Jim Sinclair’s Commentary

Or a reason why Greece will be papered over.

Hi Jim,

The New York Times came out with this article today regarding the unknown derivative exposure of unnamed banks in the event of a Greek default.

It sounds like we all need to fasten our seat belts and put on our helmets for the next few weeks.

Best regards,
CIGA Black Swan

Contracts Cloud Who Has Exposure in Greek Crisis
By LOUISE STORY
Published: June 22, 2011

It’s the $616 billion question: Does the euro crisis have a hidden A.I.G.?

No one seems to be sure, in large part because the world of derivatives is so murky, but the possibility that some company out there may have insured billions of dollars of European debt has added a new wrinkle to the sovereign default debate.

In years past, when financial crises in Argentina and Russia left those countries unable to make good on their government debts, they simply defaulted. But this time around, swaps and other sorts of contracts have become so common and so intertwined in the financial markets that there are fears among regulators and financial players about how a Greek default would play out among derivatives holders.

The looming question is whether these contracts — which insure against possibilities like a Greek default — are concentrated in the hands of a few companies, and if these companies will be able to pay out billions of dollars to cover losses during a default. If there were a single company standing behind many of these contracts, that company would be akin to the American International Group of the euro crisis. The American insurer needed a $182 billion federal bailout during the financial crisis because it had insured the performance of mortgage bonds through derivatives and couldn’t pay on all of them.

Even regulators seem unsure of whether a Greek default would reveal such concentrated risk in the hands of just a few companies. Spokeswomen for the central banks of both Europe and the United States would not say whether their researchers had studied holdings of such contracts among nonbank entities like insurance companies and hedge funds — and they would not say what would occur among large players if Greece or another European country defaulted.

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