The hedge funds think they have covered their bets by taking out
financial insurance on their bonds, which insurance would pay them the full value of the
bonds (not just the discounted price) if Greece defaults. These insurance policies are called credit
default swaps (CDSs), and are issued by big banks that profit greatly
from collecting all the insurance premiums.
Problem is, these banks don't have
enough capital on hand to pay off on all these insurance policies in the event
of a massive collapse. Therefore,
this would require another huge government bailout. So, if Greece doesn't give them a better deal
on their bonds, the hedge funds will welcome
a default -- in order to collect fully on their financial insurance policies. But that presents a major risk to the rest of
us. Why?
Because the entire world financial
system might collapse, including our own of course, if Greece defaults. Why such a collapse? Once again: Because there is a very good chance that the banks issuing all this
insurance have nowhere near enough in the way of real assets to pay off, on all
these CDS insurance policies they've issued.
In other words, it could be like AIG's default all over again, when that
giant insurance company couldn't pay off its
financial insurance policies. And if
one big bank fails to deliver, it could set off a chain reaction of financial defaults
around the globe.
Credit default swaps [investment insurance policies] are to
"hedging" credit exposure what nuclear weapons are to
"hedging" a nation's defense requirements. Yes, with a nuclear stockpile, you pay less
money than equipping a huge army, but if
you ever have to use the nukes, everything
blows up. Much the same with credit
default swaps: If lots
of players try to cash in on these CDS insurance policies, to collect from the
issuing banks that are way-far overextended, widespread catastrophe is the
likely result.
In the old days, bankers basically didn't bet against their
clients. If the borrower's enterprise
was successful, the banker was successful as the loan made money. If a banker thought the credit risk was bad, he
didn't hedge it by buying a credit default swap; he simply refused to
extend the loan (buy the bond) -- or else he demanded a lot of collateral
against which the loan was secured. Nowadays, however, no credit analysis is
done, and "hedging" is done through these toxic instruments (called CDSs)
which have no social value and which collectively create a hugely unstable
financial system.
To put it bluntly, and in the simplest possible terms, the sharks are using financial nuclear
blackmail to extract billions from the Greek people. And they can get away with it for one
reason: the EU and America are enormously fearful
that a Greek default would lead to a chain reaction of financial defaults that
would bring down (vaporize) the entire global financial system.
Hopefully, one day, Occupy Wall Street will grow into a movement
large enough to end this kind of financial terrorism. Until then, as Les Leopold points out, in his
breakthrough article , which I've just summarized here, there's little we can do to prevent
the Greek people from being forced to transfer much of their remaining wealth
to these predatory hedge funds.
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