Greece Defaults!

     Today Friday October 28^th Greece defaulted on its’ bonds by forcing bond holders to take a “voluntary” 50% haircut.  The ECB is trying to say that this is not a default but what else could this be.  Where I come from if you are saying you will only pay me half of what you owe me- it is a default.  You can label it whatever fantasyland term that you want but a 50% reduction in payment is a default.  

     I am not the only one saying this.  It appears now that Fitch, the big global rater, has said so as well.  The ISDA (International Swaps and Derivatives Association) is taking a different tack.  They are claiming that this is not a CDS triggering move by Greece.  I think they are trying to save two of their biggest users Bank of America and Goldman Sachs from having to payout and risking putting their weak balance sheets into risk of bankruptcy.   If Fitch sticks with their claim that this is truly a default it sets a bunch of potential lawsuits in New York and London.  Ultimately I believe that this is truly a default.

     Imagine you borrowed money from your friendly neighborhood loan shark.  A month later you walked in and told them they will have to take a 50% haircut on what you owe them.  How do you think they would take it?  Would it help if some pin stripe suit wearing guy from the bank told them that this was “voluntary”?  I think you would quickly find out that this is a default and you would have at minimum both your legs broken or pay with your life.  I think Greece and the rest of PIGS will soon find this out.  

     I would recommend only keeping FDIC insured limits in bank accounts with Bank of America and closing all brokerage accounts with Bank of America/Merrill Lynch and Goldman Sachs.  The brokerage accounts are only covered by industry provided insurance that will easily be swamped if and when these giants fail.  You will get your securities back after a few weeks but your money market funds are not really that protected.  You will not be able to trade any securities held in street name, i.e. any security where you do not have a physical certificate with your name printed on the shares, until they sort through your account and transition it to another broker.

Full Disclosure

     As of October 28^th I still have my personal and business accounts with Bank of America but they are well below the FDIC limits.   I do not trade with any of the banks mentioned about.  I also do not own any of their securities directly.  I do own a Proshares ETF that shorts financial companies which BoA and Goldman Sachs are part of.