If you caught my video “Credit Default Swaps and the European Debt Crisis“, you know that those who lent to Greece had the opportunity to buy a unique form of insurance called a Credit Default Swap, or CDS… Insuring that if Greece didn’t make good, someone else (generally a large financial institution) would.. At least that’s how it was supposed to go down…

In addition to Greece’s creditors, there was a contingent of investors (we can assume hedge funds) who speculated big time by buying CDS contracts without ever having invested in Greek debt… So-called “naked CDS”…

Now the powers that be, the so-called Troika (the European Union, the European Central Bank and the International Monetary Fund, aka the bailouters) tried desperately to screw CDS holders out of their claims by pushing for a “voluntary” default… Supposedly, had all the debt-holders volunteered to take a 50+% haircut, the CDS contracts would not have triggered…

Within the latest Greek deal the “voluntary” isn’t happening, and it therefore looks as though (unless the committee that ultimately determines whether the trigger’s been pulled determines otherwise) CDS buyers will indeed get paid… And I say Hallelujah!!

Here’s the thing folks, bailouts are morally hazardous events… And, for the sake of our system going forward, those who make irresponsible investment decisions (in this instance the institutions that backed the debt issued by Greece, of all places!!) have got to suffer the losses… And, for crying out loud, a contract is a contract!!

During our own credit crisis, AIG, and those who bought its CDS, got away with financial murder: AIG issued $hundreds of billions of CDS (insuring mortgage-backed debt) without the capital to cover… In a real market it would have defaulted on the default swaps, leading itself to bankruptcy and the buyers of those contracts with the incentive to do some real due diligence next time around… Instead,
you and I bailed em out, 100 cents on the dollar; unbelievable!!

Excess money printing (think Greenspan in the ’00s) + lack of prudence (think real estate, second/third mortgages and MBS) = a bubble every time… Like I said, going forward we have to allow the system – the profit and LOSS system – to work…