Tuesday, December 25, 2012

Cause for furor!

Articles like this one can truly disturb my holiday spirits! Here we read about the inner workings of hedge funds; how hedge funds went on extensive fact-finding missions to Greece earlier this year; how they were given the red carpet treatment by all sorts of governmental bodies; how the Greek government and EU decision makers sought out the opinions/advice of hedge funds; etc.

If I were a hedge fund manager, I would laugh at the 'financial innocence' of politicians. In fact, I would laugh about such useful idiots all the way to the bank.

What in the world does a hedge fund directly have to do with the Greek problem? I am not disturbed when hedge funds make millions/billions in their dealings with other professional market participants. A hedge fund can only buy Greek bonds at 14 cents on the Euro if someone else is prepared to sell at that price. That is a totally voluntary transaction on both sides. If the hedge fund can later unload this paper at 28 cents on the Euro, again to 'someone else', again in a completely voluntary fashion, the hedge fund has doubled its investment by playing the market smartly. It has not taken huge profits on Greece. Instead, it has taken huge profits on 'the market'. That is fine and dandy.

But this silly behavior on the part of politicians (which we have seen since the beginning of the crisis) to ask those for advice who are most likely to profit if their advice is followed, well, that behavior is silly.

A debt or equity buy-back is a totally common event in financial markets. It's also a smart move when it is totally voluntary. Warren Buffett offers to buy back shares of Berkshire Hathaway when he thinks he can buy them below what he thinks they are worth. Potential sellers will only sell if they don't think those shares are worth as much as Warren Buffett thinks. If no shares are offered at the price which Warren Buffett tenders, there will be no buy-back.

I have written before how silly it was to make the Greek debt buy-back a major pillar of the latest agreement. In consequence, the 'voluntariness' was taken out of the game. When the Greek government knows that it must be successful with the debt buy-back, a hedge fund manager can take the attitude of "I won't even pick up the phone unless you offer at least 35 cents on the Euro". He knows the counterparty will call again...

Hedge funds are to be congratulated for having had the nerve to buy Greek bonds when they traded at 14%. They are to be congratulated for making millions/billions by selling them later at a much higher price. Troika and Greek authorities ought to be shunned for intervening in voluntary market behavior and more or less forcing holders of such Greek bonds to sell when they would not have sold voluntarily. What they did was to force those holders to allow hedge funds to cash-out on their speculation.

No one can tell whether 35% was a good price for the seller or the buyer long term. That is not my point. Instead, my point is that third parties which speculate amongst themselves should have to do that voluntarily so that risk and reward continue to go hand in hand, and so that it remains immaterial to Greece what those third parties do.


  1. I think you are perfectly right. I hope that one day the European taxpayers will wake up and punish the politicians who take such decisions. Unfortunately there are still people who are fooled into believing that we have to pay for these acts of madness out of "European solidarity."

  2. I am still working at the serial about The Task Force for Greece and it is much, so I need 5 more videos to have all the questions and all the answers together in a serial.
    Today I continue.
    Christmas forced me to take a break.
    I forced my self, not easy!

    I would like to start now, immediately, with adding also the words of this post in a video.
    I can do that after the serial has been finished.
    Maybe there are more posts then, (I will make quotes out of them then) but I continue with this way of publishing and paying attention. It works better than commenting. I am sure. And the music does a lot extra, the photos also.