Opinion

Felix Salmon

How insider trading becomes endemic

Felix Salmon
Jun 22, 2011 13:34 UTC

This week’s New Yorker has George Packer’s massive, 11,000-word article on Raj Rajaratnam, his prosecutor Preet Bharara, and financial prosecutions. Highly recommended. But there was one line in particular which jumped out at me:

If there are examples of people whom Rajaratnam unsuccessfully tried to corrupt, they have not surfaced in the voluminous public record on Galleon.

I asked Packer what he meant by this. Is it simply a narrow statement about “the voluminous public record on Galleon”? Is it possible that Rajaratnam never met someone he couldn’t corrupt? Or is it something in the middle, maybe that Rajaratnam had an extremely good nose for the kind of people who could be corrupted?

I wanted to know just how malign Packer considers Raj to be. If you or I had been approached by Raj in full flower, would he have corrupted us, too? I have an image of Raj as someone a bit like Javier Bardem in No Country for Old Men, only instead of killing the people who come across his path he just turns them into insider traders.

Packer replied:

From my work on this story, I’m certain there are people Raj tried to corrupt and couldn’t. And perhaps it’s not surprising that their names didn’t show up in the record, since we’re talking about a criminal investigation. It’s just striking that so many names of the corruptible do show up, how casually they show up, how easy it was for Raj to turn most of them. Also striking that not a single counter-instance happens to stumble into the record, with all the documents I’ve seen and wiretaps I’ve heard. You’d think that at least one example would appear. (And, to answer one of your questions, I’d to think that if you or I floated through this world, we’d have been that example.) And finally, it’s striking how many people who weren’t actively involved in the crimes must have known about them but apparently never raised a red flag, and certainly never went to regulators or other authorities. There’s a kind of code of silence on Wall Street that reminds me of omerta in the mob and the blue wall with the police, which obviously makes it all the harder for prosecutors to take on the vast scope of these crimes. Preet Bharara was cautious about what he would say to me, but one thing he did say was that insider trading is “everywhere you look.”

This is depressing, and rings true. I’m no expert on insider trading, but it does seem to me that prosecutions tend to come proactively as a result of deep investigations, rather than reactively as a result of companies or employees turning violators over to the authorities. Galleon employed about 70 analysts, fund managers and traders when Raj was arrested, as well as support staff; it’s reasonable to assume there were at least as many ex-employees too. It’s silly to believe that they were mostly ignorant of what Raj was looking for — and yet none of them said anything.

The key here, I think is the same slippery slope of complicity that I’ve written about before. Start with a job offer, and an office culture. And then slowly raise the money and the pressure, and bring as many people as you can inside the fold. Long before they do something illegal, they’re tainted, and won’t give up their colleagues.

I also wonder: hedge funds are famous for the barrage of interviews and personality tests that they put prospective employees through. Are some of those tests ferreting out precisely the sort of people who are the most corruptible? After all, corruption is a close relative of greed, which hedge funds are unabashed about prizing.

And remember too that all of Wall Street, even down to the level of individual investors, trafficks in exclusive information. Think of all those expensive newsletters offering an edge in the market, or the various subscription websites and boring conferences which promise to give people hugely valuable investment advice.

It’s a given, on Wall Street, that information can be prized and valuable. One time-tested way of making it big on Wall Street is to find information which others don’t have and then act on it: look at Muddy Waters for a prime example. Everybody’s looking for the information edge — and the point at which exclusive information crosses over into being inside information is maybe not always obvious from the point of view of an ambitious analyst. If I’m sitting on the Acela and overhear two businessmen talking about an upcoming deal, I can act on that knowledge perfectly legally. And the main problem with analysts’ information isn’t that it’s illegal, but rather just that it’s worthless.

All of which says to me that there’s a lot more insider trading going on than the number of prosecutions would imply, and that it’s going to be extremely difficult to crack down on. The very architecture of Wall Street is designed to encourage it, with only a thin layer of compliance people doing their best to warn people sternly about what they can’t do. They — along with prosecutors — are likely to remain mostly ineffectual, so long as everyone else continues to push for an edge wherever they can find one.

COMMENT

ah, PragCap, the website written by a guy who thinks 2 and 20 is the investment banking model….

Thank god no one needs to bother with facts anymore.

Posted by Danny_Black | Report as abusive

Counterparties

Felix Salmon
Jun 22, 2011 04:20 UTC

Google’s websites had more than a billion unique visitors in May — WSJ

The FBI knocked Curbed, Pinboard & Instapaper offline as collateral damage to a server seizure — NYT

A Visual Representation Of The Law School Bubble — ATL

Existing home sales fall to 6-month low in May, with prices down 4.6% yoy — Reuters

Adventures with debt ceilings, CDS edition — Reuters

COMMENT

You could alternatively use the CDS price as the congress stupidity index, since the US can only default on its debt if it chooses to do so.

What specific event would trigger the payment on the agreement? Are all CDS written with the same language, or could there be some dastardly contract writers out there that are trying to win based on a technicality?

Posted by djiddish98 | Report as abusive

Why is wine getting hotter?

Felix Salmon
Jun 21, 2011 23:52 UTC

I’ve long suspected that this is true, but now there’s a formal academic paper proving it:

Winemakers perceive that consumers demand wine with a stated alcohol content that is different from the actual alcohol content, and winemakers are willing to err in the direction of providing consumers with what they want. What remains to be resolved is why consumers choose to pay winemakers to lie to them.

Essentially, people like to think of themselves as sophisticates who go to art-house movies, even if in reality they’re much more likely to sit slack-jawed in front of some reality TV show. In the case of wine, they like the idea of buying something grown-up, with a relatively modest amount of alcohol; when it comes to drinking what’s inside, however, the more heat the better. So wine labels consistently show lower alcohol content than what’s inside.

This is especially true in the new world. Out of 43,908 tested new world wines, 24,561 under-reported their alcohol content, with the reds averaging 14.1% alcohol while claiming just 13.6%, and the whites averaging 13.5% while claiming to be 13.1%.

Interestingly, the smaller number of wines which either over-reported their alcohol content or got it exactly right all reported pretty much the same levels of alcohol: 13.1% or 13.2% for whites, and 13.6% or 13.7% for reds. On average, it seems, wine will just say that it’s 13% if it’s white and 13.5% if it’s red, but in reality it’s likely to be higher than that.

So wine is hot, and getting hotter. Is this a global warming phenomenon? No:

The coefficient on the heat index is approximately 0.05, suggesting that a one-degree Fahrenheit increase in the average growing season temperature everywhere in the world would cause the average alcohol content of wine to increase by 0.05 percentage points; it would take a whopping 20 degree Fahrenheit increase in the average temperature in the growing season to account for a 1 percentage point increase in the average alcohol content of wine.

Instead, it’s a style thing:

We can expect Old World (European) wines to have about 0.63 percentage points less alcohol than wine produced in the New World (the Americas, Australia, New Zealand, and South Africa)… compared with France, three countries produce somewhat lower-alcohol wine (Canada, New Zealand, and Portugal) while the rest produce higher-alcohol wine, with the effects being most pronounced for Australia (0.55 percentage points higher on average) and the United States (0.85 percentage points higher on average).

In Australia, red wine has increased in alcohol content by a whopping 1.4 percentage points over the past 18 years: it’s pretty much an entirely different drink, now, to what it was as recently as the mid-90s.

And yes, the wineries know exactly what they’re doing.

It is relatively inexpensive to measure the alcohol content of wine reasonably precisely (though some of the devices used may entail larger measurement errors), and it is necessary to do so to be informed enough to comply with tax regulations, at least in the United States. It is also an important element of quality control in winemaking. Consequently, we speculate that commercial wineries for the most part have relatively precise knowledge of the alcohol content of the wines they produce and that the substantial average errors that we observe are not made unconsciously. This speculation is based in part on informal discussions with some winemakers who have admitted that they deliberately chose to understate the alcohol content on a wine label, within the range of error permitted by the law, because they believed that it would be advantageous for marketing the wine to do so. In one instance, we were told specifically that the stated alcohol content was much closer to what consumers would expect to find in a high quality wine of the type in question.

If you want to explore the world of high-quality, low-alcohol wines, then, don’t always trust what you see on the label. And doing so is going to be much harder than it used to be. In 1992, white Bordeaux wines averaged 11.7% alcohol; since then they’ve been getting hotter at a rate of 0.35% per year, putting them at 12.5% today. And in the new world the numbers are much higher: Chilean reds, for instance, averaged 12.3% alcohol in 1992, and have been growing in alcohol at a rate of 0.82% per year since then. That means they’re now at 14.2% and rising.

How much further can this trend go? We’re beginning to see a backlash to high-alcohol wines, but I fear that the backlash is simply manifesting itself in lower numbers on the label, rather than lower alcohol levels in the bottle. Winemakers are convinced they know what consumers want — and I fear they’re entirely correct. And consumers, clearly, love to be lied to. So this is likely to continue for a while yet.

COMMENT

You should learn a little more about wine making and what ever your next subject of choice is. Wine professionals are all laughing at you.

Posted by Goddu | Report as abusive

Nocera vs Sorkin, bank capital edition

Felix Salmon
Jun 21, 2011 13:36 UTC

One of the consequences of Joe Nocera’s move to the NYT op-ed page is that his column now appears on the same day as that of Andrew Ross Sorkin. Which can sometimes result in a great lesson on the difference between how Wall Street is viewed from the outside and how it is viewed from the inside.

Nocera devotes his column today to Basel III, which is of course fantastic — he’s quite right that the fight over capital standards is much more important than any wrangling over Dodd-Frank, or derivatives, or the Consumer Financial Protection Bureau. Capital is crucial, it’s insufficient at present, and Nocera’s right that asking too-big-to-fail banks to hold as much as 14% of their assets as equity is a very good idea.

(One point I’d add: these capital standards have to be progressive, a bit like income tax. The last thing we want is a situation where too-big-to-fail banks have an incentive to get even bigger, on the grounds that if they’re going to be socked with the highest capital surcharge anyway, they might as well just get as big as they possibly can. So my suggestion is for the SIFI surcharge to range between 3% and 7%, giving banks an incentive to shrink and thereby get a lower rate.)

Nocera also links to the smart analysis of Anat Admati, who explains that there’s no good reason for banks to minimize the amount of equity they hold:

JPM’s overall funding costs, averaging the required return on the various debt claims it issues (some of which might decline if JPM is better capitalized) and the required return on equity, need not change just because more equity is used.

In other words, it’s a really bad idea to encourage banks to minimize the amount of equity they have, or to look at banks’ profits solely as a percentage of their total equity, rather than in relation to their entire funding structure. If you want to look at profitability, then return on assets is a much smarter place to start than return on equity.

Which brings me to Sorkin:

Wall Street is facing a new reality that it has yet to come to grips with. “Return on equity,” perhaps the best metric for considering the health of the Wall Street, fell to 8.2 percent in 2010, according to Nomura. That is down from 17.5 percent in 2005, before the crisis.

By comparison, total compensation has hardly fallen at all. At Goldman Sachs, for example, compensation and benefit expenses fell 5 percent in the first quarter… And its annualized return on equity fell to 12.2 percent from 20.1 percent in the period a year earlier.

Andrew is, simply, wrong on this. Return on equity is not “the best metric for considering the health of the Wall Street”, precisely because it makes equity seem like a bad thing which should be minimized, rather than a good thing which should be maximized.

More generally, looking at total compensation as a percentage of total equity is rather silly. What direction does Sorkin want that ratio to move in? He seems to think it a bad thing that it’s going down — but isn’t a world where bankers are less overpaid and equity is more abundant exactly what we want?

Sorkin’s bigger point is that higher base salaries (to make up for lower bonuses) are “perverting Wall Street’s calculus during periods of weakness”. Which rather forgets that Wall Street’s calculus was pretty perverted before. The current system is definitely an improvement: it forces banks to hire people for the long-term value they create, rather than for the short-term quarterly profits they can generate before cashing their eight-digit bonus checks and quitting for a life of leisure.

And, since when is this a “period of weakness” for Wall Street? Hasn’t the banking sector been wallowing in cash dropped from Ben Bernanke’s helicopters for the past couple of years? This is a period of strength for Wall Street, and the biggest banks are making record profits. If they’re firing people, maybe that’s a good sign that they reckon they can get by without employing quite as many of America’s best and brightest. And that in turn is a development to be welcomed, rather than criticized for its perversity.

COMMENT

“looking at total compensation as a percentage of total equity is rather silly. What direction does Sorkin want that ratio to move in? He seems to think it a bad thing that it’s going down — but isn’t a world where bankers are less overpaid and equity is more abundant exactly what we want?”

I’m no fan of Sorkin but I think you are mischaracterizing his point here. I think he is suggesting it is a problem that the total compensation/equity ratio has NOT declined along with return on equity

Posted by chris9059 | Report as abusive

Counterparties

Felix Salmon
Jun 21, 2011 03:36 UTC

Foursquare reaches 10,000,000 members — 4sq

$250/mo for bike parking on E 12th St — Twitpic

Club Penguin Down After Disney Fails To Renew Domain Name — Mashable

Something still doesn’t smell right, here, on the Skype firings — Techcrunch

COMMENT

$250/mo bike parking! holy crap!

Posted by KidDynamite | Report as abusive

Groupon’s idea of going quiet

Felix Salmon
Jun 20, 2011 23:17 UTC

If you want a great example of the kind of mean things that people are saying about Groupon in the run-up to its IPO, you could do a lot worse than Rocky Agrawal’s TechCrunch essay entitled “Why Groupon Is Poised For Collapse”. It’s a great example of overstretch and dubious logic, with a couple of moments of brilliance and genuine insight thrown in at the same time. Groupon, of course, being in its quiet period, can’t react. Except, it just can’t help itself, and has put up a whiny post, supposedly authored by the company cat, about how unfair the whole situation is.

The fact is that when Groupon made the decision to go public, it invited exactly this kind of attention — both before the IPO and forever more. When Groupon was private, no one really knew anything about its financials, and CEO Andrew Mason could happily declare that he’d much rather talk about building miniature dollhouses. Once it’s public, however, he’ll have a fiduciary responsibility to his shareholders, and will have to answer such questions at length. Will that make him happier than answering such questions with a death-ray stare? I doubt it, to be honest. Revenues and business models and profits and forecasts are serious things, and you can’t kid around with shareholders in the same way you can with journalists.

In other words, Mason will have to go from saying nothing, which can be fun, to saying something, which almost certainly won’t be. Rather than moan about his inability to say anything in the quiet period, he should enjoy it while it lasts. From now on in, the boring financial questions are going to be unavoidable — from analysts, from journalists, from shareholders, even probably from merchants and customers who wonder whether Groupon’s profitability is a sign that they’re being ripped off.

Which brings me to one of Agrawal’s smartest points:

Underlying Groupon’s success is an auction. It’s not explicit, like Google’s AdWords bidding platform, but the economic effects are similar. The fact that Groupon runs daily deals creates artificial scarcity and drives up pricing to absurd levels. Even with four deals a day in a given market, you’re talking about fewer than 1,500 deals a year.

The reason that Groupon can get away with retaining 50% of the proceeds of its offers is precisely because the supply of those offers is so constrained that demand will always exceed it. Groupon can then pick and choose among the various different merchants clamoring to do business with it, aiming to maximize its own revenues by selecting the offers which are most lucrative for Groupon.

In this, Groupon’s interests are not aligned with either merchants or consumers. With merchants, indeed, the interests are almost diametrically opposed: the greater the proportion of total revenues that Groupon takes, the less well the merchant does. And consumers will always prefer an offer with a low up-front cost, while Groupon wants to maximize the up-front spend, since that’s all that Groupon ever sees.

Up until now, there’s been one overriding narrative when it comes to Groupon: its astonishing, breakneck rate of growth. The secondary story was the quirkiness of the place, and its sense of humor. And I’m sure that from the company’s point of view there’s something frustrating about running into its first real barrage of negative press just when it can’t respond at all. But my guess is that it won’t take long before executives look back wistfully on these quiet days. Because the aggressive questions aren’t going away — and the questioners are never going to be satisfied with Groupon’s answers, either.

COMMENT

Groupon has been hiring a lot lately (http://bit.ly/k0qi6j) and going after Silicon Valley’s top talent… and launching great new products. The Rocky dude can complain as much as he wants, but the business won’t stop. It’s a great value proposition for both consumers and merchants.

Posted by CarlaOlson | Report as abusive

Charts of the day: The rise in structural unemployment

Felix Salmon
Jun 20, 2011 18:28 UTC

Is this jobless recovery a peculiarly American phenomenon? This chart, from a new paper seeking to unentangle cyclical from structural unemployment, would suggest that it possibly is:

change.tiff

I find these numbers quite shocking: after all, it’s hardly as though countries like the UK and Portugal have emerged from the recession unscathed. But the US increase in unemployment over the course of the recession was more than double the increase anywhere else.

That said, the US has historically has a much lower rate of structural unemployment than most of these other countries: the level of unemployment which is baked in to economic reality, before cyclical factors move it temporarily up and down. And what I fear is that the Great Recession has moved the US towards European levels of structural employment, without any kind of Euro-style social safety net.

Here are the charts for what’s happened to structural unemployment in the US. The red lines are the official employment rate; the blue lines are the structural employment rate. The first chart shows the unemployment rate overall; the next four break it down into people unemployed for less than five weeks; people unemployed for between five and 14 weeks; people unemployed for between 15 and 26 weeks; and the long-term unemployed who have been out of work for more than six months.

structural.tiff

What’s going on here is pretty clear. For short-term unemployment, little has changed: the structural rate has been around 2% for decades. But look at any of these charts and they show structural unemployment at an all-time high, with the situation getting much worse the longer the duration of unemployment. Overall, the structural rate of unemployment is now more than 8%, which means that we’ll only dip below that level temporarily, during cyclical upturns.

Measuring structural unemployment is, of course, more of an art than a science, and I’d be astonished if any economist agreed with all of the figures in this paper. That said, it’s entirely intuitive to believe that structural unemployment rose significantly over the course of the recession, and that it’s now painfully high. And that the Obama Administration is, to a first approximation, doing absolutely nothing to address this crisis head-on.

COMMENT

“America no longer has much work for someone who hasn’t gone to college, but has a strong back and strong muscles and is willing to work hard.”

Unless you’re an illegal alien, in which case you are one of the Chosen People.

By the way, America no longer has much work for people in a lot of white collar professions as well.

Posted by lsjogren | Report as abusive

When Uncle Sam forecloses

Felix Salmon
Jun 20, 2011 16:23 UTC

You probably won’t be surprised to hear that Wells Fargo is sparring with the government on the subject of foreclosures. But you might be surprised to see who’s on which side:

Wells Fargo & Co. decided to exit reverse mortgages after federal officials insisted it foreclose on elderly customers who were behind on property tax and insurance payments, a Wells executive wrote in an email to business contacts Friday…

Reverse mortgage market participants generally agreed that the industry is enduring hard times…

One problem is that lenders are not allowed to set aside payments for property taxes and other such recurring costs, leading to trouble if the borrower cannot pay them. Contributing to the issue is a prohibition on underwriting loans based on borrowers’ credit rather than the equity they have in their home.

A third problem arises in the course of disposing of the property. If the borrower dies and the equity in the home does not cover the mortgage, the FHA is responsible for making up the difference. But it is often the lender’s duty to dispose of the house, a process that sometimes forces it to eat some of the costs. An FHA requirement that the lender not sell the house for less than 95% of its appraised value can make that process difficult, Lewis says. “Imagine 5% as your margin on this kind of housing market — it’s insane. If someone has a 375 bid for a 400 house, we can’t sell it.”

All of this is, of course, a direct consequence of the fact that the government is now more lender than regulator when it comes to mortgage finance. Rather than standing up for beleaguered borrowers, it now has a huge financial interest in extracting as much money from them as it can, as quickly as possible.

It’s also completely insane that lenders can’t underwrite reverse mortgages: if we learned anything during the housing crisis, it’s that writing mortgages based on nothing but home value is a recipe for disaster. Tanta, of course, explained this better than anyone:

Three things have been the core of mortgage underwriting since roughly the dawn of time: the three Cs, or Credit, Capacity, and Collateral. Does the borrower’s history establish creditworthiness, or the willingness to repay debt? Does the borrower’s current income and expense situation (and likely future prospects) establish the capacity or ability to repay the debt? Does the house itself, the collateral for the loan, have sufficient value and marketability to protect the lender in the event that the debt is not repaid? …

“Traditional” subprime lending was about loans to people who had capacity but not creditworthiness or who had creditworthiness and capacity but not great collateral…

Given assumptions about the collateral—like, its value always goes up and its value always goes up—you could more or less forget about problems with the other two Cs. When the RE markets were hot enough, in fact, there weren’t “problems” with the other two Cs.

This was spectacularly boneheaded even during the height of the real-estate boom. But it’s even more boneheaded in an environment where homes are falling in value. You can’t underwrite a mortgage, reverse or otherwise, based only on collateral and not at all on creditworthiness. You just can’t. We’ve learned this a million times. And yet HUD is forcing lenders to do just that — and then forcing them to foreclose when the loans go sour, even if the only delinquency is on property tax and insurance payments.

The big problem here, of course, is that no regulator is going to tell HUD to shape up and get its act together. The private sector turned out to be very bad at writing mortgages, during the boom. But it looks increasingly as though the public sector will turn out to be just as bad, during the bust.

COMMENT

“Lower disbursement rates as (taxes and insurance) increase?”

Exactly.

“What if borrowers have already committed to spend that money?”

Borrowers are already committed to spending amounts on taxes and insurance, this just changes the cash flow from (lender–>borrower–>tax clerk/insurance) to (lender–>tax clerk/insurance). Borrowers get lower disbursements from the reverse mortgage, but since they would not then be paying taxes/insurance out of pocket, their cashflow would be unaffected.

Posted by SteveHamlin | Report as abusive

Could the EFSF engineer a Greek restructuring?

Felix Salmon
Jun 20, 2011 12:25 UTC

We’re now close enough to a Greek default that the likes of Daniel Gros are coming up with schemes for how to avoid such a thing:

The European rescue fund — European Financial Stability Facility, or E.F.S.F. — should offer holders of Greek paper an exchange into E.F.S.F. paper at the current market price. Banks could be “induced” by regulators to accept the offer.

The E.F.S.F. could then be the only remaining creditor of Greece and propose a bargain to the country: “We write down the nominal value of our claims (say, 280 billion euros) to the amount we paid (say, 150 billion euros) and extend all maturities (at unchanged interest rates) by five years provided you (Greece) agree to additional adjustment efforts (and asset sales).”

This should be too good of a bargain for Greece not to accept since it avoids default and saves the country 130 billion euros. While the E.F.S.F. exchanges the stock of Greek bonds, the International Monetary Fund could finance the remaining deficits in the usual way, with bridge financing until the fiscal adjustment is completed.

Greece would then be left with some I.M.F. debt and the 150 billion euros it owes to the Europeans. Together, this would be about 85 percent to 95 percent of its gross domestic product, which is not far from that of France. It would be high but manageable.

The losses that would be taken by Greece’s private-sector creditors — €130 billion or so — would be small enough to avoid large-scale bank insolvencies, at least outside Greece itself. (What would happen to Greek banks is far from clear.) But it’s not at all clear how this regulatory “inducement” could work.

One problem here is that unless they’re Goldman Sachs, banks don’t mark all their assets to market every day: the current secondary market price might be a more reliable guide to value than anything else, but that doesn’t make it infallible or even in the right ballpark. And of course the minute that the EFSF or anybody else starts treating the market price as some kind of holy benchmark, you can be sure that the market price will start rising dramatically.

A bigger problem is that the market price is a marginal price, being set between a relatively small group of speculative investors with pretty short-term time horizons. (That’s why it’s fine for Goldman to mark to market: when it holds securities it does so on a speculative basis and with a short-term time horizon.)

There’s an enormous group of investors who would never buy Greek debt for anything near the current price, and there’s an equally enormous group of investors who would never sell it at these levels. Those investors, obviously, don’t trade with each other: they simply don’t participate in the market for Greek debt. But Gros’s idea is to drag them into the market against their will, tell them that they’re wrong to stay out of it, and force them to sell at a price they would never normally agree to. Regulatory strong-arming can be effective, but this would be a very tough sell indeed — and indeed would violate the very spirit of markets, where trades are voluntary and done in the knowledge that most investors aren’t actually interested in trading at the current market price.

The point here is that Gros’s plan would never work if the EFSF simply bought up Greek debt in the secondary market — it could never buy enough to move the needle, and if it started buying extremely aggressively, then the price would necessarily rise sharply. So it’s the element of coercion here which is central to the Gros scheme.

And if banks are going to be strong-armed into swapping out their Greek bonds for about 54 cents on the dollar in cash, then it should probably be Greece making that offer, and probably putting a few other options on the table as well. There’s no obvious reason why the EFSF should be the central player in a Greek restructuring, rather than Greece itself.

Any Greek restructuring is going to have a menu of options. If the EFSF wants to be helpful and provide a pool of cash which it will use to fund one or more of those options, great. But that’s just the beginning of the process — it’s not a fully-fledged scheme in and of itself.

COMMENT

this stuff ought to be analyzed from game theory. if you know that everybody is tendering their bonds and after that, Greece becomes solvent with a debt/GDP ratio of 85%, then you will want to keep the bonds and hold out for full repayment which suddenly becomes likely in this scenario.

And if i hold out, and you hold out, and everyone holds out, then nothing happens. So there isa chicken-and-egg problem here and it cant be easily solved.

On the other hand you have to admire the greek politicians for their skill at game theory. Far from being inept or incompetent, they have correctly reasoned that in case of a default the creditors suffers, not the borrower. My preference would have been to default sooner so that economy can go back to growth sooner.

Posted by Kostas1974 | Report as abusive
  •