At first blush, Greece’s prime minister George Papandreou statement that he is looking into litigation against banks that worsened the country’s financial woes sounds like pandering to his electorate. From Bloomberg:
Papandreou said the decision on whether to go after U.S. banks will be made after a Greek parliamentary investigation into the cause of the crisis.
“Greece will look into the past and see how things went,” Papandreou said. “There are similar investigations going on in other countries and in the United States. This is where I think, yes, the financial sector, I hear the words fraud and lack of transparency. So yes, yes, there is great responsibility here.”
Yves here. While this all sounds to those outside the EU like an effort to shift blame, the fact that Greece had a budget crisis does not mean that speculators weren’t trying to play the situation to maximum advantage. But any manipulation took place in the over-the-counter, and virtually unregulated credit default swaps market, so it would be interesting to see what legal theory Greece and other eurozone states could use to file a case. Regardless, the officialdom is looking into abuses:
In the days leading up to the May 10 announcement of a loan package worth almost $1 trillion to halt the spread of Greece’s fiscal woes, European Union regulators were examining whether speculators manipulated the prices of bonds and equities and contributed to the crisis.
The Committee of European Securities Regulators said on May 7 it was investigating “exceptional volatility” in the markets and would work with other regulators, including the U.S. Securities and Exchange Commission, as part of a coordinated clampdown.
Yves again. Even if some readers might think Greece and its peers have a weak case (the media was full of Respectable Economists discussing fundamental weaknesses in the eurozone structure; Greece has had riots and strikes in opposition to the austerity measures), winning in the court of public opinion is probably more important than collecting monetary damages. And if Greece can find a fact set and a legal theory that will survive summary judgment in the US, it can probably do just that. Similarly, EU banking regulators may also grill bank executives and demand records.
Never forget the example of Bankers Trust. In the mid 1990s, a series of corporate clients, including Procter & Gamble, sued the bank over losses on derivatives transactions. Many observers thought the cases were ridiculous. How could sophisticated big companies claim to have been duped by BT? They looked like sore losers trying to recoup on bad bets.
But as facts about the various lawsuits emerged, opinion started to turn against BT. The big shift occurred when P&G got access to recordings that revealed how cynical and openly predatory BT derivatives salesmen were. BT paid large settlements and suffered tremendous damage to its franchise. It limped along until an unrelated scandal led to its sale to Deutsche Bank.
While there is unlikely to be a smoking gun as compelling as the BT tapes, it isn’t hard to imagine that there is evidence at quite a few of the large international dealers of efforts to push the sovereign bond and currency markets during the eurozone upheaval.
As we mentioned late last week, the EU is in the process of putting rules in place to restrict predatory behavior by private equity and hedge funds. Tellingly, the US is trying to characterize these efforts to impose rules as protectionism, when that is not their aim (by the same token, food and product safety rules may have protectionist side effects, since not all exporters may be able to meet those standards, that is typically not their main objective).
If Greece or the EU do find some dirt, that will support calls for much tougher rules, which it may impose on banks that operate within its borders, no doubt over protests by the US. In other words, this line of inquiry has the potential to become interesting.
If the EU does find evidence of
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I’ve been shorting the Euro for two months. Does that mean I’ll be getting a Greek summons? I can’t even read Greek!
EVIL SPECULATOR!!!!!111!!1one
(and congrats on the nice trade)
I think it will be tough for the investment banks to recover from the multiple jolts to their reputation.Governments on both side of the Atlantic are pursuing wrongdoings by the banks and funds.The list of cases is already quite long ranging from insider trading,wrong advice to trading against client interests.Industries take a very long time to recover the lost reputation from such cases
To my mind, there has clearly been a significantly predatory trajectory to attacks on the Euro bond market. That market was vulnerable, an area where the Wide Boys could make a killing because the Eurozone lacked the governance structure to make a ready response, and in fact had political divisions which trammeled a swift or effective response. Wonder where all those 61 profitable days came from? Some of this action surely figured int.
—But while the activity may well have been substantially malevolent, the EU put its upper parts in the stocks without a key to get out; they did it to themselves. Significant changes in how the EU and the Eurozone operate will be necessary to protect themselves from further pillaging, so perhaps the long-term result will be salutary. But one thing we have likely seen very nearly the end of, here, is the end of naivety regarding what it takes to manage a major currency in the present global environment. The Wide Boys found an exploit—attack the tiny cripple and short the rest—which those red faces in Europe now have to sew up.
What would a smoking gun with some legal teeth look like? I find it difficult to see that this could go anywhere as a legal matter. The political potential, on the other hand, is huge.
More interesting is in my view the demands that the IMF and the EU will impose on Greece with regard to corruption and tax evasion. Non-Greek tax collectors on Greek soil?
I suppose it would be pandering to the electorate in the sense that his overall plan is to economically liquidate that same electorate in order to bail out the big Euro banks without having to tax the Greek rich, so in light of that the proposal to sue American speculators is just misdirective political theater. In the real thrust of policy Papandreou is a bankster flunkey.
But as for the substance of it, the speculators themselves are of course terrorists by any definition which includes economic attacks, and should be dealt with as such.
Do the rigged “laws” say otherwise? Probably – it’s characteristic of the kleptocracy, including its “war on terror” manifestation, that there is no rule of law, but just a humpty-dumpty might makes right regime. By definition it’s not terrorism when the rich do it.
I like the Orwellianism of how “protection” has become a bad word. It’s true that what are called protectionist measures are often actually aggressive, as in the way America and Europe act to “protect” their agricultural rackets at the same time that they seek to empower the predation and aggression of these rackets all over the Global South.
But protection can also still mean what it’s supposed to mean in the English language – prudence, vigilance, self-defense, and in this case real, not Orwellian, anti-terrorism.
No question, anyone who refuses to buy Greek debt is a terrorist. Let’s shoot them all.
“But as for the substance of it, the speculators themselves are of course terrorists by any definition which includes economic attacks, and should be dealt with as such.”
This is a very good observation but I think “financial terrorists” are more akin to international mafiosi structures. I think Europeans are starting to realize this. And you probably need intelligence services in cooperation with FBI to penetrate the planning level of those “wolfs packs”.
And that’s why RICO should be used to stop this activity.
If my reading of blog comments, poll data, and election and political articles offer any barometer, you are on to something.
A cursory reading of the NYT articles on Bernie Madoff are all one needs to see the global implications of this disaster. This appears to be ‘war’ by derivatives trades, in which nation states and their legal structures under under pressure from rogue elements for whom government is a nice, fat hog that will feed them indefinitely via backdoor handouts.
It’s long overdue for governments to wake up to this fact and act decisively.
Although I expect to see numerous, flash astroturf operations as political pressures build to use RICO-like legal structures to take down these rogues.
Keeping in mind, of course, that the “activity” in question is the failure to continue buying Greek debt at 100 basis points over Bunds. Or 150 basis points? It’s kind of hard to know how high a spread constitutes a criminal act. Perhaps we should just throw all of the French pension managers in jail for not buying and let God sort them out.
john:
How about we throw the fat-boy Blankfein into prison for 60 days? Think he could tolerate processed food and a lock down for defrauding the US population and Greece? I think he would get leaner on Mrs Pauls fish sticks and chicken by products. Maybe he would confess to what he really intended to happen after 30 days in prison. He doesn’t look like he can take the heat . . .
another Haskell from the east coast
Dear Yves, I dont believe that Greece has a real case to win in the court od law. And seems to me this suits are a vendetta agaisnt american institutios because others investment banks were playing that game with Greece, not only americans banks.
But I congratulate you for this statement:
“As we mentioned late last week, the EU is in the process of putting rules in place to restrict predatory behavior by private equity and hedge funds. Tellingly, the US is trying to characterize these efforts to impose rules as protectionism, when that is not their aim (by the same token, food and product safety rules may have protectionist side effects, since not all exporters may be able to meet those standards, that is typically not their main objective).”
I like yours opinions when are fair.
Let me tell you what I think. In fact, some atacks to the euro and his debt are deliberated because Europe wants to stop OTC derivatives operations that are used to manipiulate and rig the markets and stole the investors. These atacks from some american and british banks and their hedgefunds arms are concerted with the Admnistration Obama that covers this bullshit proteccionism excuse.
What looks to me is that a lot of american opinion makers are blind, to be polite, with this kind of war, between american oligarchs and his Administration Obama against Europeans, because we want to stop this nasty behaviour in the OTCs market. And inst only the war agaisnt our wish to regulate OTCS but also the hedgefund industry, when some masters think that are pure capitalists without law and order.
What is sad is seeing american people to be lied by their leaders, like Geithner, who is the lawer of these “pure capitalists” and “gods”, as tehey like to show to others.
What is sad is seeing how easy is for some to manipulate and rig the markets and profiting with their behaviour and nobody has guts to fight this predatory behaviour. What is sad is seeing wild west capitalism in the core political system, in the Admnistration Obama and in the both Houses, Congress and Senate.
Whats is sad is seeing absolutely impossible profits in normal free markets, as they make money everyday without losses. Everybody who understands markest and lives in the sector knows that is impossible unless you rig, manipulate and cheat others markets participants.
But as I said before, I salute you for your understanding what is the purpose of europeans when we want to regulate OTCs and derivatives markets. Thanks and cheers to you.
Let’s see.
Greece runs up enormous public deficits because of absurd promises to it’s population for all sorts of ‘mandated’ benefits, won’t enforce tax collection on that same population, has been in default on it’s obligations for some 100 years out of the last 200, has no way to make it’s bond payments with the world economy tanking……..
and it’s the evil speculators fault.
Good grief.
One of the few intersections between Economics and the real world is the notion that money will flow away from bad investments. That is, investors will someday stop loaning money to people who never pay it back. No risk premium can be high enough to keep intelligent investors from throwing money down a black hole.
If Greece is really spends to its aspirations, not its resources (the advertising industry’s ideal American consumer, by the way) then investors are enabling this behavior by continuing to buy the bonds. Whining because high-risk investments don’t pan out is just angling for a bailout or blameshifting. Or, if there’s a political agenda instead of an entirely economic agenda, then the power of the debt holders is going to steal the power of the governed.
The actual news story reminds one, unfortunately, of Obama’s favorite deception tactic. With great fanfare and serious mein, he announces an intention, a feeling, or a wish. And then does absolutely nothing to bring it about. The MSM repeats the statement without criticism, and the fog of unreality hides the inevitable that’s coming down the pike. Greece may be in for a bumpy ride.
This is really good scraping by. The advertising effect of consuming to apirations not only has indebted mac mansion owners in its thrall but local and state governments as well. Yes, tying in social norms and behaviors to policy/economics is not sufficiently done and leads to misunderstandings–politics/policy somehow silloed from the way consumers behave is a disservice of the media and our hyper specialized outlook
According to the Bloomberg article,“By first buying the CDS and then trying to affect market sentiment by going short on the underlying bond, investors can make large profits,” he said.”
This has been a common practice and has destroyed companies and now perhaps countries. Insurance of any form should only be purchased by individuals that have an insurable interest and all insurance purchases of any kind should be highly regulated.
Naked CDS purchases should be criminalized and banned. Additionally, if the owner of the insurance, CDS, bets against his/her insurable interest then it should be a felony. Buying insurance for your home and then burning it down is a felony. Simple, problem solved.
I am tired of paying for predatory speculation. If it continues unabated, we will all suffer.
Couldn’t say it better.
Maybe Europe does not have the CFMA of 2000 which explicitly made CDS exempt from insurance laws requiring an insurable interest
If so, naked CDS might be problem in Europe that it is not here
As we learned from AIG, it takes a certain amount of capital (or at least the reputation for possessing a certain amount of capital) or access to the capital markets to provide the insurance side of the CDS. And to the point of ella@8:58, it also takes a certain amount of capital to short an asset. So the ZIRP and the presumed Federal guarantee of the liabilities of the major players is a real factor here. And that there are relatively few players in this market, means that collusion is always a real possibility. I doubt though that this is primarily an American / British deal. My guess is the major German and French banks and even Spanish banks are big players too. They all have access to American accounting units (can we really call FRNs capital anymore) and to judge by the FEDs arrangement of currency swaps have availed themselves of that access. But if Euroland is convinced that these predatory practices are really largely Anglo American then the simplest solution is to let one of the PIIGS assume room temperature and see what falls out. Britian probably cannot afford another bailout of its banks and if American banks really believe that the Federal government is going to rescue them again they are deluded. If that were done it will be the end of the Federal government as we know it and possibly the end of the nation.
Alcoholic Weighs Legal Action Against Distillery for Role in Drunken Rampage
Burglar Weighs Legal Action Against Alarm System for Role in Apprehension by Police
Cat Weighs Legal Action Against Mouse for Role in Mousetrap Mishap
Husband Weighs Legal Action Against Porn Publisher for Role in Marital Discord
Coke Addict Weighs Legal Action Against Mirror Maker for Role in Nostril Destruction
Mankind Weighs Legal Action Against Devil for Burns Suffered in Hell
ho ho ho ecce homo
Wonder when the Southern Europeans will figure out that abstinence is the best prevention. But that’s so Lutheran. Boowa ahaha hahahah ahahahaha hahahahahahahah!
The example of Bankers Trust vs Procter & Gamble et al wasn’t that BT fooling P&G and so on to invest in junk, BT acting as adviser for P&G? If so there would be a case, professional ethics do I assume request that clients should be able to trust those they pay for advice.
If Greece did consult and engaged financial institutions to advice them and they betrayed their client there should be a case. But to open legal action on the grounds that ordinary buying and selling did move the price on Greek bonds seems farfetched. But there might of course be some illegal way to do it. After all there is areal risk in Greece defaulting.
But Greece, EU and many other nations around the world have adopted the neo-liberal mistrust of democracy and legislated by free will that democratic nations is not allowed to exchange bonds for cash with the Central Bank they own. The procedure shall be that governments borrow on the market and it has been clearly stated that is to “discipline” the democratic governments.
So why all this whine and whimper when the markets do what is expected of them, didn’t they discipline Greece? The eurocrats should celebrate it turned out just as they have planed or didn’t it. One can get confused for less.
That the financial markets that destroy the real economy should be banned just that anything else that damage and people and society I won’t protest. But that is not the way it has been, rather the politicians have praised the “disciplinary” effects of the market.
BT disputed it was acting as an advisor or that there was any fiduciary duty. Its derivatives salesmen were dealing with the BT Treasury department, a presumed sophisticated buyer not in need of advice.
It is more like factory with flammable substances keeps getting fire alarms and the sprinklers go off.
Insurance company complains.
The man from GS installs silent fire alarms and puts a master valve on the sprinkler system, and puts a few fire extinguishers around. For a decade the fires continue, but are put out by the extinguishers.
Then the whole factory goes up in one big woosh of flame.
Insurance company says they won’t pay, but factory owner counters that GS said it was safe and Insurance company knew about and approved of the changes since they didn’t have to pay out.
If there wasn’t this obfuscation, Greece would have to have paid a higher rate or cut benefits over the last 10 years – it would have been gradual rather than catastrophic.
This is the same thing as liars loans, and banks apparently can sometimes push back loans that were fraudulently made (e.g. if they said they checked income but didn’t really do it).
Greece is sovereign so can make the rules (ask UBS about maintaining secrecy from foreign tax authorities). They can probably nullify contracts or retroactively apply an expansive definition of fraud (contracts aren’t always valid as written, and if you accept an invalid IOU you would be out the money).
This greek tradgedy will have several acts. Start making popcorn.
Remember the Long John’s explanation!
http://www.youtube.com/watch?v=z-oIMJMGd1Q
Great Piece.
Narrative fallacy and projections…..
Fascinating how people project the U.S. system onto other nations–heck most americans have a limited grasp of the U.S. system. Lot of piecing together of some facts gleaned from the press and basic investment instrument defintions…
Greeks may or may not have a case but hard for U.S. folks to grasp that European legal system is principle based not rule based. Also, Parliamentary systems deliver very different results and approaches than the Presidential strong man and appointed executive branch (Ministers stand for elections, Secretarys wholly follow president etc…).
It will be interesting but nobody can predict what will happen in the best of cases. Projecting half understandings of the U.S. to other nations will yield nada!
Love your work Ives. Some great posts and some probably teenagers in a basement in Omaha…