SURVIVING STUPIDITY

I have no merit for this title; I took it from the great book, The Darwin Awards II by Wendy Northcutt. Taken from the description on the back cover: “The Darwin Awards II brings together a fresh collection of the hapless, the heedless, and the just plain foolhardly among us.” I felt like giving a couple of those awards to our masters of the universe because they really outdone themselves in the last week. I know, they are still with us and thus can pollute the gene pool so they don’t totally qualify. Let’s see:

• Last week, the EC comes up with a bailout plan for Greece; 50% haircut to private creditors and a rescue fund (EFSF) that is “leveraged” from 440B Euros to 1 trillion Euros
• MF Global goes bust having bet on sovereign debt with easy money from the Fed (MF Global is one of the primary dealers authorized to deal directly with the FBNY)
• Wait – that European bailout may no longer be – Greek PM Pappandreaou now wants a referendum on the bailout – the Eurocrats can’t believe it! We want to help you (when I hear that – I usually run in the other directions and that is maybe what the Greeks want to do!) and you want to give “your opinion”! How dare you!

First, we won’t waste too much time on the bailout plan since it is already in jeopardy (!) but let’s just say that “voluntary” haircuts do not exist in the real world but Eurocrats do not live in the real world. The ISDA (International Swaps and Derivatives Association where we find JP Morgan, GS, Barclays, etc.) do not live in the real world either as they accepted the cuts as “voluntary”. Right. Somebody talked to somebody before the bailout announcement – that is for sure. You are to believe that banks will take a 50% haircut and that all will be well? They also forgot to mention that 50% haircuts to private creditors mean Greek pension funds (hold Greek bonds) are cut by 50% too. Many also think that 50% is not enough to bring Greece to viability. Even IMF thinks 60% is more like it. The rescue fund, the EFSF is supposed to be “leveraged” to 1 trillion Euros. It is interesting to see politicians using the same Wall Street methods so vilified during the 2008 crisis. What does leverage means? You don’t have the money. This is why Europeans are begging China to chip in and the IMF and the G20 and why not people on Mars? Why? Because the ECB do not want (at the moment) to print the astonishing load of paper money needed to “fix” this mess. Other people’s money would be best. The Germans are still keeping an eye on that ECB printing press. For how long? That is the question.

Meanwhile, in Greece, PM Pappandreou is maybe trying to pull a fast one on the EU, like his father did (PM of Greece a couple of decades ago) when joining the EC: he would hold his vote to have Portugal and Spain join in so the Eurocrats had to pay him a couple of billions to buy his vote. Greece has a lot to lose but it seems that either way they lose: they will have to cut under the imposed bailouts by the EU or they will have to cut once they are shut out of the market if they default. The difference with the 2nd solution is 1) they decided for themselves, it does not change the facts but maybe the mood; 2) They free themselves from debt slavery to the banksters. But both situations will not be a walk in the park. Eurocrats never liked democracy much as each time they had votes (remember Ireland and France) and people said no, they just went ahead anyway. So it will be interesting what they will do with this one (if there is one because maybe Pappandreou will get what he wants…).

Join at the hip with the sovereign debt situation in Europe just described is 200 years old MF Global going bust this week. MF Global headed by Jon Corzine, formerly of Goldman Sachs and former governor of New Jersey (just that should tell you something!), bet the house on European bonds thinking that countries would be easily bailed out. This is what happens when you can play casino with easy money from the Fed. By the way, MF Global is a primary dealer dealing directly with the Federal Bank of New York and the latter did not see anything going on? The FBNY just announced the day before the bankruptcy that they had stopped dealing with MF Global. It reminds me of LTCM when they blew up in the 1990s betting the house on the Russian ruble thinking the Russians would pay. Greenspan saved LTCM though – but I doubt Corzine will have trouble finding another job – US Secretary of the Treasury would be ideal and is maybe next on his list. MF Global, in a classic move, used client’s money (which is supposed to be in a separate account) in the last week to bet again thinking they would cover their loss. If this is not the typical casino player mentality, I don’t know what is. The other interesting thing is that while many think that there is no real risk of contagion in the US/Canada of exposure to European debt, this is nothing to inspire confidence. The indirect exposure is even more worrying as ones of the biggest investors in MF Global were Fidelity Investments and Guardian Life Insurance – not really your hard core risky hedge fund. “Ordinary” people are more exposed than they think because of all those cross-investments in other funds that are exposed.

Easy money really makes people stupid. And the Darwin Award goes to…