The Reasoned Review

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Banks Bet Hard Against Greek Debt They Sold

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The Times continues its reporting on the Greek crisis:

Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.

These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.

“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.

Fabulous. So let me see if I have this straight: our banks sold Greece predatory loans which they knew Greece would never be able to repay – then they took out “insurance” on those loans, effectively betting against Greece’s solvency. Heads they win; tails Greece loses. It’s important to note that this is the exact same behavior they indulged in during the sub-prime fiasco. They sold loans to people whom they knew would never be able to pay them back, and then bet that those loans would default. If, by some miracle, the debtor was able to pay these banks back, they’d get a nice interest rate. If, as the banks bet, the debtor couldn’t pay them back, they’d get re-imbursed via the Credit Default Swaps. It’s a classic win-win for the banks – and a lose-lose for whatever poor sucker they entrapped.

Only now its happening on the level of entire countries. I want to stress that Greece is neither the first nor the last nation to default on account of the malfeasance of US banks. Iceland came before it, and Spain, Ireland, or even France are likely to come afterward.

It is clear that our banks are purely malevolent forces, who benefit only from the destruction of others, and that, for the sake of the world economy, they must be thoroughly audited and broken up. And it is equally clear that this will never happen.

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Written by pavanvan

February 25, 2010 at 12:09 pm

Posted in Economy

Tagged with , , , , , ,

One Response

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  1. These are the exact kind of practices and people that Rand would have considered “looters”.

    Ed B

    February 25, 2010 at 5:03 pm


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