A gentleman who has occasionally popped up on the forum unmasked himself the other day and was interviewed in the “mainstream media” — ABC News’ European desk.

ALBERICI: “How certain are you that UniCredit broke the law while you were there?”

JONATHAN SUGARMAN: “A hundred per cent certain and to use the Irish expression, ‘to be sure, to be sure’ that is why I brought in this London based IT company which had a very good reputation in Dublin and the result was pretty horrific because whereas the breach that I’d reported to the regulator was a breach of twenty per cent, whereas the permissible deviation was one per cent, they rang me up one evening soon after they tied into our systems, linked into our systems and said your breach is actually forty per cent”.

ALBERICI: When he raised the alarm with his chief executive, the response was dismissive. It was a systems error. The risk manager was instructed to continue approving the deals. Jonathan Sugarman was in the thick of a reckless banking culture that was on a collision course with disaster.

Everyone says that what is happening now in Italy with their banks, and with Irish Unicredit, was some sort of accident, just as the claim has been made that this was true in America.  But we have plenty of information that either is an admission or strongly suggests that there was nothing accidental about any of these events — that they were nothing more than a willingness by executives to overlook or even intentionally bury bad conduct simply to rob the taxpayer by taking risks they knew they could manage to foist off on everyone when — not if — their institutions blew up.

The worst of this is that it’s still going on!

JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS), among the world’s biggest traders of credit derivatives, disclosed to shareholders that they have sold protection on more than $5 trillion of debt globally.

Just don’t ask them how much of that was issued by Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS.

As concerns mount that those countries may not be creditworthy, investors are being kept in the dark about how much risk U.S. banks face from a default. Firms including Goldman Sachs and JPMorgan don’t provide a full picture of potential losses and gains in such a scenario, giving only net numbers or excluding some derivatives altogether.

Got that?  JP Morgan has a market cap of $124 billion while Goldman has a market cap of about $50 billion   Both have less than a trillion of balance sheet size.  Between them they have more than twice their balance sheet in credit exposure and well more than 20 times their market cap in written credit protection.

This is ridiculously dangerous and the obvious question is “how in the hell can you possibly do that?”

The answer is that we learned nothing and have refused to end “too big to fail”: As a consequence these institutions are still playing “heads we win and keep the money, tails the taxpayer loses.”

And lose we have.  We’ve lost jobs, we’ve got the government presenting roughly 10% of the economy in borrowed money and thus creating false demand that does not actually exist in the economy and our Congress continues to chug along trying to argue over whether they will increase spending by $200 or $500 billion a year.  There has been zero reckoning against the facts presented here:

This cannot work over the intermediate or longer term and yet this is what we’re continuing to try to do!

The entire world is caught up in a gigantic Ponzimania but the world’s demand for pretty colored candy-emitting unicorns will not make them appear as unicorns are mythical creatures.

Nobody — simply nobody — is dealing with this in an honest fashion.  Neither side of the aisle will put a stop to it, despite it being factually certain that it will blow up in our faces.  As nations in Europe teeter on the brink of disaster we find that once again our financial institutions have levered up and hidden their exposure — it is just a matter of time before we start hearing “nobody could have seen it coming” again.

We must stop this and start applying handcuffs to these people, not coddling them.

Then there’s Congress and the blatant insider trading that they engage in.  While it has been argued that this is technically legal there’s a new law review paper out that argues the opposite – that this practice is a black-letter criminal and civil violation of the law.  The argument is quite persuasive too — but who’s going to appoint the special prosecutor and start cuffing Congressmen and women (like, for example, Pelosi?)

Oh please.  That will happen only when “Occupy Wall Street”, The Tea Party or both together decide they’re going to “occupy” Washington DC and refuse to leave until the indictments issue.

For those on the right who say that “OWS” is wrong and a bunch of freeloaders while they’re the “rule of law” group: That above paper contains all you need to demand that every member of Congress involved in this practice go straight to prison and that an immediate felony investigation take place right now — and to find a lawful and peaceful means to force the investigation to take place.

Folks, it’s really quite simple: We’re to the point where either we, as a nation, stand up and insist that the raw corruption stop or we will not have an economic recovery, we will not have jobs, and we will not resolve the fact that we have a handful of financial institutions that four years on are still holding our nation (and the rest of the world) and every individual living on the planet hostage.

I see no evidence of a willingness to deal with the facts in DC, in Brussels or anywhere else.  At its most-basic level the underlying financial fact is this: You cannot spend more than you take in over the intermediate and longer term.  The mathematical fact of exponential growth makes attempting to do so impossible.

It is this attempt and the utter refusal to face that fact that has underlay all of the mess that we find ourselves in – both here in the United States and internationally.

There is only one question remaining: Will we cut it out before or after our entire economy collapses?

I don’t usually write on rumors, but this one simply will not go away.

Germany is rumored to have ordered printing plates to resume printing Marks, and is intending to walk.  This does make sense, although the Germans would have to find a way to shield their banks from the impact of a massive shift off the Euro and into the Mark by Germans, which would spike the Mark higher and positively trash the Euro’s value.

The usual answer to “why they won’t” is that the Mark would become ridiculously strong and that would kill Germany’s export industry, which being goods based (rather than the faux “export industry” that is often mostly services) would get plastered.  The core of most commentators’ thesis is that this fact would preclude Germany from doing it.

But here’s the problem – playing the bailout game is a tax exactly identical to the impact of that stronger currency, and the bailout game costs you the decision-making power you retain when you are the one in control of your own destiny.

The German people are tired of the crap and with good reason.  They should not have bailed out Greece in the first place; they effectively rewarded cheating, as Greece was caught cooking the books.  Rather than prosecute the banks involved and yanking their charters, along with saying “No Mas!” they knelt down and performed an obscene act – more than once.  There is a political limit to how far you can go with these acts before the people act in whatever manner is necessary to put a stop to it, and the Germans have a long and painful history of what popular tolerance of political stupidity leads to.

I think there’s at least some credibility to this rumor.  I can’t put a percentage on the bet, but it’s not pure tinfoil nonsense.  Whether Germany actually goes ahead and does it likely depends on whether there is a further contagion – and I think there will be.  In fact, as I noted yesterday in an interview (to be published as a podcast next week) I have a nasty suspicion that Europe will ultimately “resolve” this problem the way Europe has in the past – via the business end of a bunch of hot lead-chuckers.

That would be disastrous but not surprising, given historical precedent.

Here’s the problem, when you get down to it – there comes a point where further bailouts have to be refused, simply because there’s no money to fund them.  I don’t know exactly where that line is, but I do know it exists.  Believing it doesn’t is the stuff of fantasy, and yet that’s exactly what the “Troika”, the IMF and others are all running.

The market says “BS!” to all of this; the sell-off in the equity markets is bad, but the implied forward view looking at high yield credit is far worse, and that looking at credit-default spreads is even worse than that.  The latter on a number of institutions are showing the sorts of numbers that immediately preceded Lehman’s failure, implying the potential for a “no-notice” liquidity seizure.

If it happens, and if it does it is likely to come almost without warning if not literally without warning, Germany would find it very expedient to leave the Euro.

Note that the treaties that formed the Euro left no means to expel a misbehaving “member.”  But there’s no way to restrain a nation from deciding to quit as opposed to being expelled.

Many believe that Greece will leave instead.  They may, but only when it’s clear that there will be no more “bailouts” forthcoming.  Their departure would destroy their banks instantly, unless it was coupled with a simultaneous “by declaration” re-denomination at par of all Euro-denominated debts in the nation into the Drachma.

That, incidentally, is not beyond the realm of possibility.  What other nations in the Euro would think of it, and the sort of tectonic reaction it would generate, is another thing entirely.

I think we’re weeks to months away from a catastrophic failure somewhere in Europe, and the slowdown in Asia is much worse than is being reported.  Any belief that we’re going to avoid the repercussions of these events is pure folly.

That is a light you see down the tunnel, now that we have walked in well over a mile from the mouth.

Unfortunately that light it is a train and there is no chance we can run the other way fast enough to avoid being flattened.

I’m going to add to Mr. Denninger’s excellent post by mentioning that at least one prominent financial/economics advisor wholeheartedly agrees with the idea that Germany will leave the Euro.  Dr. Philippa (Pippa) Malmgren, President and founder of Principals Asset Management based in London had this to say earlier this month:

News to expect in the coming days and weeks:

• Greece defaults
• Germany protects German banks but other countries cannot do the same thus quickly provoking multiple sovereign defaults and or bank failures, all of which may easily lead to a payments crisis in the global banking system. Derivatives are particularly at risk in terms of operation and execution.
• The Euro falls in value especially against the US dollar
• The Germans announce they are re-introducing the Deutschmark. They have already ordered the new currency and asked that the printers hurry up.
• The Euro falls even more on any news that Germany is withdrawing from the Euro.

Meanwhile, it may be that Germany is not alone in this line of thinking.  Anyone remember the Irish bank crisis that was in the news for months earlier this year?  Well, they haven’t solved anything, it’s just that with Greece’s imminent default, the focus was shifted.  That little crisis is still bubbling away in the background.  So much so that there is at least one report of their secretly printing their old currency.

The Guardian: Ireland Printing Its Old Currency, Just in Case

Ireland’s central bank reportedly is printing Ireland’s old currency in case the country leaves the eurozone. At least that’s the rumor circulating in Dublin, notes Alan McQuaid, chief economist at Bloxham stockbrokers in that city.

McQuaid, writing a guest commentary for The Guardian, says he’s not sure if the rumor is true. But he does hope Ireland has contingency plans in case the euro disintegrates.

Then again, given the record of European leaders, a lack of backup plan wouldn’t be surprising.

As Greece struggles to remain solvent, the European monetary union is scrambling to stop the debt crisis from spreading. If the crisis does spread, Ireland might be next in line.

Some pundits say Ireland should drop the euro.

Being master of your own destiny does have appeal, McQuaid admits. If it returned to the punt, Ireland could boost exports by devaluing the currency and reduce its debt burden.

But if it had its own currency, the Irish would move their deposits overseas, which could destroy the country’s banks.

All is not well in the Eurozone.  I think it is not much longer before the detonations begin.

I remain amused by the complete silliness of statements coming from ECB officials. At best ECB proclamations are laughable, at worst they are completely counterproductive.

With that introduction, please consider ECB’s Mersch says Greek default would bring “chaos”

European Central Bank Governing Council member Yves Mersch said on Saturday a Greek sovereign debt default would lead to chaos, adding it was up to the parliament to deliver on its austerity promises.

Banks and policymakers moved closer to a deal on Friday to help Athens secure funds ahead of a parliamentary vote on austerity next week that Greek Prime Minister George Papandreou must win to avert default.

If the vote next week is lost, international lenders are unlikely to release a 12 billion euros funding tranche, meaning the government will run out of cash within days.

“Now it’s up to the Greek parliament. I observe,” he told reporters on the sidelines of the Bank for International Settlements annual meeting in Basel.

“The next step will be to observe whether there will be delivery.”

When he asked about what would happen if Greece defaulted, Mersch said: “Chaos.”

Greece Default Irrelevant

Here is a succinct summation of the current state of Euro-Zone affairs.

1. Greece will default, but at this point it is irrelevant.
2. The situation in Spain, Ireland, Portugal, and Italy is now so dire that it is does not matter whether or not Greece defaults.
3. Expect chaos

Mike “Mish” Shedlock
Global Economic Analysis

According to the Irish Times:

WITH THE Irish Government on track to owe a quarter of a trillion euro by 2014, a prolonged and chaotic national bankruptcy is becoming inevitable. By the time the dust settles, Ireland’s last remaining asset, its reputation as a safe place from which to conduct business, will have been destroyed.

Ireland is facing economic ruin.

While most people would trace our ruin to to the bank guarantee of September 2008, the real error was in sticking with the guarantee long after it had become clear that the bank losses were insupportable. Brian Lenihan’s original decision to guarantee most of the bonds of Irish banks was a mistake, but a mistake so obvious and so ridiculous that it could easily have been reversed. The ideal time to have reversed the bank guarantee was a few months later when Patrick Honohan was appointed governor of the Central Bank and assumed de facto control of Irish economic policy.

So, why, if they understood guaranteeing the insolvent banks would bankrupt the country, did they do it?

The deal was torpedoed from an unexpected direction. At a conference call with the G7 finance ministers, the haircut was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way. An instructive, if painful, lesson in the extent of US soft power, and in who our friends really are.

So, do you think Mr. Geithner gives a crap about US taxpayers?  Considering the man can’t be bothered to pay his own taxes, and now has condemned an entire country to bankruptcy in favor of making sure bankers can continue to cover up their insolvency, I highly doubt it.  The US Treasury is a looting operation….and you’re the crime victim. 

Costs to bail out bondholders of Irish banks has now soared to $142 billion. Worse yet, the new Irish government completely caved in to the EU and ECB and will attempt to balance the entire amount on the backs of taxpayers.

Please consider Ireland Bows to Trichet on Bondholders as Bank Rescue Reaches $142 Billion

Ireland yielded to the European Central Bank to protect bondholders even as its bailout bill for the region’s worst banking crisis moved to as much as 100 billion euros ($142 billion) after stress tests.

The ECB in Frankfurt was “solidly opposed” to imposing losses on investors in senior bank debt, Finance Minister Michael Noonan told broadcaster RTE today. The ECB agreed to provide “ongoing” funding for the banks, he said.

Ireland agreed yesterday to inject as much as 24 billion euros into four banks, while leaving bondholders untouched. The government already funneled 46.3 billion euros into the financial system and set up an agency that paid more than 30 billion euros to assume risky property loans. The total equates to about two-thirds the size of the Irish economy.

During an election campaign last month, Eamon Gilmore, now deputy prime minister, dismissed ECB President Jean-Claude Trichet as a “civil servant” who would answer to politicians. As recently as March 28, Agriculture Minister Simon Coveney said the government planned to impose losses on senior bondholders in the banks to cut the costs of its bailout.

“Taking all of the losses of the banking system and putting them on the balance sheet of the government doesn’t make sense,” Nouriel Roubini, co-founder of Roubini Global Economics LLC, said today in an interview from Cernobbio, Italy, with Maryam Nemazee on Bloomberg Television’s “The Pulse.” “Eventually, the back of the government will be broken.”

“Rather than go after over 20 billion euros in unguaranteed bonds, the government is making ordinary citizens bear the burden of this debt,” Gerry Adams, leader of nationalist party Sinn Fein, said in statement today. “Rather than act in the interests of the Irish people they are acting in the interest of the banks.”

Backs of Irish Taxpayers Will be Broken

What is the point of throwing the bums out in a massive repudiation of government policy if the new bums have the identical policies as those they replace?

The Euro reacted positively to this turn of events and also to expected interest rate hikes by Trichet. Those hikes with further exacerbate the problems of Greece, Ireland, Portugal, and Spain.

I am sticking to my long-held position “what can’t be paid back, won’t.” The timing is uncertain, and Roubini phrased it well: “Eventually, the back of the government will be broken.”

I might add, so will the backs of taxpayers. The pertinent question is how long the taxpayers put up with another set of politicians who cave in to bankers.

Mike “Mish” Shedlock
Global Economic Analysis

Ireland faces elections, probably on Feb. 25. Ireland has an historic opportunity to lead the way for the rest of the world. If politicians will just stop bailing out the bankers with the taxes of the Irish people, and have Ireland withdraw from the Euro, they could escape the coming storm.

“It’s the DEBT, Stupid!”
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