Italian Crisis: Monti Moves Swiftly to Put Digit in Derivatives Dyke

By John Ward

…but the bankers will simply never learn.

Seven weeks ago, Morgan Stanley casually but smugly issued a release saying the banking firm had ‘divested itself of $3.4bn of Italian debt’. This was an incredibly modest and self-effacing thing for MS to do: what actually happened was that Goldman Sachs implant Prime Minister Mario Monti personally negotiated with the Wall Street outfit for the chance pay them off upfront out of the public purse.

This event will pass most observers in the MSM by, but what it represents is the acrid taste of things to come….and why all the estimates of so-called sovereign ‘debt’ are out by a factor approaching 100. (That’s 100 times, not 100%).

This is the beginning of derivative collateral sluicing its way back into the real money system. Mario Monti paid Morgan Stanley $3.4 bn because he did a little homework on the insurance arrangements, offsets and hedges associated with the debt. They came to a sum, I’m told, in the region of $0.2 trillion – and in some cases the number would be worse.

Now Mario is a sharp guy; but are Baroin, Rajoy, van Rompuy and Barroso? Does the Pope sh*t in the woods?

Italy, with its humungous debt of $2.5 trillion, has lost more than $31 billion on its derivatives alone so far this year, according to data compiled by Bloomberg. Even if the collateralisation of the country’s total national debt was only to bite us all in the bum at a factor of ten, that means, without massive debt forgiveness or an economic miracle, the knock-on effect on world wealth – real wealth – would be a $25 trillion loss….more than the entire cost of the 2008 debacle from just one European State.

Last October, best-selling money author Christopher Whalen defined the problem with elegant simplicity:

‘Valuation is not the most important problem in finance; valuation is not the most interesting problem in finance; valuation is the only problem for finance. Once you know value, everything happens. Cash moves for value. If you do not recognize the difference, the fundamental difference between price and value, then you are doomed.’

What the eurocrats and the Fed are feeding us is the alleged ‘price’ of bailing out banks and sovereigns. The reality is that there is not enough real money in the world to pay off the derivative value of that kind of money….without printing it. What we saw the start of yesterday in Greece was printing money, but that was just to solve a problem Athens has with even the price of the debt. Dealing with the ultimate cost of the debt is beyond the real money system without knowingly creating gigainflation.

Why did the banking firms and big banks create this gigantic twilight etherea of paper wealth that now creeps towards us like Noforatu’s shadow? There are two theories: one, dumb greed; and two, a calculated choice by indebted sovereigns (especially the US) to create the sort of Weimar inflation on steroids that would inflate away their enormous debt.

I think the answer is a combo of both: the banks opened Pandora’s Box without giving a moment’s thought to the consequences, and then the Fed realised what was happening….and probably decided to use it. This may have started with Greenspan in 2004, I don’t know. But according to one Labour Shadow Cabinet member, UK Chancellor Gordon Brown had certainly grasped what was going on by 2006.

“He devoted much of a Cabinet session to briefing us on it,” the former Labour Minister (and one of the few for whom I have respect) told me eighteen months ago, “And we thought he was trying to scare us into better budgetary control. On balance now, I’d say he was being genuine.”

In theory, this would ruin every citizen on the planet below $US billionaire level. But the banking and sovereign systems would survive….according to those who think that way about stuff. As The Slog has been saying since its inception, the other approach (far more adult and less dangerous in a nuclear world) is global debt forgiveness. But Greece, we are told by Berlin, was unique: there’ll be no more of that nonsense, thank you very much.

What Goldman employees never ever think about is the geopolitical response of people having that yardbrush rammed up their economic backside. They never think about the point at which citizens snap, and storm Bastilles. They never think about the social effects of unemployment and ruination. These are the Undead who invent oxymorons like ‘jobless recovery’. The people who lost the plot years ago, and see the human race entirely in the context of its ability to consume goods and watch circuses. For them, the idea that the People come first long ago became an alien concept clung to by ‘saps’.

But at the level below them, the quants and packaging folks continue to sell whisky to the Indians, sorry, Native Americans. I’ve met this lot frequently, because by accident I drifted into financial marketing communications during the 1977-1999 period. They are more muddled and mentally adrift than any other group I’ve come across with the exception of Islamists. You tell them what the result of doing something will be. They ignore you. It happens. You remind them. They say, “No, you don’t understand….we made a small assumption in Chart 57, but we’ve ironed that out now, so everything will be fine next time”. I used to watch their backs leaving meetings, to see if I could detect the wiring beneath those dandy Brooks Brothers suits.

They will never change – and they’re still at it, even in the current environment. Yesterday, the Wall Street Journal said it had noted ‘a growing appetite for risk prompting some Wall Street banks and investment firms to show interest in buying the most complex and troubled assets tied to the bailout of American International Group Inc (AIG).’

This is precisely the same radioactive sub-prime dross that lay behind 2008. The plunging values of the securities – called collateralised debt obligations, or CDOs – caused AIG’s near collapse, and a gigantic $200 billion Federal Government rescue job. They’re going to hit us before too long anyway….but Wall Street goons are pressing the accelerator: they just can’t imagine what could possibly go wrong go wrong go wrong goaarooooovveerrrsplat.

As Oscar Wilde said of such people, “They know the price of everything and the value of nothing.” In this case, it’s literally true. He also said one other thing apposite to this era: “The only thing I can’t resist is temptation”. It’s the same with bankers.

Related: Bank of Greece engaged in unauthorised money-printing

In the FT this morning (£paywalled) there is a crackerjack article by Gillian Tett, one of the few reporters on finance who understands people rather than just balance sheets. It is a must-read.

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