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SULTANS OF SWAP: Act III - The Getaway!
There are 7 stages to executing a successful sting operation. Whether this is the modus operandi behind the Sultans of Swap operating in the $605 Trillion OTC Derivatives market or just simple coincidence, I will leave it to you shrewd reader to determine. The seven stages do however offer us an instructive theater guide to better understand these murky instruments called Interest Rate Swaps.
Act I can be found at: SULTANS OF SWAP: Smoking Guns!
Act II can be found at: SULTANS OF SWAP: The Sting!
In Act II of our fictional play before we broke for Intermission, we saw the mechanics of how our Sting might be perpetrated. We saw how our PATSIES were “Fearing the Gearing” and being forced to rewrite their existing SWAP contracts with horrendous fees and collateral requirements. This is money that the public purse didn’t budget for and has no hope of raising. What will our PATSIES do now? They have little choice -either pay the shylock’s usury fees or sue!
Once again our audience was witness to some strange happening when the lights came up during the intermission.
Like a wave, the news of angry PATSIES taking their grievances to the courts surged all along the global shorelines. Let’s take a quick world tour to see the carnage showing up in the court rooms.
SMOKING GUNS & FOILED GETAWAYS
CITY OF MILAN, ITALY
CITY OF LEIPZIG, GERMANY
We started in Act I with Interest Rate Swaps in Greece. In Act II we broadened our discussion to the EU and touched briefly on the US. Now we see the following in the US.
HUNDREDS OF US MUNICIPALITIES
CHICAGO, DENVER, KANSAS CITY, PHILADELPHIA, MASSACHUSETTS, NEW JERSEY, NEW YORK & OREGON
CITY OF LOS ANGELES
JEFFERSON COUNTY, ALABAMA
SAN FRANSICO BAY AREA TOLL AUTHORITY
NEW YORK STATE
COLORADO – DENVER TEACHERS’ PENSION
EIGHT CALIFORNIA MUNICIPALITIES
… And on and on. Get the message?
After a long Intermission, let us get back to the conclusion of our play.
ACT III – THE GET AWAY
Act III begins with all our actors on stage. The PATSIES are scared. They finally understand their Interest Rate Swap and realize what they or the political predecessor had agreed to. Do they take the Greek option and come clean by blaming it all on the previous government? To most this is not an option. Needing help, they have assembled all the actors to give them advice.
What the endless list of legal proceedings above tells us is:
1- Swaps have permeated into every facet of local, municipal, city and state governments.
2- Swaps are a major financial instrument being used broadly in debtor nations and governments.
3- When the PATSIES find themselves in the gears they more often than not sue. They plead ignorance, not too dissimilar to US homeowners who expected to make a killing on their overleveraged McMansion. All are turning out to be very messy Getaways.
What should be readily apparent to the shrewd observer is that the biggest debtor in the world, with the least means of paying and an international reputation for devious behavior, is missing. Where is Uncle Sam in all this?
Prima Facie says Uncle Sam must have participated in some minor fashion.
We are going to try something different in our play. For those who have seen Avatar in the cinema, you will recall you were given special glasses so you could view the show in 3D and therefore get the full impact of the presentation. We are going to do the same thing but with a modern day “internet” twist so you see the reality of all this.
I invite you to click the following link – read the complaint – (at least the yellow highlighted section) – then hit the back button on your browser before we continue. Ready? CLICK
[NOTE: FOR LEGAL REASONS THE COMPLAINT CAN NOT BE VIEWED ANY PLACE OTHER THAN VIA THIS LINK]
If this doesn’t sit you up straight then you need to check for a pulse!
I am sorry dear reader, the getaway has already happened! The masked getaway happened New Year’s Eve while we were all preparing to party. I believe ladies and gentlemen you have just witnessed a near perfect getaway! To me, the most probable justification for such an unprecedented action would be a collateral call on US government obligations of historic proportions. There are of course other possibilities.
Just in case some of our readers don’t yet realize the significance of what happened, I can assure you that you will. Everyone will eventually pay through our servitude with higher taxes, reduced entitlement programs and a much lower standard of living for years to come, if the facts in this complaint are valid.
I am not a conspiracy buff. I believe in Occam’s Razor. The simplest answer is likely the answer and not to assign suspicions to more complicated possibilities or sinister people. In my opinion, what is going on here is not conspiracy but rather just plain stupidity sprinkled heavily with greed, unintended consequences, moral hazard, hubris and the remnants of the Greenspan PUT.
Sure there are plots and strategies, but they will be noise when the $605T in derivatives start to unwind. Yes, $605T has a $3.7T net credit exposure but there are $36T CDS (Credit Default Swaps) that must be paid and not one person has accrued a cent for that payout. Everyone expects to be ‘out of town’ by that time! Everyone has their eye on the exit without trying to draw too much attention. It is still former Citigroup CEO Chuck Princes’ lament: “as long as the music is playing, you’ve got to get up and dance!”.
I AM ACCUSING NO ONE OF ANY CRIMES. How can I be accusatory in what is predominately a completely unregulated, non-exchange traded, off-shore, off-balance sheet, modern day wild west? What laws other than contract and tax laws? All the Sultans of Swaps are likely acting according to the letter of the few domestic laws applicable and in the manner carefully crafted by their legions of highly paid litigators. Even if effective legislation existed, there will still be examples of wayward behavior when the amounts of money involved are in the 100’s of millions and billions. Unethical and illegal behavior unfortunately should be fully expected. This is why laws must be comprehensive, unambiguous and harshly enforced. Former Fed Chairman Greenspan’s ‘laissez –faire’ philosophy was nothing short of naïve irresponsibility that has resulted in the global financial system being placed in a criminally tenuous position!
The actors in my estimation who are most at fault in our play are the sleepy eyed DIRECTORS and specifically the House of Representatives Finance Committee – chaired by Barney Frank and the US Senate Banking Committee – chaired by Christopher Dodd. If you are looking to assign responsibility for this mess, it begins and ends there.
The Sultans of Swap have proven that capitalism works brilliantly! In the US Gilded Age of Robbers Barons, capitalism also worked magnificently. Our great grandfathers understood rampant greed first hand and knew that smart legislation and regulatory enforcement were mandatory. They also knew guards must always man the sentinels. We are coming up on two years since the financial crisis erupted. What meaningful legislative bill (if any) has been passed? If we are this slow arriving at the scene of the crime, how can we possibly believe we can out run the crooks? We will always be ‘a dollar short and pound light’ operating within the current legislative framework.
Whistleblower Harry Markopolos testified before the Madoff Congressional Hearings, that the US legislative process and regulatory enforcement are seriously ill-equipped to either understand the financial world we now operate in or stay abreast of the breathtaking advances in structured finance. I don’t want to appear cynical, but I see it as NASA level rocket scientists being supervised by politicians who likely failed high school algebra. They don’t even know what questions to ask. Unfortunately the people ALWAYS willing to help the legislators with both the questions and answers are the Washington army of paid lobbyists. Lobbyists, as we are all acutely aware, have never been accused of having the public interest as their prime motivator. "The author Thomas Pynchon warned 'If they can get you to ask the wrong questions then the answers don't matter'"(16) So who will tell the emperor he has no clothes? Remember, it is ultimately our pockets that are being picked.
GOVERNMENT IS NO LONGER SERVING THE PEOPLE!
Some would argue it is no longer a government for the people.
White Collar crime has been interesting to watch over the last 10 years. I used to have a filing tag entitled ‘malfeasants’. By 2005 it had become such a large file I had to start breaking it down into sub categories. It was very telling to me that something was seriously amiss morally.
I was on the conference call when Jeff Skilling stepped down, Ken Lay took over Enron and Andy Fastow explained that Enron’s problem was the ‘short crowd’. I heard the same ‘short seller’ refrain during Bear Stearns and Lehman just days before they both collapsed. I heard it again earlier this month from the Greek Minister of Finance and even Angela Merkel and Nicolas Sarkozy. It never changes. I have concluded it takes two – an incompetent PATSY and someone with a STRATEGY.
I remember Bernie Evers, the founder and CEO of the Wall Street darling stock, WorldCom, weeping as he was led away in handcuffs while hearing all the townspeople and church parishioners saying how honest he was. I recall Dennis Kozlowski the CEO of Tyco, a beaten man and imprisoned man, watching his wife desert him even after spending millions of Tyco shareholder money on an exotic island birthday party for her. I watched Joseph Nacchio’s meteoric rise after leaving ATT to lift Qwest to prominence only to be sentenced to six years behind bars. The message is that none of these men thought of themselves as criminals. They perceived themselves as tough minded businessmen taking advantage of legal loopholes for competitive advantage, with a business STRATEGY that the lawyers felt they could defend in court. It was worth the business risk of being challenged and possibly receiving inconsequential fines. It took irate public and panicked politicians to force the penalties to match the impact of the crimes.
If you notice, all these examples are from the dotcom bubble. I don’t recall anyone being led away in handcuffs since the largest financial crisis in modern times has occurred. The Sultans of Swap are ripe for the wrath of public anger when real interest rates rise, taxes are increased, retirement entitlement promises are slashed and shortages squeeze the life out of the public in the years to come.
The public in Iceland would have made Johnny Depp proud when they said ‘forget about it’ in a public referendum concerning Iceland’s debt. This was a monumental stand that got little US media attention. We are hearing the Greek public say NO! We are seeing US Tea Parties say NO. Scott Brown’s stunning election in the bluest of blue states was the public saying NO! We are now hearing the Service Employees International Union (SEIU) say NO!
What does it mean to our Sultans of Swap? Their STRATEGY is built on certain perceived TRUISMS:
1. People pay their taxes; therefore Sovereign Debt is the Holy Grail
2. Economic growth may slow but is continuous and will outstrip the growth of
cumulative debt payments
3. Potential penalties for possible regulatory actions will be insignificant compared to
the ‘Vig’ or the ‘Take’ or the ‘Sting’. It is worth the business risk.
All of these ‘truisms’ for the first time in my lifetime now solicit questions.
During our three act play, I have highlighted an alarming flood of swap contract disputes which is growing globally. "It's difficult to identify the causes -- client greed or ignorance versus dealer greed or misrepresentation" (16). Gordon Gekko in the 1987 film Wall Street famously extolled "Greed is good!" Seventy-three years earlier, the 1914 silent era film The Embezzler starring the famous actor Lon Chaney, demonized greed. The Embezzler could also have been our theater guide for this play but I felt it didn't fit with a more materialistic culture and 'laissez-faire' lenience towards greed that has emerged over the last hundred years. I believe both are now even more elevated than Gordon Gekko was expressing during the earlier stages of the the greatest long-term bull market of all time . Our modern day Sultans should be seen as a product of this cultural shift. The PRODUCERS and BANKSTERS have now morphed into pushers of aggressive, yet 'legally' innovative solutions to fulfill their ever increasing greedy goals and serve their PATSIES' addiction to debt.
The issues today are inextricably legal and moral.
Embezzlement is the act of dishonestly appropriating or secreting assets, usually financial in nature, by one or more individuals to whom such assets have been entrusted. Wikipedia
Learn more at the SULTAN SWAP SENTINEL
(1) 03-18-10 Cities in the casino - Municipalities and derivatives The Economist
(2) 03-17-10 Banks Stealing From Colorado Teachers' Pension The Huffington Post
(3) 01-25-09 State Bond Deal Losses its Luster Albuquerque Journal
(4) 01-23-10 California Probes Muni Derivatives as Deficit Mounts Bloomberg
(5) 03-05-10 The Swaps That Swallowed Your Town New York Times Gretchen Morgenson
(6) 03-11-10 Banks win on Swaps while DPS loses courtesy of Bennet & Boasberg? ColoradoPols.com
(7) 03-22-10 Interest-Rate Deals Sting Cities, States Aaron Lucchetti, Wall Street Journal
(9) 03-12-08 High Finance Backfires on Alabama County Wall Street Journal
(10) 11-13-09 Alabama county sues JP Morgan over sewer bond debt Reuters
(11) 03-09-10 And Now Oakland Just Voted To Repudiate Interest-Rate Swaps With Wall Street Business Insider
(12) 03-09-10 A Preview: California's Coming War On Banks And Pre-Crisis Swaps Business Insider
(13) 03-09-10 A Preview: California's Coming War On Banks And Pre-Crisis Swaps – Slide Set Business Insider
(14) 08-21-09 Ambac Suit a Long Shot; Lawyers, Swap Advisers Don't See a Win for Insurer AllBusiness
(15) 03-09-10 Stop the Swaps SEIU Blog
(16) 03-22-10 Swap Tango: A Derivatives Regulation Dance Part I Satyajit Das
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Gordon T Long
Mr. Long is a former senior group executive with IBM & Motorola, a principle in a high tech public start-up and founder of a private venture capital fund. He is presently involved in private equity placements internationally along with proprietary trading involving the development & application of Chaos Theory and Mandelbrot Generator algorithms.
Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.
© Copyright 2010 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.
statements and information contained in any report, post, comment or recommendation you receive from him.
Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.
Copyright and Disclaimer
© Copyright 2010, Gordon T Long. The information herein was obtained from sources which the Gordon T Long. believes reliable, but we do not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that the Gordon T Long. or its principals may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Gordon T Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from us.