Sunday, January 08, 2012

Hair[cuts] of the Dog[s]

Part 2

4.   Two weeks before the summit, the European Union announced that it was setting a deadline for the development of, and agreement upon, a comprehensive program for saving its currency and itself from the insolvency of the sovereign and banking debts of its member nations. 
Publicizing the deadline date did not exactly instill confidence in the financial markets.  Actually, the deadline announcement elicited nothing more than a shrug of the shoulders and an uncomfortable feeling of déjà-vu among the bondholders, and those traders who had become holders against their will since the markets had frozen in the chill wind blowing from the south. 
“Haven’t we already done that?  Didn’t we say we had already done that?  And twice?  Didn’t we do that last year, in the summer of 2010?  Didn’t we that this summer, in July?”
What might be déjà-vu for the rest of us is, and is always a repetition compulsion for the bourgeoisie and their agents.  Yes, they had said that in June 2010.  Yes, they had said that again in July 2011.  Yes, they were saying it again in October.  And yes, they would be saying it again in December.
Déjà-vu and short-term memory loss are the two poles measuring the full range of the bourgeoisie’s neural processes, just as fear and greed measure the full range of their emotional processes.  This year’s model of déjà-vu and short-term memory loss was the vision of a more “robust” [robust meaning unrealistic] European Financial Stability Facility [EFSF]. 
The members of the EU had guaranteed this bailout fund to the tune of e440 billion, which was, of course, inadequate to the task.  The 440 had been reduced to 250 after the commitments to Greece in 2010, and then Ireland and then Portugal. The summiteers had to come up with a program to expand the protection afforded by the EFSF umbrella and they were ready to consider anything—anything that is except actually purchasing a bigger umbrella.  Germany, Finland, the Netherlands were convinced rain, even if it is acid, even black, is good for the spirit, especially the spirit of those watching others getting soaked.   France wanted a bigger umbrella but certainly couldn’t afford one.  Britain… well as Sarkozy said to Cameron “You’ve missed a fine opportunity to shut up.”
The EU summiteers proposed two methods for expanding the EFSF.  One proposed method was to turn the EFSF into an insurance fund—insuring the first 25% of losses on purchasers of sovereign debt, thus turning the EFSF into a “mono-line” insurer of the Ambac variety [Ambac filed for bankruptcy protection in November, 2010].
The second mechanism was that old favorite, the “public-private partnership” whereby EFSF funds would be used to guarantee the “value”— actually, the purchase price private institutions paid for sovereign debt.    
What do the bourgeoisie do when they are a bit short of their common currency, OPM, other peoples’ money? They borrow. They leverage. They structure. They take the debt-service payments of a debt instrument [mortgages, auto loans, credit card debts] and package those debt-service payments as an equity, a specialized, structured investment vehicle  The “as if” equity then becomes the basis, the collateral, for the sale of more and expanded debt instruments—of leverage. These collateralized debt obligations then can be combined again into super or synthetic CDOs ad infinitum and ad nauseum. 
All the compounded debt service payments depend upon the revenue stream attached to the original debt instruments.  When the reproduction of that revenue stream falters, we get….Bear Stearns, Northern Rock, Lehman Brothers, AIG,  RBS, Wachovia, Dexia; we get 2008.
Essentially, the EU proposed leveraging the EFSF, the fund that was supposed to manage an orderly deleveraging of non-performing EU sovereign debt.
The US Treasury, Federal Reserve, and FDIC attempted a PPIP in 2009 for the “legacy assets” [i.e. non-performing loans] that has so encumbered US banks.  In the US scheme, the bank had to offer the debt instruments for bid, accepting the highest bid.  The private bidder, of course, was certainly not going to bid the notional [face] value of the securities. The entire basis for the PPIP was the fact that there was no market for these legacy assets.  There was no effective process of valuation.    The FDIC would guarantee 85 percent of the bid amount, by guaranteeing the bonds the bidder would issue for that amount.   Of the remaining 15 percent, considered the “equity portion,” half would be funded by the US Treasury.   A private purchaser was responsible for the other half.   .
What recourse did the FDIC have if the private purchaser failed to dispose of the legacy assets and make the payments on the FDIC guaranteed bonds?  None.  The legacy assets were the collateral for the loan issued to buy the legacy assets. So if the partnership failed, the FDIC would seize the unmarketable, non-performing legacy assets. Now that’s what I call leverage.  And what the bourgeoisie call a public-private investment partnership.
The US Treasury was optimistic about the prospects for its PPIP program, anticipating the movement of hundreds of billions of dollars of non-performing loans into these partnerships for resale and liquidation.  However, when the program was closed, only $30 billion is such assets had moved into the program.
The US PPIP failed for essentially the reason it was deemed necessary—there was no market for the unmarketable securities.  The sellers, the banks, did not want to sell into the discounts, and thus realize the loss.  The buyers could not establish a price floor based, at the very least, on     the anticipated revenue, the interim payments, the debt service, until sale.
The US PPIP had the advantage, at least, of recognizing the need to discount the legacy loans, of the banks absorbing losses.  The US PPIP also had the advantage of having sufficient funding [at least in theory] from the getgo to actually sustain the program, and “cover” the private “partners.” 
The EU “plan” lacked both those elements, as the PPIP’s origin was in the fact that the EFSF was insufficiently funded.  At the same time, the EU summiteers were swearing that Greece was an exception, a “one-off,” a unique situation, and that all other EU sovereign debt would be redeemed by its issuer or an EU body at face value.  Hence no purchasing the debt at a deep discount and no basis for arbitrage.
Jens Weidmann of the Bundesbank took up the song:
 “[The proposal] embraces the same kind of financial instruments to boost effectiveness that many blame for causing the financial crisis in 2008.”
 “The envisaged leverage instruments are similar to those which were among the sources of the crisis because they temporarily masked the risk.”
When the sovereign debt markets opened the next day, they were speaking German.
“Risk” which not so long ago had been the badge of courage for our brave bondholders was now scorned.   “No risk, no reward” had been transformed into “risk, no reward.”  The “workout” mantra, a meaningless phrase mumbled repeatedly, numbing the mumbler to reality, of “no pain, no gain,” was replaced by the European Commission’s workout mantra, “no gain, all pain.” 
The entrepreneurs’ ode to joy had become fear and trembling, a sickness unto death.

5.   The bond markets regarded the summit statement as boilerplate, that standard language applying the usual conditions to the ordinary transactions, when the markets themselves were hardly in the usual condition, incapable of conducting ordinary transactions.  What the text on the boilerplate really said was, “days late, and dollars short.”  
 The European Central Bank held fast to its position, unsurprisingly the same position as its biggest shareholder, the Bundesbank, adamantly declaring that its resources could not and would not be utilized to bail out any EU government.  The ECB held fast to another position, also shared by its biggest shareholder, the Bundesbank, adamantly declaring that all of its resources would be mobilized to bail out the European Union banks holding the sovereign debt of the governments it would not bail out.
The private banks were permitted to post the sovereign debt as collateral for essentially unlimited loans.  The private banks then re-deposited the funds in overnight accounts with the ECB.  It was a public-private investment partnership that the EU governments could only dream of joining.

6.  Prior to the 2009 election that restored Papandreou’s socialists [PASOK] to power, the Amherst College, London School of Economics, Harvard University educated soon-to-be-Prime Minister, dismissed concerns over the country’s sovereign debt. ”The money’s there,“ said he.  “The markets can wait.”
Two years later the money that wasn’t there wasn’t waiting any longer.
During his period as prime minister, Papandreou had dedicated his energies to enforcing the austerity programs that the “troika” had mandated as restitution for the money that had never been there.  He had governed behind the ranks of helmeted police protecting the buildings, the offices, and the very parliament of his government from the resistance and fury of the governed. 
He had exercised his dismal wizardry, which by the way, had reduced the average income of a family in Greece by the equivalent of some seven thousand dollars, safely obscured by the curtain of tear gas that hung over Athens for days on end.
Yet on October 31, 2011, a bizarre hallucinatory fusion of the memories of his Halloween days spent in the US around Cambridge with the recognition that he was in fact Greek and it was, after all, Greece that he was governing, produced a sort of epiphany in Papandreou. 
All dressed up, goody-bag in hand, he rang the Eurozone’s doorbell and announced, “Trick-or-Treat, motherfuckers.  We’re going to have a referendum.” 
Actually he said, “The people are wise and capable of making the right decision for the benefit of our country.”  He received the following immediate responses:
“While Greece is threatening a vote, nobody will ever give Europe the resources for the enhanced [bailout fund],” Jan Poser [sic!], chief economist Bank Sarasin.
“[The vote] is a very unfortunate development…we have to do everything to prevent it,” Mark Rutte, prime minister the Netherlands.”
“Be in Cannes no later than 1100 hours.” Or else,” Angela and Nick.
At the same time, the EU suspended release of the next tranche in the loans scheduled for distribution to Greece.  
“No democracy for the birthplace of democracy.”
“The bondholders, united, will never be defeated.  The bondholders, united, will never be defeated.”
“We own 99%.  We own 99%. We own 99%.
These were the chants coming from Brussels, The Hague, Cannes, Frankfurt. 
On November 2, Papandreou, knowing to whom he owed allegiance, left Greece, preferring Cannes and its La Croisette to Athens and its parliament where his government was facing a debate on its “program” and a no-confidence vote.
Nick and Angela, having refined their good-cop, bad-cop routine picked a conference room with an unobstructed view of Ile Sainte-Marguerite, prison home of The Man in the Iron Mask, for their meeting with George.
While Angela toyed idly with the set of handcuffs she always carried, Nick put it to George, straight simple and no chaser.
“In or Out, George? Before you answer, look out there,” said Sarkozy gesturing to the pink, gray, and green island resting comfortably in the Mediterranean.  “Beautiful isn’t it?  Never guess from here that there is a completely restored and functioning prison, avec dungeon there, would you George?  Used it for Carlos the Jackal.  Plan to have him spend the rest of his life there as soon as the trial is completed.  He might like some company.  What do think George?  In or out?”
That was the good-cop.  The bad-cop just played with her handcuffs.
On November 4, Papandreou announced his withdrawal of the proposal for a referendum.
It was too little and too late.  EFSF cancelled its planned issue of euro 3 billion in 10 year debt instruments due to lack of interest, which means of course that the EFSF would have been required to pay too much interest, as the markets were discounting the face or notional value of the debt, thereby increasing the total return, and the yield to maturity of the EFSF bonds. 
“If the vehicle that is supposed to borrow on behalf of the countries that can’t borrow can’t borrow, then that may push the crisis into an even more dangerous phase,” Alan Wilde, Barings Asset Management.
See, it’s like this:  if a woodchuck won’t chuck wood, who would chuck the wood the woodchuck wouldn’t chuck? 
Papandreou returned to Athens, where upon being informed that he had triumphed against the no-confidence vote in Parliament, promptly resigned as prime minister. George made way for Lucas Papademos, the former governor of the Bank of Greece, recent vice-president of the European Central Bank, and, most importantly, the man with the Frankfurt connection.  He was a “Senior Fellow” at the Center for Financial Studies at the University of Frankfurt.  Maybe Germany wasn’t about to put its tanks in the streets of Athens, but it sure would send its bankers.

7.   The outgoing ECB president, Trichet, had been steadfast in his refusal to “rescue” any country by committing the resources of the bank to securing the trading, and refinancing, of sovereign debt instruments.  He had been that steadfast even as he utilized the bank’s resources to purchase sovereign debt in the secondary markets, even as he accepted sovereign debt as collateral for loans to private banks.  There was no country he was more steadfastly committed to not rescuing as he was steadfastly committed to not rescuing Italy…. as long as Berlusconi was premier.
Was Trichet lodging a monetary protest over Berlusconi’s dalliance with 17 year olds?  Was Trichet enforcing an embargo on governments where the prime minister installs girlfriends and former girlfriends in official positions?  Of course not, Trichet is French.  He knows why men enter politics.
Berlusconi had wavered in his commitment to the ECB to take Italy down the path already taken by Ireland, Portugal, and Greece.  He could not be trusted to attack wages, and even more importantly, to attack past wages, deferred wages, pensions.  There is no future for capital without wasting, and wrecking, the past.
Italy, with its euro 1.9 trillion in sovereign debt wasn’t too big to fail, it was too big to save.  No bailout fund could absorb the burden of supporting that amount of non-performing debt if Italy were frozen out of the bond markets, so it had to adopt the measures the “troika” had imposed on Greece, willingly, autonomously, without recourse to loans from the EFSF.
No meetings in Cannes, Berlusconi simply had to go.  It had to appear that the bond markets were the forces behind Berlusconi’s defenestration.  After all, neither France nor Germany was willing to put its tanks on the streets of Rome. Besides, if Merkel and Sarkozy had summoned Berlusconi to Cannes, he just would have shown up topless…and with a date.
So when the bond traders started another round of crack the whip, driving up interest rates on Italy’s ten year notes in the secondary markets, Trichet decided to intervene by not doing what he had done so often before; utilizing ECB funds to enter the markets, purchasing the debt, and blunting the rise in interest rates.  Nero had fiddled while Rome burned.  Trichet wouldn’t fiddle, thus allowing the Roman to burn.
Journalists, economist, financial advisors, traders all did their jobs when the interest rates broke through the 7 percent level.  “Interest rates that high are simply unsupportable,” said one, said all.  The EU bourgeoisie had found their marker, their indicator, their summum bonum and maximum malum, for all things economic.  Below 7%, good, 7% bad, above 7%, unsustainably bad. 
Of course, the 7% rate in the secondary markets didn’t cost Italy an extra penny, as it applied to debt that had been issued previously, underwritten previously, and sold previously.  It did cost the banks which held the 10 year instruments a bit, as the value of their holdings declined. It could mean that more collateral would have to be posted to get the low interest loans from the ECB.  It would mean that the EU banks, already pressed to increase capital levels to offset accrued risk, that is to say the accumulated devaluation [another marvel of capitalism’s oxymoronic being], would require more capital.
It would cost Italy a bundle in the future, on its future debt issues, provided such issues escaped the fate that had recently befallen the EFSF and there was even a market for future issues.  Finance, to repeat what all traders know, is nothing.  Refinancing is everything
“Lay waste to the past.  Destroy their pensions.  Preserve our future.  Protect the rollovers,” demand the bondholders, traders, bankers, central bankers. “If not, we’ve seen the future and you can’t afford the vig.
Seven was the lucky number, with luckiness being next to godliness in the bourgeoisie’s order of battle.  Seven percent however was the unluckiest number of them all. 
Emerging from World War 2, the bourgeoisie of Europe thought that they had found a fix to the competition that periodically led to destruction of the continent.  That solution was supposed to be in a customs, trading, currency and capital union.  The markets however were telling the bourgeoisie that the currency and capital unions were the problem, and they, the markets were ready to drown the EU in their own fix… which was the 7 percent dissolution
Berlusconi had survived more than 50 no-confidence votes during his tenure as Italy’s Il Primo Ministro.  It was, however, the approval of his austerity budget that signaled his downfall as the budget was passed due to, and only due to, the abstention of members of the opposition parties, allied parties, and even his own party. 
Once Berlusconi agreed to vacate the premiership for Mr. Monti, the ECB intervened in the sovereign debt markets in the attempt to push the interest rate on Italian government debt below the 7 percent dissolution mark, thus bailing out the government it had sworn never to bail out.  This leads us to an important question: When is a bailout not a bailout?  
“Wenn wir sagen es ist nicht,” replied the Frenchman Trichet.
“Dies ist kein Rettunspaket,” answered the Italian Draghi.
8. Berlusconi or no Berlusconi, Papandreou or no Papandreou, the October Summit did nothing to calm the November markets.  On November 16, panic swept the European bond markets.  Germany was unable to find buyers for 40 percent of a euro six billion bond issue.  Individuals and corporations moved deposits out of EU banks, and out of EU currencies, including the euro.
Finance is nothing.  Refinancing is everything.  European Union banks had been frozen out of the short-term commercial paper money markets, utilized for day-to-day operating costs. For months, US mutual funds have refused to rollover the short term debt as it came due. 
European Union banks have also been frozen out of the long-term capital funding markets, unable and unwilling to risk the response to senior bond issuance.  Market refinancing to the banks had been pretty much restricted to “coco” instruments--  “contingent convertible” obligations, which are debt obligations that would convert to equity stakes if the amounts the banks held in their capital tiers [tier 1, 2,etc.] dropped below specified levels. 
The problem is that for the “cocos” to be approved by the European Banking Authority as instruments for replenishing capital, the conversion triggers are so “fragile” that the convertibility is practically automatic providing almost no security for the bondholder as the bond is converted into equity, ownership shares with no claims on assets.  This in turn requires the issuing banks to increase their coupon payments to levels well above the “unsustainable” 7% dissolution mark.
The “coco” is in essence, the flip side of the asset-backed-security, of the collateralized debt obligation, as the bond liquidates itself into an equity pool upon the failure of bank assets to produce sufficient earnings. The bourgeoisie not only peddle their hair-of-the dog-that-bit-you cure for what ails their machinations, they also flog their hair-of-the-inside-out-dog-that-will-bite- you-soon alternative.
Cocos to the contrary notwithstanding, the ECB has become the lender of only resort to European Union banks, providing overnight, one week, three month, one year, and three year loans to the European banking network   And what do the banks do with the “unlimited liquidity” provided by central bank?  They deposit the loans in overnight, one week, three month, one year, three year accounts with the European Central Bank, of course.  The more liquidity the ECB supplies to the banking network, the more cash the banks deposit in the ECB.

As a result of its generosity, the balance sheet of the ECB, the assets held on its books for loans extended, now measures some euro 2 trillion, with the capital ratio of the ECB, the paid in cash from its shareholder EU governments that it refuses to “bail out,” relative to those loans, is far below the levels the European Banking Authority requires for private banks.  What has not resulted from the “unlimited liquidity” offerings of the ECB is the refinancing of the assets the private banking network holds on its balance sheet.
The banks will require approximately euro 700 billion of refinancing in 2012.  Eurozone governments are estimated to require a total of euro 800 billion in additional and rollover financing in 2012. 
These amounts are trivial, however, in comparison to the corporate debt, in bank loans and bond issues that EU corporations must refund in the next four years.  That amount is a cool euro 4 trillion.  The EU banks hold three-quarters of that outstanding corporate debt.

9.   The central executive committee of the European Union called the European Commission demonstrated to the satisfaction or dissatisfaction of all that it had no economic program to remedy the sovereign debt crisis of its member countries. The ECB established emphatically through the inability of its “unlimited liquidity” programs to restore liquidity to the financial markets, that the predicament of the European Union banks was not a “liquidity crisis,” or a “credit crunch,” but rather a matter of solvency.  But failure can be its own reward, just ask any CEO picking up his or her paycheck on the way out of the door of a company in liquidation.
The reward for our merchants of failure isn’t in the resolution of the solvency crisis, but rather in the use of the solvency crisis to suborn the budgetary processes of the member countries of the EU to the social policy and program of central bank.  Where the European Central Bank pretends to an “independence” from government policy, it makes no such allowances for government independence from its policy. 
And so the October summit statement introduced inside the shell of “haircuts,” the leveraging of the EFSF, under the guise of greater coordination, couched in its own boiler plate language, the subjugation of it member countries to a single fiscal policy.   The summit statement proposes that each eurozone nation adopt constitutional requirements for the government to maintain a “balanced” budget; that each member state submits fiscal and/or economic policy reform plans to the European Commission for pre-view; that each member adhere to the recommendations of the Commission. 
Those are the proposals for governing the governments of the states without “excessive deficits,” i.e. requiring any special economic assistance.
For member states already encumbered in the “excessive deficit procedure,” the summit statement proposed that national budgets be submitted to the European Commission before submission to the “relevant national parliaments,” and that the Commission will maintain a monitor, review, and amendment capability over the course of the budget.  
Where before the universal warning had been “Beware of Greeks bearing gifts,” now the warning was “Beware of those bearing gifts to the Greeks.”
Finally, however, the European Union had its policy, its program, and its new intra-continental, inter-national anthem:  Bundesbank über Alles!
As the bond market turmoil continued through November, the European Commission pushed forward proposals to expand its authority over national budgets, including the ability to request revisions of draft budgets.
The structure of the EU, which would not and could not be changed to allow the Union to issue a single common Eurobond,  supposedly would and could be changed to allow the European Commission to, in essence, put a member state into receivership.
To be sure, there was some concern among the member states.  Even Sarkozy felt a bit of discomfort being so close to Merkel.  Sarkozy proposed that the individual member states exercise their sovereign powers in electing to submit to the super-sovereignty of the European Commission, while Merkel preferred the power to be concentrated in the Commission and the obligation in the members. Obviously it was time for another summit to once and for all resolve the sovereign debt crisis and propel the Union forward to its future of unencumbered prosperity.
For the proposals to be adopted by the European Union, as a union; to fund the bureaucracy inherent in authority, review, and enforcement, the member states would have to agree unanimously to the changes [and dispense, it was fervently hoped, with messy parliamentary votes, not to mention the nightmare of referenda].
The summit was set for December 9, 2011, and on December 9, 2011, the world was privileged to see the prime minister of Britain’s government of the posh and the twits, by the posh and the twits, for the posh and the twists, that runner from the floor of the London Stock Exchange, that messenger boy from the financial institutions located in “The City,” David Cameron, hold an entire continent for ransom.  Cameron, whose own policies of retrenchment, austerity, and deficit reduction, were expected to increase his government’s borrowing, declared that no economic reorganization would be allowed unless it guaranteed the right of his friends, his schoolmates, his rippers, his swindlers to rip, swindle and conduct business in their accustomed manner.   
“God Save The Queen,” he concluded.
Sarkozy, not missing a beat, channeling the Sex Pistols, responded:
“She’s made you a moron,
 A potential H-Bomb”           
Merkel, who had received her higher education in the then East Germany, and had satisfactorily completed her required coursework in Marxism-Leninism, simply stared at Cameron and muttered in German:
“Trotzkistischen Zerstörer!” this is the way the summits end, not with bangs or whimpers, but with old songs. 
New music, meanwhile, is out there, waiting to be composed, orchestrated, conducted.  There’s a new music army tuning up in the streets.

S. Artesian
January 8, 2012.