Several problems with this theory. I think you will find that a lot of the CDS’s were written by UK subsidiaries of US companies. Which are fully fire walled from the parent in the worst case scenario. Lehman US strip mined Lehman UK the weekend before it went under and there was nothing the UK authorities could do about it.
Then there is the whole collateral and netting out experience with Lehman. If I remember correctly 400B of the 700B of Lehmans debts were covered, and when all the positions were netted out after the credit event the final net payments were around 7B. So any likely number from a partial or full euro sovereign default will be of the same order of magnitude. I.e less than was lost by Anglo (so far).
I strongly suspect that the real of the problem is the big Euro banks. The reason AIG was bailed out was because the big Euro banks had credit enhanced huge amounts of junk and used it in their Tier capital. Well the junk is still there. And the junk is a lot junkier than it was in 2008. Could the problem now be more concentrated. Large Euro banks that wrote CDS’s on their own Tier 1/3 capital. Like Soc Gen and DB perhaps? Or a small group of big banks who cross wrote CDS’s on each others Tier 1/3 junk?
So any credit event would leave a mountain of naked junk in the core capitol of the major euro banks. That might be a problem.
At the heart of it all there’s a force that can bounce continents, called by everyone, “the markets”. What is that?
Well, two weeks ago, in a first-of-its-kind attempt to identify the makeup of this global influence, economists at EPFZ (Zurich) published a paper confirming the interconnectedness of transnationals thus:
There’s an interesting paper about the largest trans national corporations that has come out of somewhere (I read it somewhere this morning, so it is a little alarming that I can recall so few of the details). Anyway, one thing stuck out - the companies effectively own themselves or each other - the public ownership through shareholding mechanism has fallen to pieces and must now be considered effectively outmoded. The banks and insurance companies are only a part of this grouping.
ehm i think you mean the paper mentioned four posts up in this thread…
Say isn’t it a nice day?!
Outmoded and replaced with what? The report took into account the controlling percentages that each company held in each - and therefore the voting rights, which imply board presence, direction etc. From my reading of the paper the authors also factored in the notion of “controlling interest”, i.e. over 50%.
But do you mean, for example, that the Washington Post has a director who is a director of Lockheed Martin, and Washington Post has another director who is a director of JP Morgan, so therefore JP Morgan and Lockheed Martin are linked?
If so then I agree that is another angle, but it doesn’t completely nullify the shareholding analysis: we can still tell a lot about the beast from that footprint. (Then again maybe you don’t mean that at all!)
By the way you probably saw TASC’s model of Irish inter-company director-level relationships, “Mapping the Golden Circle”. Here it is again anyway (in case you forgot )…:
Sorry about that - the new job has eaten my brain.
What I mean is that a good percentage of ownership does not vest in control - individual shareholders can’t be arsed and are too small anyway. Institutional shareholders aren’t interested (as we have seen time and again as pension funds get stiffed by corporate looting).
The idea of public shareholding (from what I understand) is that it is supposed to provide a long-term interest in the management of the company that is amenable to change. Instead, it is just another class of get rich scheme that provides only the most opaque accountability.
With TNC’s, though, it is a little bit more worrying - offshoots of public companies that are wholly owned by them ‘own’ most of the business - so a company in the Cayman islands owns most of the international operations of a nominally US quoted company. ‘Management’ get to decide what goes on and only the most basic of accounting is required up to the quoted company. No?
Ah yes yes, I see what you mean. Yeah very good point.
Checking out the footnotes in the new paper, the study was based on an earlier one which - kinda - adverted to your point:
But to conclude that there was a “super-entity” acting in its own interests, the new paper mixed in two other studies which proved that collusion came with mutual ownership (of shares):
And the following - which appears to be a bulwark of US antitrust law - (I tried to paste in a longer excerpt but Adobe wasn’t playing fair with me):
Having said that, I like your point. I do think, though, that the financial sector moved as one in aftermath of Lehman in the USA. And I see it continue to move as one in the Euro crisis, and I see policy bending to its pressure. If we also get a TARP, it will end out like the US:
(FWIW, I also expect that if the German parliament rejects QE and the government falls, that the next elected German government will go ahead and do it anyway. Seems to be the way around here.)
Excellent post bokonon (well, I think so, it interests me), thank you.
I agree that signs of industries moving as one are evidence of perverse incentives - the financial one being that it is better if your competitor isn’t burned because some day a fire might come your way. Indeed, regulators have done much in the financial sector to encourage these incentives - the bailout of LTCM involved everyone but Bear Stearns (who refused to cough up). The result? No-one wanted to save Bear Stearns this time round. It is much like the perverse incentive that pharmaceutical companies have with curing things - if they do suceed, they lose business. Government supports this by continuing to pay for products of limited efficacy - expensive placebos, if you like.
To take just one bit from one of the bits you quote:
My problem is not with the top shareholders, they seem to me to rarely get involved (unless they have an axe to grind - Dobby the tax elf, for example). The smaller shareholding activism (from some of the other quotes) in collusion terms makes sense, though, in a very Robert Ludlum sort of way.
Mind you, I have a few of these: farm3.static.flickr.com/2054/2453003382_3c778d7508.jpg dinars by yoganmahew, on Flickr
floating around, so maybe the best idea would be to just resurrect and revalue the old Yugoslav dinar (a country that doesn’t exist anymore), redenominate all cross-matching debts and assets into dinars and I’ll pay them off. Brilliant. I’ll just give myself another grant to keep me going while I fine-tune the idea…
In an article in the Sunday Times yesterday, by Robert Watts, economics correspondent states:-
(Sorry can’t link - behind paywall)
Greece is going down, many french and german banks are going to take a major hit, this will knock on to the remainder of the financial industry via CDS and interbank loans if banks collapse. The only way out of this is for the EU to shore up greece, to give the rest of the world time to unwind positions (if they can).