Notes From Underground

As the tragedy/comedy of negotiations over the private sector involvement (PSI) in any form of debt relief for Greece continues, it is important to remember that the Institute of International Finance (IIF) has no real leverage in the situation and is merely trying to attain some type of outcome better than the supposed 90% haircut. The IIF represents the interests of large and medium banks as it seeks a compromise that is “fair” to all parties. Let’s remember that while the large banks are pressing for a better deal, many of them are being bailed out by the LTRO program put in place by the ECB.

Yes, hedge funds are not directly being bailed out, but many HEDGIES have significant positions in large EUROPEAN BANKS and are being supported through the bailout. The hedgies want to be assured of getting paid on the credit default swaps (CDS) that they own in case there is an actual Greek DEFAULT. The IIF was initially represented by its Chairman, Josef Ackermann, who also heads Deutsche Bank, a very significant player in the EURO DEBT drama. Mr. Ackermann made a wise decision to step aside and let Mr. Dallara be the lightning rod for any animosity the French and Germans will harbor toward the global banking lobbying group.

It would not have looked good for Deutsche Bank’s CEO to be bargaining for a smaller haircut while Chancellor Merkel is pushing for the private sector to take a greater share of the losses. Sometimes it is better to send in the CLOWNS and the EUNUCHS, especially when it is the banks that will continue to need further financing from the ECB. IIF Managing Director Dallara said “Europe had a very good week last week” in that debt auctions in Italy and Spain went very well and, therefore, the negotiations in Greece should continue on a compromising path.

Again, Mr. Dallara, the auctions went well because the ECB is providing huge amounts of cheap  liquidity. The end result will favor Greece in the short-term. (The negotiations are mere sideshow.) As the joke goes: The man approached the woman in the bar and asked if she would sleep with him for 10,000 EUROS and she said YES. When he inquired about the same proposition for 100 EUROS, she indignantly responded that what type of woman did he think she was. He responded that it already been determined and now the only issue was price.

***This week we will have the President’s State of the Union as well as a two-day FOMC meeting. The President’s State of the Union has already been vetted in a very public fashion and it seems that it will be oriented toward a major program for MAIN STREET. This will most probably be some type of major REFI program as so many different trial balloons have been floated as to various programs. It seems that the OBAMA CAMPAIGN STRATEGY is to gain traction as the protector of Main Street while allowing the Republicans to be painted as the party of the RICH and Wall Street.

The problem for Mr. Obama is going to be that his entire economic and financial team is the personification of the WALL STREET FINANCIAL CLUB: Geithner, Gensler, Summers, Rattner … the list is ENDLESS. If there can be immediate relief for Main Street the President will have gained a huge head start on the Republicans. The housing issue should have been PRIORITY ONE, but Tim Geithner made sure that the banks did not have to take a hit and the banks were protected as homeowners were left to fend for themselves. If the State of the Union is heavily laden with REFIs for homeowners then it will be time for Geithner to be cut loose.

Tags: CDS, Charles Dallara, ECB, Euro, FOMC, Greece, IIF, Josef Ackermann, Obama, PSI, refi, State of the Union

This entry was posted on January 22, 2012 at 7:44 pm and is filed under Europe, Fed, Greece, United States. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.