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The World Is Not Expecting This

by By Dominique de Kevelioc de Bailleul: Beacon Equity Research — last modified Mar 25, 2012 05:29 PM Copyright 2009-2012 ETFDAILYNEWS.COM
it’s now official: Greece defaults. Zerohedge called the event: The biggest debt writedown in human history.

Strangely, or not, there was no press conference by the ECB, no bold-letter  headlines about the event.  Nothing.  There was nothing but an innocuous statement issued by the International Swaps & Derivatives Association (ISDA) on Friday, which reads:

The Determinations Committee determined that the invoking of the  collective action clauses by Greece to force all holders to accept the exchange  offer for existing Greek debt constituted a credit event under the 2003 ISDA Credit Derivatives Definitions.

According to the Depository Trust & Clearing Corporation’s CDS data  warehouse, the total net exposure of market participants who have sold CDS  credit protection on Greek sovereign debt is approximately $3.2bn as of March 2,  2012.

The net cash payout on CDS when a credit event occurs is the face amount  of the CDS contract less the recovery value of the underlying obligations as  determined at a CDS auction. For example, if the CDS auction showed the recovery  value of debt to be (hypothetically) 25%, the aggregate amount payable would, in  Greece’s case, be 75% of $3.2bn: $2.4bn.

Furthermore, statistics indicate that, on average, 70% of derivatives exposure is collateralized and the level of CDS collateralization is likely to be even higher as over 90% of CDS transactions (by numbers of trades) are collateralized. [emphasis added]

In essence, the ISDA said Greece cheated in an attempt to forestall a default  on $3.2 billion of its debt.  The nation has defaulted, and now the credit default contracts issued against the debt must pay off.

However, there’s some curious verbiage of the ISDA statement that sticks out like a sore thumb.  Why would the ISDA gratuitously include the emphasized text (above) within its official statement?

The details added to the decision to declare a credit event is akin to a judge handing down a ruling, then embarking upon an explanation into the details and ramifications of the ruling, of which he cannot possibly know in advance.

Just as Fed Chairman Ben Bernanke stated confidently in early 2008 that the sub-prime mortgage crisis was “contained,” the ISDA somehow knows that the trillions of dollars in CDS’s attached to the Greek debt in question, which are not registered with its data source, DTCC, have no bearing to the total exposure of the banks and other  institutions to the writedown.

In fact, we now know, what was labeled by Bernanke as a sub-prime mortgage crisis turned out to be instead the start of a full-blown real estate crash.  ALL mortgages became sub-prime and the cascading bankruptcies and bailouts ensued.

And that’s exactly what we have here, a Lehman II, according to “Mr. Gold” James Sinclair—who, incidentally, was one of a handful who said from the beginning of the ‘sub-prime’ defaults that Bernanke was downplaying a much larger problem.

“The release made by the International Swaps & Derivatives Association (ISDA), for the average Mensa member or genius, is totally incomprehensible,” Sinclair told King World News.  “The press is using the word default, but the ISDA is using the word ‘auction.’ Clearly, the amount of CDS’s outstanding is infinitely more than the $3.5 billion that is being quoted.”

Sinclair added, ““The BIS confirms, in the area of CDS’s the total  outstanding is approximately $37 trillion. So I believe the reports being given about this just being a small and modest market event is false.  As a market observer and having more than 50 years in the business, the real number is at least 50% or more of the existing $37 trillion that is related to Greece.”

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