As a result of labeling 50% haircuts "voluntary", Credit Default Swap contracts have proven to be useless when it comes to protecting against sovereign default. The serious implication is investors will need to find another way to hedge.
The European Union's ability to write down 50 percent of banks' Greek bond holdings without triggering $3.7 billion in debt-insurance contracts threatens to undermine confidence in credit-default swaps as a hedge and force up borrowing costs.
As part of today's accord aimed at resolving the euro region's sovereign debt crisis, politicians and central bankers said they "invite Greece, private investors and all parties concerned to develop a voluntary bond exchange" into new securities. If the International Swaps & Derivatives Association agrees the exchange isn't compulsory, credit-default swaps tied to the nation's debt shouldn't pay out.
"It will raise some very serious question marks over the value of CDS contracts," said Harpreet Parhar, a strategist at Credit Agricole SA in London. "For euro sovereigns in particular, the CDS market is likely to remain wary."
This approach may undermine confidence in credit-default swaps as a hedge and force banks to look at other ways of laying off risk, according to Pilar Gomez-Bravo, the senior adviser at Negentropy Capital in London, which oversees about 200 million euros ($277 million).
"If they find a way to avoid a trigger event in the CDS, then people will doubt the value of credit-default swaps in general, leading to more dislocations in the market," she said.
"It is symptomatic of the regulatory and legal goalposts being constantly shifted either randomly or to suit political interests," said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. "For genuine long-term investors, either financial or non-financial, it's a major liability."
"Customers" that accepted ISDA documentation when buying credit default protection on Greece are now discovering that ISDA defends the position that a 50% discount on Greek debt is "voluntary" and therefore not a credit event for credit default swap payment purposes according to its documents.
First Step in a CDS: Protect Yourself from the ISDA Cartel
As previous sovereign problems have illustrated, the only way to buy protection is to rewrite the flawed ISDA "standard" document and agree to new more sensible terms, before concluding the initial trade. One has to first protect oneself from the ISDA cartel "standard" documentation before one can buy sovereign default protection, or any other protection for that matter.
This isn't the first time investors have been burned in the sovereign credit default swap market. Hedge funds Eternity Global Master Fund Ltd. and HBK Master Fund LP thought they purchased protection against an Argentina default and sued when J.P. Morgan refused to pay off on Argentina credit protection contracts they had purchased.
At issue was the definition of restructuring. Did Argentina's "voluntary debt exchange" in November of 2001 meet the definition of a restructuring? The Republic of Argentina gave bondholders the option to turn in their bonds in exchange for secured loans backed by certain Argentine federal tax revenues. J.P. Morgan claimed this didn't meet the definition of restructuring, at least for the protection it sold to Eternity.
J.P. Morgan's story was different when it wanted to collect on the protection it bought from Daehon, a South Korean Bank. J.P. Morgan claimed its slightly different contract language met the definition of restructuring under the credit default protection contract it had with the South Korean Bank.
In other words, J.P. Morgan made sure its contract language would allow it to get paid when it bought protection and would make it harder for its counterparty to get paid when it sold protection.
Language Arbitrage: You're Not a Sucker, You're a Customer
Banks that play this game call it "language arbitrage." Anyone that bought sovereign credit protection on Greece after accepting ISDA "standard" documentation without modifying the language now finds that they are on the wrong side of an "arbitrage." An arbitrage is a riskless money pump. In this case, it means that money has been pumped out of credit default protection buyers with no risk to their counterparties, the financial institutions that ostensibly sold them credit default protection on Greece.
Derivatives King Always Wins
Note how the "Derivatives King" JP Morgan wins on its contracts, even on both sides of essentially the same bet.
By the way, I have a couple of questions:
What the hell are banks doing in all these derivatives markets in the first place?
Isn't it time banks act like banks instead of arbitrage hedge funds?
Addendum:
Reader Scott writes ...
One look at the ISDA membership should disabuse anyone of the notion that this is some kind of neutral judge. The big banks that write most of the derivative contract also compose the group that defines a credit event. This is not much different than have a baseball pitcher call the balls and strikes. How this is legal is beyond me.
Many people sent links regarding a bombshell ruling in Massachusetts by the Daily Bail that allegedly "made foreclosure sales in the commonwealth over the last five years wholly void."
On Oct. 18th, 2011 the Massachusetts Supreme Judicial Court handed down their decision in the FRANCIS J. BEVILACQUA, THIRD vs. PABLO RODRIGUEZ – and in a moment, essentially made foreclosure sales in the commonwealth over the last five years wholly void. However, some of the more polite headlines, undoubtedly in the interest of not causing wide spread panic simply put it "SJC puts foreclosure sales in doubt" or "Buyer Can't Sue After Bad Foreclosure Sale."
In essence, the ruling upheld that those who had purchased foreclosure properties that had been illegally foreclosed upon (which is virtually all foreclosure sales in the last five years), did not in fact have title to those properties. Given the fact that more than two-thirds of all real estate transactions in the last five years have also been foreclosed properties, this creates a small problem.
The Massachusetts SJC is one of the most respected high courts in the country, other supreme courts look to these decisions for guidance, and would find it difficult to rule any other way in their own states. It is a precedent. It's an important precedent.
Clueless Hype
Let's first dispose of the nonsense that the "Massachusetts SJC is one of the most respected high courts in the country, other supreme courts look to these decisions for guidance, and would find it difficult to rule any other way in their own states."
The more important issue is the way sites trump up these cases with preposterous statements such as "In essence, the ruling upheld that those who had purchased foreclosure properties that had been illegally foreclosed upon (which is virtually all foreclosure sales in the last five years) ..."
The essence of the matter is the Daily Bail preaching clueless hype.
I asked Patrick Pulatie at LFI Analytics to chime in on the significance of the case. Pulatie writes ...
US Bank foreclosed upon the property, but no assignment to US Bank occurred until after the foreclosure. B then bought the property.
The court ruled that the foreclosure was unlawful, like in Ibanez. Therefore, B could not own the property. That said, the court ruled that if the Chain of Title could be corrected, then the foreclosure can be redone.
The author completely misrepresents the ruling like so many do. They claim that gold exists, where there is only lead. Unfortunately, this will only give homeowners more false hope.
What tells you how little the authors know is their claim the MA court is so well respected that other states will use the ruling as guidance.
That is laughable hogwash.
Third Opinion
We have heard from the Daily Bail and from Pulatie. Let's find a neutral party for a third opinion. I just happen to have one.
The Massachusetts Supreme Judicial Court issued its opinion today in the much anticipated Bevilacqua v. Rodriguez case considering property owners' rights when they are saddled with defective titles ...
Contrary to some sensationalist headlines [linking to the Daily Bail], the sky is not falling down as the majority of foreclosures performed in the last several years were legal and conveyed good title. Bevilacqua affects those small percentage of foreclosures where mortgage assignments were not recorded in a timely fashion and were otherwise conducted unlawfully. Bevilacqua does not address the robo-signing controversy.
The Bad News
First the bad news. The Court held that owners cannot bring a court action to clear their titles under the "try title" procedure in the Massachusetts Land Court. This is the headline that the major news outlets have been running with, but it was not a surprise to anyone who has been following the case. Sorry Daily Kos, but the court did not take away a property from a foreclosure sale buyer. The buyer never owned it in the first place. If you don't own a piece of property (say the Brooklyn Bridge), you cannot come into court and ask a judge to proclaim you the owner of that property, even if the true owner doesn't show up to defend himself. It's Property Law 101.
The Good News
Next the good news. The court left open whether owners could attempt to put their chains of title back together (like Humpty-Dumpty) and conduct new foreclosure sales to clear their titles. Unfortunately, the SJC did not provide the real estate community with any further guidance as to how best to resolve these complicated title defects.
It should be pretty clear now as to what is hype and what is not.
As a followup post including an analysis of Assignment of the Deed of Trust in the California case Calvo v HSBC, please consider More on the Coming Wave of Foreclosures.
A deal has been reached. While many decisions are yet to be made the agreed upon deal looks something like this:
A "voluntary" haircut of 50% on Greek debt
Bank recapitalization set at 106 billion euros
EFSF will use leverage to get to at least 1 trillion Euros
Leverage will be via a combination SIV plus Insurance plan
Banks get an additional 21 billion Euros in "official aid"
The ECB is going to continue to buy Italian bonds come hell or high water
A group of 70 European banks will need to raise 106 billion euros in the next eight months. Recapitalization Breakdown
Greek banks need 30 billion euros
Spanish banks need 26.2 billion euros
French banks need 8.8 billion euros
Italian banks need 14.8 billion euros
Remaining countries 26.6
Banks that fail to raise enough capital on the markets will first tap national governments, falling back on the EFSF rescue fund only as a last resort.
The fuzziest point in the deal is in regards to what banks get the additional 21 billion Euros in "official aid", with what strings, and where the money comes from.
Good News for Bears
Although many details are yet to be resolved, the bulls got everything they wanted except endless printing by the ECB. However, the sad fundamental situation remains unchanged
No structural problems have been solved
Banks most assuredly need more than 106 billion in recapitalization efforts. The idea that French banks only need to raise 8.8 billion is preposterous.
No investors in their right mind will fund Greek and Spanish banks to the tune of 56.2 billion euros
The haircuts were not voluntary
Instead of the rumor mill of potential actions working to lift the market 24 hours a day for three straight weeks, it will be up to the EU to make the plan work. However, the plan won't work because of point number one above: not a single structural problem has been solved.
Although this rally may run for a while longer on fumes of past rumors and blind hope, it will eventually wear itself out.
Bear market rallies tend to end on good news. What more good news is coming?
The bulls got nearly everything they wanted, putting an end to torture by rumor. What could possibly be better news for the bears?
Halloween is the most favored holiday by AgencyNetters. Every year we have a pretty epic Halloween party full of creative costumes, candy and of course plenty of palatable potions. This year, it's sure to be better than ever. Halloween Trends for 2011. Enjoy!
Over the past decade, I've been part of many reviews of websites, both in-person, as a consultant (prior to 2009) and at many events. I've found that much of the time, the reviews themselves lack structure (particularly those that happen "on the fly" during a conference panel or informal sit-down). Thankfully, during my recent face-off with Distilled's Will Critchlow in London, I had an excuse to noodle on that and work up some ideas.
The Searchlove conference had a unique concept for our classic presentation battle. We were each given three websites to review around 12:30pm and had to give 30 minute presentations using slide decks 4 hours later. My will to win and avenge my depressing loss at Mozcon Seattle was stronger than my jetlag, and I gave the following presentation:
The point isn't that I won (or that Will now owes me a very fancy dinner next time I'm in London) :-) It's that I think this framework can function reasonably well for many marketers in need of an expedient methodology to evaluate a site's strengths, weaknesses, opportunities and risks. The deck above uses:
Broad Questions about the Website
Why does this website exist? (i.e. what is it hoping to accomplish? what does success mean?)
Who cares? (i.e. who are the people using and getting value from the products/services/information?)
What motivates, inspires and interests this audience (this is critical, because great content and great inbound marketing stems from interesting the audience, not just giving them the task that will make your business succeed)
What's the client worried about? (the client might be your boss, the CEO, the business itself or an actual client)
Social Optimization (getting placement, timing, engagement, etc. right)
This framework is, obviously, just one way to think about how to review a site, but I think it may be valuable to others in the field and thus, wanted to share. I'd also love to hear feedback and suggestions for how to improve. After all, I need to take on Will again in New York this coming week.
This year's MozCon was, undoubtedly, the best event we've ever put on. The 500 attendees had some incredibly kind things to say about the event, perhaps the most remarkable of which is captured below in some of the charts I've extracted from a survey we ran to attendees.
As many who attend professional events in the SEO/online marketing world know, finding expert-level content is a huge challenge. We work tremendously hard to make sure MozCon provides a uniquely high level of material from every speaker and you can see that reflected below:
Given the high level of folks who come to MozCon, the feedback above was incredibly flattering. Of course, we'll be working even harder next year to make sure that little blue slice shrivels away entirely :-)
The next chart from SurveyMonkey shows whether those who attended would be likely to recommend the show to others:
And again, I'm pretty excited by the results. 62% of those who responded said they'd give it a 10/10 when talking to others. Not too shabby!
Thus, I'm very excited to announce the 2011MozCon Video Bundle. This year, rather than old-school, 1990's technology, we're trying something new and giving you the ability to stream the videos online and download them to your mobile devices. Pretty sweet, right?
The Powerpoint slide decks are also included with the video bundle, so you can follow along and grab the URLs that speakers reference in their presentations. We’re also doing something a little nuts: if you buy the bundle before November 30th you'll get all of the videos from MozCon 2010* and Distilled's SearchLove 2010* (that’s an extra 42 videos) for free!
What's in the 2011 MozCon Video Bundle?
Included in the price ($299 for PRO members or $399 for non-PRO members) you’ll get:
26 videos (over 14 hours) from MozCon in high definition
Stream or download the videos to your computer, iPhone, or Android device
Downloadable PowerPoint slide-decks for the presentations
Plus the limited time offer: Until November 30th you'll get an additional 42 videos (over 26 hours of content) free of charge from our Seattle 2010 and Distilled's London 2010 seminars.
26 videos of our best presentations yet
MozCon 2011 was our 6th annual event, and I can honestly say, it was our best event yet. We had three days chock full of astounding presentations plus an awesome lineup of speakers. When you purchase the bundle, you’ll get videos and the PowerPoint slide-decks for all 26 of the presentations. Essentially, it will be as if you were there... except without the ice cream breaks.
Watch the videos online in high definition
This year, we've tossed out the DVDs (well, OK, not actually tossed them; more like, just didn't make them) and put the videos online. Once you purchase the bundle, you’ll have immediate access to watch all of the videos in high definition.
And download the videos for offline viewing...
You can also download any of the videos and watch them on an iPhone, iPad, or Android device giving you the ability to watch your videos wherever you want. This is perfect for a long plane ride or when you’re commuting to work (or relaxing in the living room furniture of your choice).
For a limited time... get an extra 42 videos from our 2010 events for free
We’re so excited about this year’s video bundle that we’re doing something special. For anyone who purchases the bundle before November 30th, we’ll include online videos from MozCon* 2010 in Seattle and Distilled's SearchLove* 2010 London. In all, that’s an extra 42 videos (26 hours of content) included absolutely free!
What people said about MozCon 2011
MozCon is the best online marketing conference I have ever attended. The content is well-rounded and advanced.
Bekka Palmer Senior SEO Strategist Thunder SEO
Great presentations by expert speakers delivering up-to-date, actionable content in not just SEO, but also conversion rate optimization, Facebook and paid marketing, viral content design, and a host of other topics. I came away inspired to 'make the web better' by delivering even more SEO awesomeness to my clients.
Steve Ovens Director of SEO Digital Media Strategy Pty Ltd
I've been passionately involved in SEO/SEM for nearly a decade, and I can honestly say that MozCon was the most educational 3 days that I've ever experienced in that amount of time. There was a wealth of tangible information and insight that I'm going to be able to utilize in all aspects of SEO. MozCon was simply inspiring.
Greg Bebezas SEM Specialist OpenText Corporation
MozCon was all that I could have hoped for. I learned what we really needed to know to be successful at SEO, including the nitty-gritty techniques that you just don't get at other conferences. MozCon is where it's at.
Nils Rasmusson Web/Graphic Designer Beijer Electronics, Inc.
* p.s. Prior to 2011, we called these events "PRO SEO Training" but have since learned a little about branding :-) SEOmoz's annual conference is now "MozCon" and Distilled's is "SearchLove," which BTW, you can still buy tickets for next week in NYC if you'd like to join us in person.
We the People was launched to bring the voices of Americans around the country into our government and we're thrilled to see so many Americans engaging members of the Obama Administration in a constructive dialogue on such an enormous scale. Stay updated on the latest petition responses and other news by following @WeThePeople on Twitter.
We Can't Wait to Help America's Graduates President Obama announced new efforts to make college more affordable by helping millions of borrowers better manage their federal student loan debt.
Today's Schedule
All times are Eastern Daylight Time (EDT).
9:30 AM: The President receives the Presidential Daily Briefing
10:30 AM: The President meets with Treasury Secretary Geithner
11:00 AM: The President meets with senior advisors
12:30 PM: Press Briefing by Press Secretary Jay Carney
3:10 PM: The President holds a bilateral meeting with Prime Minister Petr Necas of the Czech Republic
5:05 PM: The President greets city and municipal leaders from across the country
6:45 PM: The President has dinner with winners of a campaign contest
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