Comments on Maison Fleury: Leveraging the EFSF. TARP style

heh, a month later, the proposal from BNP is ess...

2011-10-20T06:11:38.952-07:00

heh,

a month later, the proposal from BNP is essentially what is written above http://www.ft.com/intl/cms/s/0/47fb8f2e-faef-11e0-bebe-00144feab49a.html#axzz1bKCor0Qc

so excited... why the anonymity. Yeah, I don'...

2011-10-17T12:34:41.921-07:00

so excited... why the anonymity.

Yeah, I don't think the banks are all clean in the crisis but clearly a 'bubble' in investment in housing took ALL of us. So huh... look around before you get all high and mighty.

The bank 'bailout' I still have to see a final tally on "cost". One thing is liquidity swaps (which are included in 'bailout' but never really cost anything). The govt debt was stimulus. That debt will need to be repaid. Or monetized (ie. printing presses).

Where does all of this money come from? Attaching...

2011-10-17T10:56:44.791-07:00

Where does all of this money come from? Attaching banking backstops to "the public purse"? When did that stop being the kind of sleazy thing that ought to have bankers put in the electric chair, set to 'slow cook'?

Government backing of loans to buy foreign government's savings bonds? With money that comes from where? And who pays the interest? Where does the other country's money to pay the interest on the loans come from? Interest your government is going to pay on the bonds other governments buy? And where does that money come from? Bernanke's scrotum?

Or is it better when the US Banks that were bailed out to give small businesses loans, and then don't and instead use the money to buy US Savings Bonds and Treasury Certificates that the US Treasury is supposed to pay interest on?

The definition of 'leverage' in the second...

2011-10-04T07:31:06.813-07:00

The definition of 'leverage' in the second paragraph is weird but maybe 'factual'. If so there is no 'leverage' as in monetary creation just straight funds from ECB. (which is possible).

The paragraphs about contagion I think miss the point. Particularly, the goal is to backstop the panic in the markets. To cut the negative spiral of "negative expectation -> high yield on debt -> more probability of default of government->bank negative expectation" that is killing the banks at the moment. If you look at the numbers what is priced is usually COMPLETE MELTDOWN, which is of derived of panic histeria. The greek problem is sub 100B. Of course the "worst case" he refers to is the total of europe melting down, but as much as speculators like to speculate, EU sovereign debt is very different from US subprime. Trade this insight at your own risk (I was reading about China CDS spiking this morning which I find hilarious).

If you sell a CDS to the banks you effectively backstop the book value at 80c/eur. That in itself should put an end to the pressure. Remember that what is going on here is speculation pushing trend.

If trend reverses, watch dynamic stabilize and the speculator move on. The second point is that a CDS does not require anyone but the EFSF. The third operational difference is that while the 2T is NOMINAL (only requiring hard cash of 500B) it would be realized as losses occurred on a as needed basis. So QE, if needed, is delayed which is again, more simple than printing money now or selling the CDO today. Finally, it does not force the banks to unload the assets, just puts an insurance floor on it, whereas the CDO would require a market pricing of that debt which is dangerous since the market is so volatile.

On this part I would not only bet that it will work but that it can in fact turn a profit for the ESFS in terms of premium. Which is better than giving 500B outright to capitalize the banks.

Of course the above is right about the core of the issue. That the markets are predatory and have smelled the bacon in the form of the 500B cash and want it injected in the banks as a free gift for people with position on said banks. There is nothing to see here but the rent. The game of chicken means to short these institutions (banks) until the govt gives in. Again a CDS WILL NOT GIVE IN, because the collateral is still with the ESFS instead of being a free gift to the banking system (what happened in the US)

got this from a friend, but dont get it: "Th...

2011-10-04T06:12:40.079-07:00

got this from a friend, but dont get it:

"The EFSF, after the most recent expansion is 440 billion euros.
That's the amount pledged by the eurozone member countries, to be
spent on buying the debt of at least greece, and possibly others. It
could be transferred directly as cash, or indirectly as a kind of
insurance against loss.

The leveraging means the eurozone members pledge the same amount, but
added to that are funds borrowed from other entities, possibly the
ECB, and then the losses aren't distributed evenly. The EFSF is on the
hook for the first 20% or so, meaning the eurozone countries' 440B is
suddenly much more at risk. That's not always obvious from the
reporting, and might not be grasped by the politicians who vote for
it.

And what's worse, is that the 20% cushion won't be enough, so the ECB
will still end up with losses, which would require it to raise capital
from eurozone members anyway. We'll see how politically acceptible
that is. The author of the blog suggests that it'll be easy enough to
print money. I think it's likely to push some goverments over the
edge.

The guy's example is similar, but slightly more favourable to the EFSF
and ECB, since they take the 2nd and 3rd losses respectively, and
someone else is on the hook for the first - possibly the institution
being bailed out. It changes the sums, but not the worst case
scenario.

He reckons it'll stop contagion dead. I reckon the 2 trillion figure
is meaningless. You have to concentrate on the 440 billion figure, and
the size of the problem. It won't work, and the 440 figure is the one
the markets will play chicken with.

The current feeling seems to be that the ECB isn't willing to play the
game anyway, and that the funds could come from the private sector.
It's certainly not going to be any cheaper than coopting the ECB."