Thought We Were In The Clear Did We?
One of the mysteries of the GFCs and the stupendous amount of mass debt that we as a civilization accrued, and brought down Lehman Brothers, Bears Stearns Northern Rock and all of Iceland amongst other things, is what happened to all those CFDs and CDOs. It turns out a lot of municipal councils bought them exactly because they were rubber-stamped AAA by the ratings agencies. And yes, those would be the very same ratings agencies suddenly handing out very tough marks to governments of the world here and there; but once upon a time before the GFC blew things up, they would rubber stamp AAA on to all kinds of things at the behest of the banks.
Today’s lovely article then is this one here about Ku-ring-gai Council, and how it is hounding the one councilor who dared to ask what the huge hole in the accounts were and why these CDOs were blowing these holes into their accounts.
His interest in the matter of CDOs was first aroused in 2007 when he noticed a $1 million loss in Ku-ring-gai Council’s investment portfolio.
“All councillors have a duty under the NSW Trustees Act 1925 to investigate finances,” he told BusinessDay. Although, he didn’t actually know at the time what a CDO was, he began asking questions of the then Mayor and the council’s Director Finance.
“They wouldn’t admit that they had bought derivatives. But then, who would know what a derivative was?” As far as Hall and his fellow councillors knew, the councils were just supposed to buy AAA-rated investments. He has some sympathy for the original investments, just not with the way it had been handled since.
“Well-backed investments, was what we were told. CDO lines such as Oasis and Black Rock. Both of those are gone now. Maple Hill was another. That’s still alive.”
Ku-ring-gai also bought the deadly Rembrandt CPDO’s from the local arm of Dutch bank ABN. These were even more poisonous than a regular CDO and are subject of the above-mentioned court battle.
When Ku-ring-gai was approached to join the action, it found it owned a different issued note (no2) .
“The Rembrandt No.3 note lost 90 per cent of their value within one year,” says Hall. “With the No 3 note suffering a 96 per cent loss, ABN came back to my Council and said, we can save yours if you put in another 200 per cent of your original investment and we will capital guarantee your product with quarterly paid interest, to maturity in 2016”.
Lehman had struck similar deals, one by one with its various council clients whose investment values were plummeting. “Restructuring” it was called and it often involved buying more of the same product but with the promise of greater security. Hall said it was another form of gambling but using public money.
Tony Hall didn’t see this as much of a deal. After all, ABN was later bought by Royal Bank of Scotland (RBS) which was bought by the UK government and whose ownership may soon change hands again soon. “The prospect of having such a commitment honoured seemed to be a risk”.
The article then goes on to describe the council turned on Mr. Hall even though he was trying to bring to light just how exposed the council was to the GFC. Unfortunately, there are $300million dollars of these CDOs still waiting to blow up , owned by assorted councils. When they do blow up, these councils are going to be incredibly distressed all of a sudden. Which would be a rather interesting sight to behold but only if you like watching slow motion train wrecks.
Tony Hall is proposing a debt swap with the NSW Government to get the councils out of the mess but one wonders if the current NSW Government is philosophically capable of seeing the merits of the argument when the remedy essentially amounts to what conservatives called a moral hazard back in 2008 when the GFC was kicking in.
Whatever the case, you know it’s going to be the tax payers who will pay for these losses through raised rates by councils or heavier duties imposed by the state government. Of course it will have knock-on effects as asset prices will have to fall in the wake of such payments. If you thought we dodged the GFC bullet, perhaps we only kicked the can down the road. The ramification of these CDOs blowing up in the faces of our councils is going to be very expensive for our country. It goes to show the GFC really hasn’t played itself out at all.
The article is worth a read, if you can stomach the scary nature of it.
In Case You Were Wondering, Greece May Yet Default Totally
The ugliness that is the Greek situation rolls on. Today is the day the debt swap deal has to take place. The problem is that the deal set in place months ago back in December may still topple over if not enough of the creditors sign up for the deal.
So this is it. After three years of high drama, the European Union is staring at its first ever sovereign default and, ironically, unlike every other deadline so far, this one looks set to be adhered to.
At 8pm GMT tonight (7am, AEDT, Friday morning), the authorities will know – or have a very good idea – how many of Greece’s international creditors have accepted its 206 billion euro ($256 billion) bond-swap offer.
The results will probably take a few days to come out – Athens has to put its decisions through Brussels’ sluggish decision making processes – but this time it isn’t up to the politicians so the possible outcomes are clearer.
So if more than 86% don’t sign up for the deal, it could all fall apart. It’s hard to understand what that *means* because as Bill Clinton famously observed, “that would depend on what you mean by ‘mean'”. If it’s short of 86% who sign on for the miserable debt swap that socks 69% of value off the bonds, then there is no deal and Greece defaults ‘totally’. Banks immediately go into crisis, global credit seizes up, the clock of financial sectors hits midnight and everything turns into a pumpkin. Which is fine, because you can take that pumpkin, issue a derivative against the pumpkin maturing and on-sell it in debt parcels…
Anyway, jokes aside, the Greek government is pretty adamant about the “this deal or no deal” stance. You can hardly blame them. After two years of being told what nincompoops they are for not being able to manage their finances (and, yes they are the said nincompoops), and having the deal thrust at them from the ‘The Troika’ of the IMF, World Bank and the ECB, and having to push through hideous austerity measures one after the other (against the will of their own people) to attempt to meet these demands, just to get a cash float, it would be hard to imagine the same crew of people would be sympathetic to stragglers who want a better deal. Everybody wants a better deal, but in these circumstances, nobody’s going to get one. Would you be open to separate side deals if you had to live through the torment and insults of the Greek leaders for the lats two years?
So, there you have it. Debt swapping, even if agreed upon is this aggravating. Can Ku-ring-gai and other councils even stomach a single directive from the NSW Government if they had to undergo a debt swap deal? One wonders.
Where Did All This Water Come From?
Sydney has suffered its heaviest rainfall in five years, bringing the city’s transport system to a halt and causing hundreds of rescues and evacuations.
About 120 millimetres of rain fell on parts of the CBD this morning, with the Bureau of Meteorology’s Observatory Hill weather station recording its highest daily rainfall total since 2007.
In the city’s west, 146mm fell on Merrylands.
There’s a La Nina going on at the moment so we’re bound to get a lot of rain. but parts of NSW are seeing rain that hasn’t been seen in 160 years. As anomalous weather events go, citing 160 years is pretty wild. You shouldn’t really expect to see weather events that happen in that scale of time in one’s lifetime. We’ve seen worst in 30year events followed by worst in 60 year events. now we’re hitting once in 160 years. It’s worth pondering if this is even statistically normal in a lifetime to witness so many events that smash record books. Either that or the weather is on steroids, competing for something.
What nobody is saying is that all this water is now in the system thanks to global caps melting. There are a bunch of idiots who still want to argue that there is no such thing as man-made climate change, but this mad rainfall event can serve as an extra data point.