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The Genius of Mutual Indebtedness – Nigel Farage
You can’t make this stuff up! And remember, as Europe goes, so goes the U.S.  We’re just another kick of the can or two down the road.  Our banks are all inter-related.  The (Greek, Spanish, and the rest of the PIIGS) bonds are “backed” by derivatives (CDS), issued by U.S. banks that do not have the capital to pay up when called upon.  If Europe’s banks go under, so do the five biggest US banks, which have exposure to Europe’s banks (via CDSs) far in excess of their total capital.  That’s why the recent ISDA ruling that there was NO default in Greece.  The U.S. banks would not have been able to pay out on their CDS insurance on the Greek bonds.  Now Spain is in the cross hairs.  If we couldn’t survive a bankruptcy in Greece, pray tell how can we survive one in Spain?

This reminds me of a story that a friend of mine, a prominent cardiologist in Miami, told me last winter.  He was Meyer Lansky’s (mob accountant) cardiologist.  In the late 1970s, Lansky went into a Miami hospital for bypass surgery and my friend was part of a group of doctors who were going to perform the surgery. Before he went in for the surgery, Lansky stared at the doctors and in a gruff voice said, “I die, you die!”  My friend’s heart started pounding.  Then Lansky smiled and said, “Just kidding!”*  Well, the analogy here is simple – Europe dies, we die and this time, no one is kidding!  So, for those of you who still think the end is not near (are you listening Backwoods Jack?), try and rationalize away the following link.

‪*Lansky survived the heart surgery.  He died of cancer in 1983.

After I wrote this section, Jim Sinclair published the following, which ties in nicely with my contentions:

In The News Today

June 26, 2012, at 12:38 pm
by Jim Sinclair

…the message is simple. Do not count on the euro, which in my opinion will not happen.

What prevents this is the OTC derivative disaster and contract settlement collapse such an event would produce. Not even MSM welcoming it with a yawn can prevent the explosion.

U.S. Banks Aren’t Nearly Ready for Coming European Crisis
By Simon Johnson Jun 24, 2012 4:30 PM MT

The euro area faces a major economic crisis, most likely a series of rolling, country-specific problems involving some combination of failing banks and sovereigns that can’t pay their debts in full.

This will culminate in system wide stress, emergency liquidity loans from the European Central Bank and politicians from all the countries involved increasingly at one another’s throats.

Even the optimists now say openly that Europe will only solve its problems when the alternatives look sufficiently bleak and time has run out. Less optimistic people increasingly think that the euro area will break up because all the proposed solutions are pie-in-the-sky. If the latter view is right — or even if concern about dissolution grows in coming months — markets, investors, regulators and governments need to worry not just about interest-rate risk and credit risk, but also dissolution risk.

What’s more, they also need to worry a great deal about what the repricing of risk will do to the world’s thinly capitalized and highly leveraged megabanks. Officials, unfortunately, appear not to have thought about this at all; the Group of 20 meeting and communiqué last week exuded complacency and neglect.

Very few people seem to have gotten their heads around dissolution risk. Here’s what it means: If you have a contract that requires you to be paid in euros and the euro no longer exists, what you will receive is unclear.