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To: pogohere who wrote (113746)	9/4/2010 8:56:18 PM
From: pogohere	2 Recommendations Respond to of 116555

Satyajit Das Examines Eurozone Stability Fund Three Card Monte by Yves Smith July 13, 2010 Satyajit Das is too shrewd to call the European Financial Stability Facility, informally described as a €440 billion sovereign bailout fund, a mere sleight of hand. But it’s hard not to draw that conclusion after reading his Financial Times comment today. Central banks and governments have developed an alarming fondness for the very sort of fancy financial structures that investment banks used to camouflage and transfer risk and engage in regulatory arbitrage prior to the crisis. These students have quickly aped their teachers. The Fed used off balance sheet vehicles (Maiden Lane, Maiden Lane II and Maiden Lane III) to obscure the fact that it was circumventing Constitutionally-mandated budgetary processes and creating funding vehicles for the Treasury. These entities also served to hide the degree and nature of the risks absorbed from the public. (more) nakedcapitalism.com Debt Shuffling Will Be A Self-Defeating Exercise by Satyajit Das July 13, 2010 George Bernard Shaw observed that “Hegel was right when he said that we learn from history that man can never learn anything from history”. Emerging details of the European Financial Stability Facility (EFSF) bear testament to this. The structure echoes the ill-fated collateralised debt obligations (CDOs) and structured investment vehicles (SIVs). The head of the EFSF also had a brief stint at Moore Capital, a macro-hedge fund, entirely consistent with the fact the new body will be placing a historical macro-economic bet. In order to raise money to lend to finance member countries as needed, the EFSF will seek the highest possible credit rating – triple A. But the EFSF’s structure raises significant doubts about its creditworthiness and funding arrangements. In turn, this creates uncertainty about its support for financially challenged eurozone members with significant implications for markets. The €440bn ($520bn) rescue package establishes a special purpose vehicle, backed by individual guarantees provided by all 19 member countries. Significantly, the guarantees are not joint and several, reflecting the political necessity, especially for Germany, of avoiding joint liability. The risk that an individual guarantor fails to supply its share of funds is covered by a surplus “cushion”, requiring countries to guarantee an extra 20 per cent above their ECB contributions. An unspecified cash reserve will provide additional support. Given the well-publicised financial problems of some eurozone members, the effectiveness of the 20 per cent cushion is crucial. The arrangement is similar to the over-collateralisation used in CDOs to protect investors in higher quality triple A rated senior securities. Investors in subordinated securities, ranking below the senior investors, absorb the first losses up to a specified point (the attachment point). Losses are considered statistically unlikely to reach this attachment point, allowing the senior securities to be rated triple A. The same logic is to be utilised in rating EFSF bonds. If 16.7 per cent of guarantors (20 per cent divided by 120 per cent) are unable to fund the EFSF, lenders to the structure will be exposed to losses. Coincidentally, Greece, Portugal, Spain and Ireland happened to represent around this proportion of the guaranteed amount. If a larger eurozone member, such as Italy, also encountered financial problems, then the viability of the EFSF would be in serious jeopardy. (more) ft.com