Again, Investors Benefit…Taxpayers Suck It In…

Why do large investors…hedge funds and others…like governments to get involved in financial affairs?

Because these investors can make lots of money from the actions of these governments.

Ask George Soros about the behavior of the British government in the 1990s.

Now we have another possible piggy-bank on the horizon…thanks to the Greek government and the Eurozone.

“Under the deal Greece struck in July with its banks as part of Europe’s rescue plan, a substantial portion of its existing bonds are scheduled to be swapped into new longer-term securities that could be valued at more than 70 cents on the euro.” (link)

Why is this “deal” important?

Many Greek government bonds “are changing hands for as little as 36 cents for each euro of face value.”

Making money on this deal requires that the latest Greek bailout system is ratified by the parliaments of the 17 European Union countries that use the euro by late October.

If the EU deal closes, “those who bought the bonds recently at distressed prices might in some cases come close to doubling their money.” And, in only one or two months time!

Again, investors benefit…taxpayers suck it in…

“According to a person with direct knowledge of the debt swap, about 30 percent of the investors who are expected to participate in the (deal) bought their bonds after July 21. They are not the original debt holders…”

What governmental “leaders” don’t seem to understand is that once they take a position, many other people in the world will change their positions to take advantage of the new position of the government. Things just don’t stay the same. And, if these “leaders” follow the same strategy over and over again…others will take advantage of the repeat strategy and use it against the “leaders”.

In the case of the European Union, the “leaders” of the EU have tried repeatedly to “kick the can” down the road. By failing to take action in the past, these “leaders” have postponed the actions that must take place. But, by postponing and postponing the day when the actions will take place, the “leaders” have just limited their options and created situations in which large investors can take advantage of the dislocations that have developed in financial markets.

If the “leaders” had been leaders and had moved earlier when the dislocations in the financial markets were smaller, such possible large returns would not have been available. By postponing action, these “leaders” allowed the situation to get further “out-of-line” and this results in the possibility of well-placed investors making lots and lots of money.

Of course, the bailout must go through…and this is the risk that these investors face.

And, the fate of the taxpayers?

“Defenders of the (deal) say that while it may not be ideal, it was the best deal that could be reached at the time. If hedge funds make some money along the way, they say, that is a small price to pay for securing a contribution from the private sector.”

An investment tip…look for dislocations created by government actions.

Another place where lots of money was made recently was on French banks. Why? Well, because French banks…and other European banks…have been given special treatment in the past and the problems relating to European sovereign debt have been handled, well, inconsistently…at best. And, then there were the “stress tests” given the European banks which proved to be a joke.

The stock prices of French banks had to decline and with this decline the rating agencies lowered the ratings that were given to the banks exacerbating the decline in their stock prices. The article cited above begins its discussion of hedge fund purchases of Greek bonds by stating, “After a number of investors struck gold by betting against French banks…”

Lots of money will be made from the European financial crisis. Lots of money will also be lost. The money made will tend to go to the better off who can “bet” against the governments. Postponing actions to protect the “less well off” only seems to lead to situations where the benefactors of the ultimate actions of the government are not the ones the “leaders” of the government are trying to help.

As I have stated many times, Europe has gotten into the current situation by assuming that its sovereign debt problems were problems of liquidity and not solvency. People tend to avoid as much as possible questions relating to solvency. This is especially true of bankers and the assets that reside on their balance sheets.

Solvency problems, however, cannot be postponed forever…they must eventually be dealt with. But, this is where real leaders must step up. Identifying solvency problems earlier rather than later is always a benefit. Identifying solvency problems earlier let you deal with the issues surrounding the asset sooner when the problems are not so severe. Dealing with solvency problems earlier rather than later allow one to make smaller, incremental adjustments that the institution…or country…can more easily absorb.

People…especially politicians…don’t like to admit mistakes and so we declare that the problems we face are liquidity problems and not solvency problems and we postpone the day of dealing with them.

Such postponements can only result in opportunities for others. Wanna chance to double your money?

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About John Mason 79 Articles

Professional history: Banking--President and CEO of two publically traded financial institutions; Executive Vice President and CFO of another. Academic--Professor at Penn State University and at the Finance Department, Wharton School, University of Pennsylvania. Government--Special Assistant to Secretary George Romney at Department of Housing and Urban Development; Senior Economist in Federal Reserve System. Entrepreneurial--work in venture capital and other private equity; work with young entrepreneurs in urban environment.

Visit: Mase: Economics and Finance

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