Remember credit default swaps? AIG? Hopelessly entangled exotic financial instruments tied to esoteric asset valuations that caused cascading defaults in 2008 and threatened to tank the global financial system unless taxpayers ate all the losses? Remember how we reformed Wall St. to make sure that never repeated itself? Someone tell Goldman Sachs, JPMorgan, and Morgan Stanley, because they've teed the whole damn thing up again, this time in Europe.
Bloomberg's Yalman Onaran has an excellent and terrifying account of how American banks have spent the last three years replaying precisely the same malevolent game that led to the '08 crisis. But instead of playing with shitty real estate, they're playing with European bonds. Either way, the endgame is the same: As soon as someone can't pay their bills, we'll be talking about "systemic risk" again.
American lenders have sold a half a trillion dollars worth of insurance on European debt, mostly in the form of credit default swaps, Onaran reports. That means that if European bond issuers default, these American banks—Goldman Sachs, JPMorgan, Citbank, Morgan Stanley, and Bank of America chief among them—are on the hook to pay up. And the amount of insurance issued by U.S. firms actually ticked up by $80 billion in the first half of 2011—a time, you will recall, when half of Europe seemed to be teetering on default.
http://gawker.com/5855715/how-american-banks-are-engineering-the-next-apocalypse-again
Selling More CDS on Europe Debt Raises Risk for U.S. Banks
By Yalman Onaran - Tue Nov 01 14:37:06 GMT 2011
“Risk isn’t going to evaporate through these trades,” Cannon said. “The big problem with all these gross exposures is counterparty risk. When the CDS is triggered due to default, will those counterparties be standing? If everybody is buying from each other, who’s ultimately going to pay for the losses?”
http://www.bloomberg.com/news/2011-11-01/selling-more-insurance-on-shaky-european-debt-raises-risk-for-u-s-banks.html
"JPMorgan CEO Jamie Dimon, 55, said last month that the New York-based bank hedges its exposure to European sovereign debt through contracts with lenders in other countries, including Germany and France."
You can see how this might be a problem, right? Insure people against European catastrophe and then insure your insurance with European banks. What could go wrong? Bloomberg says the Dexia bailout was similar to the AIG backdoor bailout:
http://www.cjr.org/the_audit/bloomberg_on_how_a_european_ai.php
Satyajit Das
November 2, 2011
In the first of a two-part assessment, Satyajit Das looks at solutions to Europe's destabilising economic crisis
http://www.smh.com.au/business/firewall-needed-to-protect-countries-from-contagion-20111101-1mtzy.html
Profile: Satyajit Das
Lucinda Schmidt
August 31, 2011
We're in for a protracted period of low growth, this derivatives expert warns.
However, he has had less time for leisure pursuits after his prescient book, Traders, Guns & Money, was published in 2006 accompanied by a speech he delivered in the US and Australia on ''the coming credit crash''.
Das began writing the book a couple of years earlier as a loose memoir but his research caused him great anxiety about the future of the global economy.
''I realised that the way the derivatives market had developed meant it did not mitigate risk, it was a risk in itself,'' he says, adding that the debt built up in the system was unsustainable, creating a giant paper shuffle.
He has written another book that analyses what he calls ''the financial alchemy'' of the past 30 years and its destructive global consequences.
The global market upheavals of early August were, he says, an inevitable result of ''Botox economics'' where deep-seated global financial problems were temporarily covered up by government bailouts and stimulus packages.
Das says the response was the right one but it simply bought time by substituting public debt for private debt. He has been horrified by the ''mission accomplished'' attitude of some financial markets players and regulators. The analogy he uses is of a car that has crashed and been repaired, and is now hurtling back along the same highway, only with its safety features removed.
''It's very difficult to see how the real economy will recover,'' he says, noting the global economy has relied on debt and financial gimmicks for the past 30 years. ''We are entering a very protracted period of low growth.''
http://www.smh.com.au/money/investing/profile-satyajit-das-20110830-1jiv1.html
Extreme Money: The masters of the universe and the cult of risk
The bestselling author of Traders, Guns & Money on how money and finance enslaved the world.
Once, we built things – useful things. Now, we construct immense financial structures from thin air and lies. We have crafted a colossal worldwide financial machine that makes a few individuals staggeringly wealthy and sacrifices everyone else at its altar of risk.
Bestselling author Satyajit Das draws on over thirty years of personal experience at the heart of modern global finance to narrate this story. Das reveals the spectacular, dangerous money games that have generated increasingly massive bubbles of fake growth, ponzi prosperity, sophistication and wealth – while endangering the jobs, possessions and futures of virtually everyone outside the financial industry.
You'll learn how everything from home mortgages to climate change has become financialized, as vast fortunes are generated by individuals who build nothing of lasting value. Das shows how 'extreme money' has become ever more unreal; how 'voodoo banking' continues to generate massive phony profits even now; and how a new generation of 'Masters of the Universe' has come to dominate the world.
http://www.penguin.com.au/products/9781921880131/extreme-money-masters-universe-and-cult-risk
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