Why I support SOPA

Mostly because I am a troll and because the extreme positions taken in this debate annoy me. So I take a bit of the "avocat du diable" (devils lawyer in french) position on this one. But let me clarify.

I spent a good part of my professional life in the world of Free and Open Source Software (aka FLOSS). There as a producer of content I helped pioneer a model to make money off a free software product. We operated in the application layer of the internet and distributed our wares for free. In the FLOSS community, people are actually fairly educated when it comes to IP, licenses, trademarks, copyrights, patents etc. Lately I spend a lot of time in writing music and have got to see first hand who is impacted by the net.

The goals of SOPA
The goal is rather straightforward. Online piracy and counter-feit are rampant. Most people do not see "downloading a song, a movie, buying counter-feit products" as theft, it is perceived as innocuous. What is more technology has contributed to enabling this. P2P, social sites, torrents, powerful search have all enabled easy access to pirated content.

Respect of IP is key to our economic future
Increasingly the western world relies on IP to make a living. Since we produce less "real world" goods and more "digital world" goods we open ourselves to piracy. If we are to move to an information based economy there needs to be a limit to the infringement of IP. In music for example instead of releasing VST plugins, people prefer to tie them to hardware or the iPad to make sure they monetize their creations. I for one welcome the innovation in music instruments on the ipad and realize it is because a/ the platform lends itself to it b/ the platform helps monetize.

The implementation of SOPA
Essentially what is new in SOPA is that it supersedes "safe harbor" provisions of DMCA, the previous legislation around digital based IP. The onus is on a content provider to monitor and censor their own content. Failure to do so will result in DNS blocking. This is important and is worth a bit of explanation. Say you upload pirated content to youtube. Essentially today you will receive a notice on youtube saying "we detect that this is not your content please remove bla bla bla". If you don't do so, then it is all kosher, it just goes on. With SOPA, youtube would have to shut you down, if they don't they can be blocked. DNS is essentially what maps meaningful names like www.piratebay.com to more esoteric IP addresses like 123.234.53.94. This would require that top DNS domains comply with the law.

This is a cost to content providers
Of course this is cumbersome for content providers and will add cost to their operation as well as complexity. In reality crowd sourcing of content monitoring is implementable and what is required is that providers then act on the information. This is work and in my opinion the gist of the opposition against the bill. Filtering of IP is already implemented in most corporate firewalls and used for censorship in China for example. I am not endorsing censorship just making a technical point. Google does censor when the Chinese government tells them so. The internet continues to function at a DNS level. Surely DNS modifications like the one hinted here is no "undermining the core infrastructure" of domain naming.

This is an opportunity cost to providers
Remember the Apple iPod original adds? "Rip/listen"? the truth is that most providers turn a blind eye to these activities because it constitutes traffic and they like traffic first and foremost.

Criticism: abuse of SOPA
From what I can tell, the central criticism is in the abuse of SOPA. People are fretting that this broad legislation will be abused by corporations effectively giving them censorship power. Obviously this is a hysteric generalization not helped by the fact that, according to wikipedia, some RIAA companies already have lists including their own artists and competing (but legal) sites. But truly nothing in the law says this is what will result, to see it as a risk is a valid concern, but an over-reaching one. If someone uses this to kill competition then that someone should be prosecuted. Abuse of this law should be punished, from what I can tell there are provisions in the bill to do just that.

Free Speech, censorship
A more excited fringe says this is a violation of free speech. How we got to free speech is baffling to me. There is a world of difference between theft of digital IP and free speech. If the law is used by abusing corporations to shut down dissent or competition again those corporations should be heavily punished. If the US government uses this to enforce chinese style censorship, I would be the first one buying servers in the cayman islands to put TOR on it. This is not china. The people who argue 'free speech' come across as an excited fringe to me.

It will create jobs
Another baffling argument comes from the valley, that this will essentially destroy jobs. Au contraire a strong IP approach will create jobs and it is a necessary step towards assuring a monetary economy on the net. That various chambers of commerce or the AFL-CIO support this bill speaks volumes. The US industry increasingly produces digital goods. Protect them.

Corp vs the people, government vs the people
A lot of the debate stems from a mistrust of corporations to do the right thing. I get it. But the potentials for abuse, which should be monitored and punished, do not validate piracy, which I consider outright theft. A related argument stems from a distrust of government and legislation. What do those clowns in Washington know? The fact that so many VCs threatened to stop investing, when the first question you usually get is how many patents are protecting your IP, is disingenuous. I say call their bluff, you think they will stop investing? huh, huh, the days pigs fly.

It won't stop piracy
For sure it will not stop piracy entirely, those that want to put the IP address will always do so, those that want to circumvent DNS will do so . But it will seriously curb piracy.

It will stifle innovation
This one again baffles me. How can this legislation be used to kill startups? If it is, whomever is doing it should be prosecuted.

It will place unlimited liability on new companies
This argument is usually put out by the software investors. Again I find this linked to the cost of implementing the law. But I doubt it will create an infinite liability. This is the kind of argument from my friends in silicon valley that sounds as honest as the record companies already planning to shut down their own artists.

But my music does not need that
As a nod to my musician friends, a lot of what I hear is "but you know the real way to make music is through live shows, not your music". As someone who doesn't do live shows I think the internet really has killed the music business, before you could make money with you records AND the shows. Today only shows and some licensing if you are lucky. I don't mind the majors but don't care if they live or die, I just do not consume their products by and large. I can see that things like "bandcamp", "itunes" or "beatport" allow one to make a living, today meager and insufficient in most cases. However it is obvious to me that piracy is the single most important factor in the decline of the monetization of music. Why should one be content with piracy as a "matter of fact" is baffling. You can distribute your music for free but that is your choice (certainly mine in some instances).

The internet as the last bastion of libertarianism
Look, I get it. I was once called a "bearded freak of the sandal brigade", referring to the die hard "freedom or death" ethos of the old UNIX/Internet folks. I personally sported crew cut, shave regularly and yes, I did wear smelly sandals in my PhD years. But I think that on the part of a lot of my friends and acquaintances in the software world, there is a strong emotional response to "censorship on the net". The webs is one of the last bastions of libertarianism, at least in ethos. We are far from china and protecting that freedom does mean cracking down on piracy. I view with mild cynicism the countless corporations that are anti-SOPA, mostly the content providers, who wrapped themselves in the flag of freedom when we are just balking at regulation that will cost to them and talk of Armageddon to the US industry.

This is not the way
An interesting point made by many people is that in fact the solution may be in new business models to circumvent piracy, think Itunes/bandcamp/spotify etc etc, Surely these are welcome additions and successful but it doesn't make up for piracy.

A flawed implemenation
By and large, I welcome the controversy as it puts in light a lot of the question around digital IP. I can sit here and argue why the software patent system is fundamentally broken in the US as well as argue for SOPA. I can also discuss the finer points of DNS filtering and IP fire-walling, but that to me is largely irrelevant. The truth is that technology has not been able to police the abuses of the net and it doesn't really want to either. But if the implementation of SOPA is ripe for abuse that means that anyone that abuses it should be sternly punished. Police the police, doesn't mean there is no police. There is "social contract" that is needed in the internet, one that today is not in existence for those who claim to "first do no evil". Traffic at all cost, "rip/listen".

and hope
I do think that a proper SOPA needs to see the light of day, it is worth the wait to get it right and get every corporation sensitized to what "abuse" will mean, since some RIAA people are already running wild with this. They should know better. But the fact remains, that in a strict view of property, which included digital intellectual property, what is going on in the internet today is out of control. It is worth the wait and getting it right.

QE in EZ: a war of necessity

I was reading an article in the FT this morning as to how the UK government bonds were being rewarded as "safe haven" status with ultra low yield. I kind of lost it in the comment sections out of disgust.

Of course the tone of article and commentary was all self congratulatory, about, really, how the superior management and responsibility paid off.

What a joke.

Ain't nothing going on but QE
All there is to it is a lot of money printing. Buy enough of your own debt (aka monetizing debt, QE, Printing money) and your yields will go dramatically lower. It is not because they are better or better run or safer it is just the mathematics of demand/offer when one of the players has infinite liquidity at his disposal.

QE as a stabilizer
QE1 in the US has backstopped the negative spiral of depression. Let the records show that much. It can be an effective stabilizer. Those that fret about inflation confuse flow and stock. Yes, printing is of course an inflationary contribution but if your background is one of debt deflation (as is going on massively in the western world since 2007) then you are counteracting the main trend. You have a big negative monetary flow (debt deflation) countered by a positive flow (QE) for a net result that may still be negative (stock). QE1 was started in the midst of financial panic in March 08 when the DOW was at 6,666. (yup)

QE2 as a financial weapon
While I can easily rationalize QE1, I must admit I was taken by surprise when Bernanke announced QE2, even though we were in the midst of a summer panik in 2010. I rationalize it as a competitive devaluation of the money vis a vis trading partners and a further stimulus to your economy via depressed yield curves and low cost of financing.

Financial war
I am growing increasingly convinced we are in the midst of an all out financial war, with QE as the main nuclear weapon in use. Naked CDS are weapons of mass destruction (really folks? you want to be paid 10x what a sovereign is defaulting on?). Again low cost of financing for a govt in times of crisis is a god sent (minus the tea-party clownery on the debt ceiling it is all blue sky for the US cost of financing compared to the 7% italy is paying). Devaluing your currency is the simplest way to go back to growth.

Maastricht constraints, German attitudes
By constitution, the ECB cannot, in theory, print all the money it needs to buy a targeted sovereign (no preference clause, no bail out clause). This is partly due the germans ingrained distrust of money printing given their history and partly due to the hawkish stance of Mr Trichet and the technocrats in general.

The QE pedal will be pressed
So Miss Market is throwing her weakly tantrum, getting governments toppled and demanding her pound of flesh in fresh money. The moment a sovereign cannot fund itself in the face of sound fundamentals is when the QE pedal must be pressed. I do not buy for a second that Italy is fundamentally insolvent (and not just in the MMT sense that one can print, but in the accounting sense), this is a liquidity crisis that is quickly turning into a solvency one but with reverse causality.

EFSF and QE
Mechanisms like the one in the post below with the put/cds EFSF structure also naturally put QE where and when it is needed, not too soon and not too late. The moment it is put in action, the euro will slid which will help everyone including the germans, the euro stocks will rally, competitiveness will be regained using the same weapon the US/UK are using. The cost of funding governments will go down and this whole non-sense driven by hedge funds will evaporate.

Miss Markets gets her way

Of course, the paranoid analysis (which has been profitable for me in the short term) is that there is a concerted attack by hedge funds on sovereign, picking them one by one as if a sniper, all the while harping on the moral defaults of the greeks and Berlusconi. But what Miss Market wants is 1/ volatility 2/ FREE MONEY. It is about to get free money as she has succeeded in bringing about panic dynamics on Italy. The irony of it all.

A best of both worlds?
In fact I am hoping that the germans come to this view but keep a stiff back. This is not a bailout for profligate governments. While I watched in horror the tea-party debt ceiling self inflicted fiasco, and with contempt the self congratulatory comments in the FT about "low cost of funding is a safe haven status" I do think the EZ is overly socialist and that it cannot continue. France is a point in case, I consider france a proto-communist country in terms of the public employment trends, they always go up, never down.

That compromise will restructure of government through austerity, where a little bit goes a long way and too much will kill your economy in in a simple Keynesian way, while at the same time lowering the cost of funding for the remaining streamlined operations.

Comparing CDO and CDS-like solutions to EFSF leveraging

The confusion is sky high, both in the markets and the officialdom in the EZ. The ideas on how to leverage the fund are rather straight forward but with different implications.

The CDO Structure: Protect the FIRST 20%
This one is floated by the german banks. The idea is to structure the EFSF rescue fund as a CDO where the reserves are essentially equity tranches so that the "FIRST LOSSES" are borne by the EFSF. This means that if the losses are less than say, 20%, then those losses are taken by the fund. For this to work you need to find the financing for the senior tranches upfront. This achieves "leverage" by committing the core capital to the equity tranche and looking for further financing outside for the higher tranches. This is derided by some critics (amongst them Roubini) as a mirror of the subprime debacle in the US. Of course the main difference is that in one you had REAL subprime bonds defaulting at 80%-100% in the second you have EuroZone sovereign. Not the same thing, but no matter.

The CDS-like structure: Protect the LAST 80%
This one is floated by the french banks. I call it CDS like because the idea (partly my projection I think) is that 80% of the value would be insured (100% CDS I find silly but that is just me). So if you lose 20% that is your loss, but if it goes beyond then it is the EFSF. Note that this is truly a PUT like structure but instead of being on the value of the stock it is on the nominal. It insures A PART of the default but not all. I don't know that such a structure is common place but I am probably wrong on that one. This effectively leverages the fund because the capital is committed as collateral, which is a fraction of the nominal.


why germans vs french?
So what is so hard about these 2 schemes? essentially I think it rests with the banks. The german banks, as of this writing, are off the radar of the markets. Whereas their french counterparts (BNP, SG, CALYON) are already deeply discounted (60% book value). So the french would of course like it if the first 20% was paid for but truly they care more about the downside. Also a 80% put would essentially give them 20% back just like CDO structure, so to them it is a wash on the downside but a minus on the upside. To the germans it is the reverse. The germans have not been discounted so they want protection for the FIRST 20%, the french have already been discounted and would rather see protection for the LAST 80%.

Funding differences
To me the main difference is in how the structure is funded. In case of the CDO structure it depends on outside funding for the senior tranches. The chinese and EM have already said "you can buy it all, if you don't why should we?". In other words it depends on the kindness/greed of strangers which can be complicated.
The CDS, however does not require funding until collateral is called. Collateral call will only happen when Miss Market has really killed the sovereigns and we are in +20% ACROSS THE BOARD discount, which, personally, I view as VERY UNLIKELY. Furthermore at that stage, you just fire up the printing presses, something the ECB has been reluctant to do under Trichet and German tutelage. It is however a necessity.

Market confusion
So in a nutshell the CDO is complicated to get funded (and needs to be funded 100% today). While the CDS is ALREADY funded and the funding would need to happen ONLY IF AND WHEN the shit hits the fan. At that stage QE will be palatable. To me this is a simple case but note that CDS/PUT structure I am talking about is rather exotic. It exists on stocks (put) and on bonds (100% CDS) but the 80% CDS has to be OTC.

Italy and Miss Market

I call her miss market because she throws tantrums. The sad part is that she has been taught to throw tantrums and expects instant gratification. She is an impossible 6 years old.

Of course the official version is that she is called "Mr market", carries a big manly stick and that he has the wisdom of crowds. Theory of numbers says that truth will be found in the market vote, because it represents the opinions of the multitude where all information resides.

That is the theory. The practice is that in this media driven, internet delivered news world, hysteria and market sentiment fluctuate on a weekly basis. We have gone from despair to euphoria to despair again, in less that 10 days.

Ganging up

There has been various report of the infamous NYC hedge fund get together. This is where "money" gets together in a smoked filled room, sipping on whiskey and decides which target to pick on next. Apparently last year they decided Greece and the Eurozone. There is no end to greed. Of course reality is probably more prosaic, with boring lunches being planned and people just following the internet news cycle. No need for mafia style 1920 get togethers.

Choose your target
The FT of late likes to talk about "flaws' in the eurozone, mostly pointing out that people are different and that couldn't work. The reality is that it is BY DESIGN, that is the whole point, to bring together people that were slaughtering each other 70 years ago so, yeah, it is bound to be bumpy. The major flaw, imho, is not the disparate composition, but rather the fact that the bond mechanisms were open to snipers, essentially countries can fall one by one. First it was Greece (with reason probably) now it is italy. The problem in italy does not warrant the panic going on but no matter, the only thing that matters IS THE PANIC ITSELF. Hedge funds CAN create a panic by aligning.

Choose your weapon
The weapon of choice is the naked CDS, the hedge funds will run the cost of funding up by piling on on the buying side of the CDS. In parallel they are probably buying the cheap debt that less nimble actors are dumping and sit on it until the central banks intervene with liquidity. Central banks like the ECB cannot print money. This induces a negative spiral: higher cost of funding for sovereigns, means lower spending, means more recession, means less income, means higher cost of funding. The boat is capsizing with Italy above 7%. As soon as your cost of funding is more than your growth, you have a negative cash flow problem that can only get worse by this spiral.

Hold everyone hostage
The problem with Naked CDS is that it takes the nominal problem (the size of the debt) and multiplies by 10. So your little greek problem that was 300B is suddenly 3T. Size matters. A 3T transfer in cash WILL DESTABILIZE ANY MARKET. That was the reason for the Geithner trip to EU. That is the reason the ECB was a voluntary haircut. The size of the italian debt is supposedly 1.5T. So now we have a 10T hole? It makes NO SENSE. These are clearly weapons of mass destruction whose ONLY reason d'etre is speculation. BAN CDS.

QE is the pacifier
The reaction by the central banks in the US and UK: to print money. To print money in the face of deflation is not inflation as a result, just an inflationary contribution in the a deflationary background for a STILL deflationary (albeit less) result. Those who do not understand that point mistake stock and flow. We are talking about flows here. So QE is the way to stabilize the markets. The ECB cannot do that by constitution and the germans view this experience through their own historical Weimar lens. When free money is injected, the markets stabilize, the stocks rally etc etc.

Miss market throws a tantrum
So the italian government is toppled, the greeks are about to be thrown to the wolves of depression (how long it last depends on whether they stay or not in the euro, but default they will). Miss Market is having her way, everyone still deifies her and wants to appease her. She wants QE and QE she will get.

The Greek CDS tragedy

I am trying to steady my thoughts on the EU saga following the gyrations in stock prices that are still going on. BNP the leading frech bank, gains 30% to lose 15% the next day. This is all scary price action. And amid it all I am not sure I completely understand what is going on yet.

Follow the CDS thread
The one point that really pricked my ears was the bit about asking for a voluntary haircut from bondholders. Since bondholders most likely have CDS this seems quixotic. A bondholder will WANT the default so as to trigger the CDS. Then of course the question is 1/ who sold the CDS 2/ how much of it is naked.

The numbers get big
If there is 350B oustanding greek debt and if we assume a 10 to 1 naked to covered ratio that means that a 350B default event really means 3T of cash settlement. That is a lot of money to be paying out to speculators. Of course that is what the EFSF wants to avoid. So they are trying to nationalize that market, according to what I have read by becoming the sole purveyor of CDS at least in europe.

Naked/non-naked a false dichotomy
This point is rather theoretical but it dawned on me that to an extent CDS are non useful. If the price of protection is less than the yield of the bond, then by buying the bond and the CDS you have a risk free flow. This of course is non-sensical and the price of protection HAS to be the yield (no arbitrage). Therefore a CDS is really a swap, not of the default but of the bond itself. You are out of the equation, at this stage you might as well sell the bond. CDS serve no purpose from that analysis but as a speculative instrument. Arguments that they 'provide' pricing, liquidity and information seem flimsy compared to their risk. They have to be banned, in the naked form. I question their non-naked utility altogether.

The Paulson shadow
Everyone has read 'the greatest trade' where a 250b subprime event was turned into a T level event through CDS (naked) and everyone thought that greece was the next puppy to provide that bonanza. I bet that trade is CROWDED with speculator licking their chops at the prospect of a sovereign default from which they profit.

Where does the chain stop
I have had a hard time tracing that. Some accounts say that it is greek banks that have sold the protection which feels flimsy at best. How can the banking system rescue the country when it is going down. Some say it is the european banks which would explain why the EFSF is destroying the sovereign CDS market. Some say it ends in the united states, specifically at Bank of America amongst others. I find that hard to believe but who knows. Whomever is holding that T level bag (even if distributed) is in big trouble as a T Level event of liquidity will simply crater the markets. This is why the G20 is busy trying to avert "default" by calling for voluntary haircuts.

how does it all end
Very simply put I don't think anyone can sustain a 1-2T liquidity event in the system at the moment. The subprime 250 chain was enough to create the mother of all liquidity crunches that brought about 2008. This time the numbers are bigger and the multiplier on the base even bigger, because everyone wants to be Paulson (the hedge fund). So voiding the CDS market seems like the rational thing to do.

Chain reaction
if this is the case, then the nominal yield on debt will rise to account for real default ex CDS (which it should anyway). So there is only one way out, it is not fiscal integration, it is not default, it is debt monetization. Let the printing presses begin.

The Animoog; a new type of synth of iPad

A friend at Moog (thanks Amos) connected me with their latest creation, the Animoog. I have been playing with the RC for a bit over a week now. It is publicly available since yesterday. It is priced promo at 0.99 and will revert to 29.99 in a month. If you have an iPad go get this app, the sounds coming out of it are quite impressive.

Anyway, I will be dropping a first song built around the animoog very soon.

TL;DR: a very cool synth. New sounds and approach. A fantastic UI design, very functional and intuitive. It is a new instrument for me.

2D Wavetable synthesis
At the heart of the synth is an interesting synthesis concept, Moog calls is Anisotropic Synthesis Engine. A rather fancy name to describe what is a strack of wave tables or a 16x16 table. Each cell is a sound. Each row a wavetable. You select each row as a 'timbre'. Then you can move through that. If you move vertically, you move through those waves/timbres, if you move horizontally you move through the wavetable itself. This is rendered as a grid and occupies most of the screen. You can have 4 voices or dots going through the grid. The moving dots make for very pretty effects with colors and trails.

Orbits and Path
You can then easily program a path through that grid (and still use your fingers to modulate). You can sync to BPM for fraction of notes effect. If you have very different timbres then the change will be dramatic. If you have slowly evolving timbres then you will program evolution of your sound just through the path. At each dot of the path you can program an elipse (x-y parameters) with a frequency, further allowing you to automate variations through the grid.

poly-touch and after touch
The keyboard is rather nice. It is at the bottom of the screen and depending on where you put your finger on the key it will consider it pressure and aftertouch. This is very helpful as input for modulation and a very intuitive way to work with the surface.

Subtractive filter
The architecture is rather trivial as it features a simple subtractive module. (LP, HP, BP). It comes in a look that reminds one of the classic Moog hardware designs. It sounds nice but I have found the buttons hard to use in a 'live recording" way, my fingers being more occupied by modulation.

Modulation
This part of the arch is rather nice and impressive actually. You have 4 modulations you can set up. You can use any type of input (LFO, x position, y position, key, touch etc) and route that signal to pretty much any thing you want. I like the ones based on touch position on the keyboard as it gives you a very tactile way to generate rather rich sounds.

Effects
Rather straightforward reverb and chorus, nice sounding, no comment.

Midi connection and DAW
I have connected mine through the simple out mini-jack and that is good enough to record. I have bought the ioDock from Alesis but find it very disappointing for my needs. That will be collecting dust very soon. I have also gotten the camera IO adaptor for the iPad which exposes the coreMidi and (supposedly) get the IO sound out? I had to order a USB-USB cable so haven't tested it yet but that may be the right way to hook up my animoog.

No custom Wavetables
First thing I wanted to do was to load up my own wavetables, I just want to load up V-Synth GT timbres and use the Animoog as a fancy 2D wavetable sampler. I got in contact with Amos and the feedback was "not yet". The reason is that they want the instrument to sound nice. I can see that people would shoot themselves in the foot with the raw engine mixing timbres that really shouldn't be mixed together but I think this thing will find his rightful strides the moment people start building custom timbres and thus custom patches.

Overall: 9.5/10
All in all, what most impressed is the ASE engine and mostly the UI. The combination makes for a VERY rich sound and a VERY VERY intuitive use. I use a lot of evolving pads and textures in my music so this fits naturally in the way I work. For folks that love only drums this will not be helpful. It is a very melodious and evolving instrument and it is meant to be *played*. Moog drives the point home that even in this day and age of VSTs, an instrument is also the UI and the way you interact with it. While the ASE is a fantastic sounding idea (2D haptic movements) it is really the keyboard modulation and movement through grid that make it for me. A very intuitive way to get the sound to evolve. As a VST in a DAW, it just wouldn't be the same. It is the fact that it is an iPad that is interesting. I don't think they will release as VST due to piracy and they should stick to iPad since it almost guarantees them the sales. And at $30 I predict a grand slam. Moog's done it again.

Here is piece with the animoog. Root of Evil.

Root of Evil 3.2 by marc fleury

Leveraging the EFSF. TARP style

So I receive a call from my friends at Goldman, the BNP just jumped + 15% intra day. I ask what happened, something about a leverage of the EFSF that would effectively backstop the bank meltdown. Then during an exchange with a friend who just testified in front of the US senate on the EU banking situation, he sends this link, attached with this money shot.

This is an idea building on elements of the U.S. Term Asset-Backed Securities Loan Facility from 2008.

The EFSF and/or ESM could use its funds to cover potential losses the ECB could incur on its purchases of bonds of countries under market stress -- up to a certain amount.

In this way the ECB would have a guarantee it would not lose money on the bonds it buys to smooth out market turbulence under its existing program aimed to improve the transmission mechanism of monetary policy.

Depending on the assumed loss, the money at EFSF disposal could guarantee bond purchases many times its size. Like an insurer, it would only pay out in case of a default -- an unlikely scenario for Spain or Italy.

For example, the EFSF could say it would cover the first 20 percent of losses that the bank could suffer in case of a default -- multiplying the EFSF's firepower fivefold.

The problem with this solution is that it would require the ECB to continue buying euro zone government bonds, which the bank does not want to do, as it can be perceived as helping finance government fiscal policies.

I am not sure I buy what is written above, because, very frankly it doesn't make a lot of sense. The part "ECB buys bonds, and then covers the first 20% loses in the bank" is very fuzzy. If you want to leverage the pot it is fairly easy and let me see if I can put the words back in order following the US example.

You sell a sort of CDS, at a preferred rate to the market rate.
1/ The bank is effectively backstopped, it could say pay the first 20% default but a steeper fall would fall on EFSF. So the book value would be discounted to 80c on eur much better than the current 60-50% haircut. Banks like that, markets like that because it puts a floor on the loses.
2/ The collateral you have to post is the EFSF. If it has 440B in capital and you assume a 20% prob of default you are leveraging 5X or 2Trillion effective coverage. Yep, THAT will do it.
3/ it may violate maastricht as it will target banks, maybe not, I don't know and in any case I don't expect the individual governments to block this.
4/ probability is that NOTHING will default (outside of greece), the EFSF gets the premium. Now, a premium like this has a price, a steep price let's say 5% (no idea), on 0.5T that is 25B, that is a small cost for the full protection.
5/ It is an effective way to take all the risk on public purse. Of course the 'Armageddon' scenario that all debt blows up will completely blow up the EFSF since it only has 20% of the collateral. But by then QE should be a palatable option for everyone involved.
6/ This effectively STOPS the greek contagion by creating a federal insurance for the banks.

In a previous post I had argued that they needed QE to leverage the EFSF but what they have done is leverage it via CDS like constructs with the banking system. Absolutely brilliant shock and awe without resorting to QE (if inspired by the Geithner trip I suppose).

Of course Greece will still default and what they do is still up in the air, but as far as 'contagion' goes this is over.