Planning with Jerry

I may have told you previously about a friend I had long ago named Jerry who was serious about his partying.  On occasion he would arrange to have me meet him at a bar partly for camaraderie and no doubt also because he expected someone besides himself would need to drive.  He was always the man with a plan.  He would tell me, “If I get there first, I’ll draw an X with chalk on the sidewalk outside the bar.  If you get there first, rub it out.”

European leaders are doing everything they can not to trigger the default clauses in those pesky Credit Default Swap (CDS) contracts connected with sovereign debt that seem ubiquitous.  They are, instead, trying to persuade banks and other bondholders to accept a 50% loss on their Greek debt holdings by swapping into new bonds at a substantial discount (see the NYT Nov 19 article Scare Tactics in Greece for an update).  Some within the European Union (EU) and the European Central Bank (ECB) are desperately trying to call this a voluntary exchange, thereby apparently allowing the official arbiter of such matters, the International Swaps & Derivatives Association (ISDA), to avoid calling the result a default. You see, calling such a default an actual default would trigger the obligatory payments required by the insurance CDS contracts represent.  Issued primarily by the largest banks both here and in Europe, this could potentially translate to enormous losses at these institutions.

This may not sound all that above board to you.  It certainly doesn’t to us here at Atlas, especially when you consider that the ISDA ruling calling for these actions to be deemed voluntary, now apparently baked into the cake by an even earlier EU compromise, favors the big banks that sold these CDSs and also conveniently sit on the ISDA board.  This may make about as much sense as my buddy Jerry did.  Smaller banks and other bondholders who don’t have such influence might challenge the ruling in court.  The consequences of such action may argue to fairness but the results are undeterminable.  Even they may fear the unknown in this instance.  Here at Atlas, we are holding our breath as these issues work themselves out, aware that some of the biggest banks there are also some of the biggest players here.  In this interwoven pastiche called global banking, European banking problems could detrimentally influence a wide range of financial matters here, including both mortgage and housing markets.