Jeff Nielson: One of the most poorly kept secrets in Wall Street’s empire of fraud was that credit default swaps were never anything but pretend-insurance. The credit default swap market is a $60+ trillion paper Ponzi-scheme. The Wall Street crime syndicate claiming to “back” this insurance have nothing more than a few $billion of liquidity apiece. It is a fact of arithmetic that these fraud-factories never intended to honour these contracts.
Given the magnitude of this fraud and the audacity of the perpetrators, this alone is reason enough to abolish the Wall Street fraud-factories, abolish the credit default swaps market, and (indeed) to abolish the entire derivatives market – so that the banksters cannot perpetrate a similar crime again in the future. Indeed, credit default swaps were banned in th U.S. for many decades, based upon anti-gambling statutes.
However the CDS fraud itself only scratches the surface on the monstrous evil behind this scheme. As I have written about frequently in the past, the CDS fraud is a tool which the banksters have used to perpetrate an even greater crime: the sabotage and/or destruction of most of Europe’s debt markets.
Here is how this particular Wall Street scam operates. First of all the banksters pile on massive shorting with respect to the credit default swaps of a particular European debt-market. This drives the prices of credit default swaps sky-high. Meanwhile, the banksters’ accomplices in the mainstream media then all perform their best impersonation of Chicken Little: “the sky is falling on Greece’s economy.” At this point the third partner of this illegitimate tag-team chimes in: the ratings agencies. Based on nothing more than changes in credit default swap prices and media rhetoric, the ratings agencies downgrade the debt of these Euro markets – immediately driving interest rates higher.
This significantly raises the interest payments on these debtor economies, instantly making those economies less solvent. This is then followed by another shorting operation in the credit default swap market, more media rhetoric, and more bogus “downgrades”. And thus the perfect vicious-circle of crime is established. Through the fraudulent manipulation of Europe’s debt markets, Wall Street’s economic terrorists have been able to drive Greek interest rates as much as 50 times higher than U.S. interest rates, despite the fact that the U.S. economy is more fundamentally insolvent than that of Greece.
Now we have what should be the final nail in the coffin of what has been the largest single scam in the history of humanity: proof that this entire market is nothing but a gigantic fraud. Last week, the International Swaps and Derivatives Association issued a ruling that the 70+% write-downs on Greece’s entire national debt did not constitute a “default event”, and thus the fraud-factories who wrote up the insurance on that debt don’t have to honour their contracts.
Understand that it has been universally acknowledged by everyone: the Greek government, Greece’s creditors, the European Central Bank, and other European nations that without some “deal” that Greece would have engaged in an involuntary, 100% default within days. As an attempt to mitigate that cataclysmic event, Greece’s creditors engaged in a negotiated, voluntary default with Greece’s government, where creditors accepted an immediate 53% reduction on the principal owing to them. Including the interest accrued, these write-downs amounted to as much as 75% for some creditors, and an average write-down of approximately 70%.
Now here is the law. If there had been an involuntary 100% default on Greece’s debt, even the unscrupulous ISDA could not avoid paying out on this supposed “insurance”, at which point the entire $60+ trillion Ponzi-scheme would come crashing down, and along with it all of the Wall Street banks, and along with it the entire derivatives market (and the world would live happily ever after).
However, in the Western legal system, when losses occur in some financial transaction and one or more parties seek to rely upon the terms of the contract for some form of indemnification there exists a Duty to Mitigate. What this means is that (in this case) if one or more of Greece’s creditors wants to collect on the “insurance” they (thought they had) purchased on their Greek debt that they had a legal duty to attempt to minimize the magnitude of Greece’s default.
This is exactly what these creditors did, and once they had done so they were entitled to rely upon the insurance they had purchased. For the ISDA to issue an entirely perverse ruling that no “default” had occurred could only be based upon one of two conclusions on their part:
a) That no default event had occurred because the “haircut” was less than 100%.
b) That no default event had occurred because the default was voluntary.
With respect to (a), as I have just finished explaining above insured parties have a Duty to Mitigate and because of this, 100% losses of this nature are rarely if ever seen. Even apart from mitigating damages, rational/intelligent parties will always seek to negotiate some compromise rather than allow a market to experience a messy collapse which benefits no one. For the ISDA to adopt this interpretation essentially means there could never be any pay-outs on this insurance, ever.
With respect to (b), for precisely the same reasons all “default events” will ultimately end up as voluntary, negotiated arrangements. So (again, as above) if the ISDA were to adopt this interpretation it would essentially mean that there would never/could never be any pay-outs on this insurance. A proverbial “heads-I-win, tails-you-lose” form of insurance. And totally fraudulent.
Understand that such a perverse interpretation of standard business practices could only be legally valid if it were explicitly codified in these contracts. We can assume that none of this has been explicitly detailed in these contracts, or there would have been no need for the ISDA to issue a “ruling” over an entirely straightforward, negotiated debt-default.
One can only gaze in wonder at the colossal naivety/stupidity of the parties purchasing this “insurance”. It ranks as one level of folly to enter Wall Street’s private, crooked casino (i.e. the derivatives market) to place a bet. However, it ranks many levels higher on this scale of idiocy to place a bet in this crooked casino, when the banksters running the casino simply tell you that they “will explain to you later if/when you win the bet.”
Allowing bets to be placed (more than $60 trillion in total), and then allowing the banksters taking the bets to define when they lose, after all the bets have been placed, is not even a subtle scam. It is a clumsy fraud perpetrated by a group of Oligarchs who yet again have demonstrated their complete contempt for an apparently antiquated doctrine known as the Rule of Law.
This brings us to the best part: the ISDA is run by the very same Wall Street fraud-factories holding the vast majority of these bets. The losers (i.e. the insurors of this debt) are claiming the exclusive/sacrosanct right to define when they have lost the bet – irrespective of how perverse/outrageous their “definitions” appear.
Understand how absurd this fraud has become. If Greece’s creditors had simply allowed Greece’s government to go under, triggering a 100% default – and payment on all of the fraudulent CDS contracts – this same ISDA would be claiming that they weren’t required to pay out on their insurance because of the refusal of the creditors to mitigate their losses. Heads I win. Tails you lose. None of the fraud-factories ever pays out on this make-believe insurance.
Sadly however, the economic terrorism which Wall Street has been perpetrating against Europe for over two years lives on, as does this entirely fraudulent market. With this massive fraud now open and totally exposed, we can add (with certainty) yet another group of “accomplices” in allegiance with the Wall Street banksters: the traitorous governments of our Western nations who are blatantly turning their backs while these banksters rape-and-pillage the economies of Europe.
Western governments can no longer pretend to represent enlightened, progressive “democracies”. The descent into Fascism in the West is nearly complete. Our governments are now nothing more than a network of crime syndicates, working wholly and exclusively against the best interests of their own people, and on behalf of a totally unprincipled cabal of Oligarchs.
This latest outrage in the Greek CDS market; this latest, blatant violation of the Rule of Law can be looked at as nothing less than a neon sign proclaiming the guilt of the bankers involved, the failure of any/all “regulators”, and the complicity of our own governments. A very dark day for democracy.
Jeff Nielson is from Canada and is a writer/editor for Bullion Bulls Canada www.bullionbullscanada.com. He has a personal background in law and economics. Bullion Bulls Canada provides general macro-economic and political commentary, since the precious metals markets are among the most complex (and misunderstood) in the world.
Bullion Bulls Canada also provides basic coverage of Canadian precious metals mining companies. Canada is the global leader in mining exploration, and Canadian-listed mining companies (on the Toronto Stock Exchange and Venture Exchange) are responsible for the majority of the world’s most-promising discoveries.