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Vampire Hedge Funds Are Sucking Greece Dry

If Goldman Sachs is a vampire squid, as Matt Taibbi so aptly named it, then hedge funds are like piranhas or sharks, eager to strip the financial carcass to the bone.

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But the European Union also insists that the bond holders of Greek debt take a hit. After all, under the supposed rules of capitalism, if you make a bad loan, you suffer the losses. So the EU wants to recall the old bonds and replace them with new ones at lower interest rates more suited to Greece’s financial condition. Imagine that! Financial elites are being asked to sacrifice a bit to pay for the problems they helped to create.

Well guess what? The elites don’t like it. You see, hedge funds have been buying up Greek bonds at steep discounts. They want to milk the deal for as much as possible. So they are refusing to accept what the EU is offering. The hedge funds want to capture as much of the bailout money as possible. They could care less if the Greek people suffer. (Think Bain.)

But wait -- why are the hedge funds refusing the offer when the alternative is having Greece default on the very bonds the hedge funds now own? If they continue to hold out, won’t the hedge funds risk ending up with nothing at all?

Here’s where we dive into rotten core of “modern finance.” These hedge funds think they have covered their bets by taking out financial insurance on their bonds, which would pay them the full value of the bonds (not just the discounted price) if Greece defaults. (These insurance policies are called credit default swaps, and are issued usually by big banks that profit on the insurance premiums.)

So the hedge funds that are playing hardball think they have their bets covered. If Greece doesn’t give them a better deal on their bonds, the hedge funds will welcome a default in order to collect fully on their financial insurance policies.

The nuclear option

There’s only one little problem: The entire financial system might collapse, including our own, if Greece defaults. That’s because no one is sure if all the financial insurance can actually be paid off. It could be like AIG all over again, when that giant insurance company couldn’t pay off its financial insurance policies. If one big bank fails to deliver it could set off a chain reaction of financial defaults around the globe.   

As Marshall Auerbach, my financial guru, points out, it’s very much like exercising the nuclear option.

Credit default swaps [financial insurance policies] are to "hedging" credit exposure what nuclear weapons are to "hedging" a nation's defense requirements. Yes, you pay less money than equipping a huge army, but if you use the nukes, everything blows up. Much the same applies with credit default swaps.

In the old days, bankers basically didn't bet against their clients. If the borrower was successful, the banker was successful as the loan made money. If you thought the credit risk was bad, you didn't hedge it by buying a credit default swap; you simply refused to extend the loan (or demanded a lot of collateral against which the loan was secured). Nowadays, no credit analysis is done and "hedging" is done through these toxic instruments which have no social value and create a hugely destabilizing financial system.

To put it more bluntly, the sharks are using financial nuclear blackmail to milk billions out of the Greek people. They can get away with it because the EU and America are enormously fearful that a Greek default will vaporize the global financial system – yet again. 

Hopefully one day Occupy Wall Street will grow into a movement larger enough to end this financial terrorism. Until then, we can expect the Greek people to transfer much of their remaining wealth to these amoral and destructive hedge funds.

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