The U.S. recession was supposedly triggered by the Lehman Brothers default according to our government experts. Lehman had overextended itself with worthless paper and then, to stave off regulators, hid its worthless paper assets through derivatives and credit default swaps (CDS). The real reason for the meltdown remains government’s meddling into mortgage lending practices which forced banks to spread the misery through derivatives starting in 2004. Derivatives and credit default swaps were financial institutions’ means of acquiring some insurance they wouldn’t be left holding the entire debt if some other institution or even a government went belly-up on them and also allowed poor administrative decisions to remain hidden from regulators until it was too late to salvage the institute involved.
Lehman’s main claim to fame was using the Financial Accounting Standards Board’s own regulations against the regulators. The FASB, for some yet as unexplained reason, did not consider anything within 10% difference of face value to value received as either a sale or a purchase. Lehman used this loophole so effectively to hide its true indebtedness the transactions acquired the moniker “Lehman 105 Repo” where the 5% difference did not qualify as either a sale or a purchase. Thus Lehman could show any interested party it did not have too much worthless debt on hand to cover its liabilities in any audit.
At the time of its implosion, Lehman was on the hook for $4.5 billion in CDS to AIG alone. AIG was then the world’s largest insurance firm. AIG exists today only because the American taxpayer is now its creditor who footed the bill to save AIG in the “Too-Big-To-Fail” mentality that swept Washington. A not so funny side note to the Lehman CDS liability is that is nearly matches what the U.S. government currently has outstanding in CDS ($4.58B). While the U.S. CDS is low compared to many European countries, why was the U.S. government so adamant about the European Central Bank’s bailout of Greece once again?
There is another agency at work, Lehman’s bitter rival Goldman Sachs. When the U.S. officials let Lehman collapse but bailed out Goldman, many eyebrows were raised. But Goldman had several aces hidden away. First was its little-known work in Greece more than a decade ago when the Greeks were trying to get into the EU. Second is the large number of ex-Goldman people currently employed in various capacities by the government. Third was the large number of politicians whose campaigns directly benefited from Goldman contributions. Goldman Sachs owned the loaded dice necessary for many central banks needed to keep the debt game afloat and also knew where the bodies had been hidden.
While Goldman showed the Greeks how to hide the true size of their debt (a debt percentage to GDP that would have prevented the Greeks from enjoying the rare atmosphere of EU monetary status around the globe) and was receiving a handsome commission to do so, the real bonanza struck Goldman after the Greeks were accepted into the EU. Goldman was able, through CDS, to transfer much of the Greek liability to places where ex-Goldman people were in a position to buy the worthless paper. Thus Goldman got paid twice for doing essentially the same job. Plus, because Greece was now having to pay a much lower interest rate, Goldman benefited yet again from at-large institutions who thought they weren’t buying Greek debt but EU debt. Goldman, running a better covert operation than the CIA has ever managed, benefited from all sides while the economy-wrecking debt bubble grew.
The U.S. Treasury, where many ex-Goldman people work, turned a blind eye to these antics at the time, never offering a rod of dissent. Goldman, knowing their security was over when Greece was accepted, began fading out in Greece when profits leveled out, but the worthless CDS remained behind waiting to blindside the EU at some future date.
Meanwhile the Greeks enjoyed their indolent lifestyle and can continue until someone else gets tired of footing the bill. Apparently having Greece default is worse than telling the Greeks the candy store is closed so the ECB, already insolvent on paper from its incessant benevolence towards the PIIGS, has rescued Greece from itself yet again.
What the ECB received for this latest bailout is another round of promises from the Greeks to implement “severe austerity programs” to get a handle on the debt. That promise will last only as long as it takes the Greeks to get back to Athens with the swag. AT home they face riots from a populace who has no intention of giving up any portion of its welfare-state support. Even the most miniscule cuts are met with massive protests and, like governments everywhere, the Grecian government is not about to deny a voter anything. It is a lose-lose game for every other economy but somewhere, sometime the game will have to end because all the chips will be in the pot.
The ECB cannot justify Greece is an intelligent choice for a bailout in any measure of normal processing. Greece has a national debt that is 161% of its $330B GDP. The Greek penchant for protesting even a modicum of additional effort has the Greek GDP on a downward trend expected to reach 4% this year. The Greek debt continues to grow at an average of 14% each year. Oh yes, Greece’s official unemployment rate is over 40%! How could any banker or any economist anywhere in the world reconcile those awful facts and agree to another loan? This is part of the reason the ECB, on paper, is insolvent yet remains alive. Somebody better check to see if Goldman Sachs is on the ECB payroll somewhere because this is exactly what it accomplished in Greece.
So Goldman did a great job in helping Greece make it into the EU. The self-serving preservation mantle the ECB and IMF are cloaked in requires further funding down the road because nothing will change in Greece. But Italy is one of the maligned PIIGS and guess who is on the scene, helping the Italian government cover up the true size of its debt? You got it!!! Goldman Sachs. Yes, the U.S.-aided Goldman is once again helping a government hide the true size of its debt from the eyes of the world’s regulators while asking the ECB for a “bailout” with assurances of “future austerity” measures on government spending. It reminds one of the U.S. Congress raising taxes to help cover current problems with promises to stem its own extravangance somewhere down the line. Those cuts never seem to make it into reality.
Italy easily has the largest debt of any EU country, almost $2.6T. That is just over 18% of the acknowledged U.S. debt. The problem with Italy, like the U.S., is its debt is just below 100% of GDP. Goldman, again, is actively using CDS and connections with so manycomplicit money people around the globe to hide Italy debt.
The future tipping point is apparent: a welfare state will not give up the welfare programs because it will cease to exist, welfare recipients will not forgo their pay-for-nothing lifestyle without a ruckus so all promised austerity programs never come to fruition. That leaves only the alternative, raising taxes. This is uncomfortable for politicos because nobody ever got elected promising higher taxes. Put another way, stealing from the local population is not nearly as gratifying or self-serving as stealing…er, borrowing from abroad or those not old enough to vote. The results are the same. Eventually you’ll run out of other people’s money to use, especially when those governments are in the red. Just ask the ghosts of Lehman Brothers.
To Americans the specter of a U.S. government shutdown has much more immediate attention than the EU crisis. But debt, in any form, is a relentless, demoralizing drag on any economy and it never rests. And too much debt requires company in the form of regulations. The regulations tend to stifle small business where creativity is king and rewards large companies where the status quo is king so the lifeblood of an economy dies. The current squabble in Washington is meaningless because all our Federal Reserve needs is a supply of paper and ink to “cover” the problem.
Either way the “Too-Big-To-Fail” crowd will find a way to collect from all sides while receiving special treatment from their government friends.
There is no direct evidence to suggest Goldman Sachs has been contacted by Portugal or Spain or Ireland at the moment but the need is there and Goldman has proven so adept at hiding things its absence from these PIIGS cannot long be endured. The ECB, Federal Reserve and IMF directors are dumb enough to continue approving nonsensical bailouts to these flailing, and failing, economies as well because they hope the ball will drop on someone else’s watch.
If you doubt this argument, let’s bet. Or wasn’t this latest Greek bailout enough proof? Whichever way the bet goes, you can bet Goldman Sachs is counting on future funding for all the PIIGS and the lovely CDS that will entail whereby everyone loses but Goldman itself.
(Next up: A closer look at the credit default swaps and their impact on the American economy.)