the release of CDS payments:
- It is not enough to save the banks
- It does not address the banks’ exposure to derivatives
- There is not enough money to cover the insured losses as AIG has shown
- There is not enough money in all the countries involved to cover the losses
The truth is that the conditions for just CDS payouts will collapse the world’s economy as the system unravels and fear takes hold. Have you seen the latest payouts on Greek bonds as an example of fear taking hold? Whether the powers that be keep kicking the can down the road (as they did with MF Global) or they are just bidding time to transfer our assets into safer hands than ours (meaning their hands as in Atlas Shrugged), time is not on our side. Join the people who are following the yellow brick road. The answer to the question will not be found in Washington, DC or New York City; only the source of the problems will be found at the end of those rainbows.
After a hurricane, homeowners check nervously to see if their insurance will cover all of their damages. With the European financial crisis still threatening a trail of defaults, United States banks are betting that their insurance is going to pay out.
Five large American banks, including JPMorgan Chase and Goldman Sachs, have more than $80 billion of exposure to Italy, Spain, Portugal, Ireland and Greece, the most economically stressed nations in the euro currency zone, according to a New York Times analysis of the banks’ financial disclosures.
But these banks have made extensive use of a type of financial insurance, called credit default swaps, to help them offset any losses that might occur if defaults swamped the five troubled nations. Using these swaps, along with other measures, the five banks have cut their theoretical exposure to the troubled countries by $30 billion, to $50 billion. The analysis also shows that Citigroup has the greatest percentage of its exposure potentially protected at 47 percent, while Bank of America has bought the least protection at 12 percent.
Credit-default swaps have functioned well for big bankruptcies, but they were also a big source of systemic weakness in 2008, when the American International Group nearly collapsed because it could not make payments on its side of its swaps contracts. Some market participants now doubt they would work properly during periods of great financial instability.
“The likelihood of actually getting paid out from owning a credit default swap would be troubling to me if this were my hedge against a systemic shock — especially in a political environment unfriendly to more Wall Street bailouts,” Mark Spitznagel, chief investment officer at Universa Investments, a hedge fund, said through a spokesman.