In no particular honorific order save the inspiration from the seventh century BCE Etruscan, Greek, Phoenician, proto Semitic, Visigothic mash up we now know and love as our alphabet (props to the Visigoths!):
Bank of America*
D.E. Shaw Group*
Elliott Management Corporation*
Pacific Investment Management Co. LLC (PIMCO)*
The Royal Bank of Scotland
*Indicates an entity that has determination control over the Americas, Asia Ex-Japan, Australia and New Zealand, Europe/Middle East/Africa, and Japan.
The most recent action taken by these folks is a wonderful Kodak Moment which offers a snapshot (which you can print on some EktaChrome, well, not so fast) of the constitution of the group that holds Damocles’ Sword over the global economy. Their meeting reportedly took place on Thursday, January 19, 2012 when they unanimously voted to determine that Eastman Kodak Co. had indeed become bankrupt. I would have loved to have been a fly on the wall to hear the debate on this one. After all, the company had filed its Chapter 11 business reorganization petition in the U.S. Bankruptcy Court for the Southern District of New York on, are you ready for this, January 19, 2012. The actual proceeding is even more fascinating.
The first question voted on by this august body was, “Has a Bankruptcy Credit Event occurred with respect to Eastman Kodak Company?” There were 15 recorded “Yes” votes and 0 recorded “No” votes. The second question – which is slightly more existentially mysterious given that they had just determined that Kodak was BANKRUPT was, “If a Credit Event did occur, is that date of the Credit Event January 19, 2012?” Once again, a unanimous vote in the affirmative. Then the third question, “Is the date on which the DC Secretary first effectively received both a request to convene the Committee and Publicly Available Information that satisfies the requirements of Section 2.1(b) for the Credit Event with respect to Eastman Kodak Company January 19, 2012? (This question is asked to determine the Event Determination Date.)” Yet again, all voting “Yes”. And the final question, “Should ISDA hold one or more auctions to settle Relevant Transactions with respect to which a Credit Event Resolution has occurred in accordance with the terms set out in the form of Credit Derivatives Auction Settlement Terms with respect to Eastman Kodak Company?” By now, I bet you’re on pins and needles with the suspense kind of like watching the NY Giants stick it to the 49ers in OT. But no surprise here – they all voted “Yes”. This model of democratic process and consensus should make our hearts beat in patriotic unison as, finally, we see a group of independent parties come together with such magnanimous unanimity to confirm…well, let’s see, an undisputable, publicly disclosed event that had ALREADY BEEN PUBLICLY REPORTED marking the long heralded demise of one of America’s iconic industrial brands.
Alright, so what’s up here? What is ISDA and why is there democratic process so important when determining when a publicly reported event has, in fact, been publicly reported. The International Swaps and Derivatives Association “… fosters safe and efficient derivatives markets to facilitate effective risk management for all users of derivative products.” It’s pretty important to understand that, while nominally representing as much as the entire world’s GDP at their peak in 2007 and now representing notional value exceeding that of any sovereign nation on Earth, these swaps are (and I will simplify) quasi-insurance products sold by financial institutions like banks to investors who buy a bet against one day owning a defaulted credit.
My personal favorite part about the ISDA and its mission is the fact that the decisions on when a “default” has been triggered is NOT based on what you and I would necessarily see as rather empirically derived from a credit agreement. Say that you don’t make a payment on your credit card or mortgage. That’s an event of default and, based on a series of remedies set forth in your contract with the financial entity, you may have a time during which you can cure the breach of your contract after which the financier can take action such as foreclosure on your assets. By the way, that’s been happening a lot lately. But the institutions that extend this debt financing to customers do not agree to play by the same rules. For them, they get to decide when a literal default is actually a default. And remember, they are NOT disinterested third parties with ANY independence. Every decision they make triggers an event when the bank, for example, has to lose the ‘asset’ of the defaulted loan, and the investor has to pay up on the insurance policy and ‘own’ the defaulted instrument. So it’s no surprise that the board is made up of a mutually assured destruction membership of sellers and buyers who get to decide when they have to pay up to each other.
ISDA is made up of real people who work for real institutions with real names. And before you start feeling squeamish about this conspiratorial sounding event fixing (note my diplomatic avoidance to suggest that any of these actions should be reviewed by the Justice Department under the Sherman Act despite the fact that ALL competing institutions agree on prices), be delighted to know that you are likely one of the beneficiaries of this scheme. If you’ve got a retirement plan, a life insurance policy, or any other managed fund where you don’t know the company into which all of your money is invested, you’re assuredly pumping liquidity into this dance.
And, not surprisingly, it is this system that gives us the seemingly endless headline about whether Greece has “defaulted”. For those of us who actually live in the non-collusive illusion world of swaps, the answer is that Greece defaulted when their capacity to service their debt ended. Kind of like when you don’t make your mortgage payment because you’re out of work. But that’s not the world that counts. The world that counts is made up of the arbiters of consequence identified above and these are the ones who would have to pay up big time if a default was declared. The “Determination Committee” – an unregulated group of real people – gets to decide whether they are accountable when the chips are down. And, I know you’ll be stunned to find this out but they have a remarkable track-record of deciding that their problem is… well, not their problem.
Let’s face it. ISDA isn’t “them”; it is “us”. It has 825 members who happily benefit from the complete opacity that the public has with respect to their specific activities. During the heady up markets when “wealth” was being created, no one was occupying anything screaming for transparency from this legacy of the Reagan Administration. And now that they control more financial instruments than the notional value of any nation’s GDP, they have become the un-elected, unaccountable, inaccessible, arbiters of all of our futures. It is OUR blind participation with blind investments that pumps the blood that animates this supranational organism and it’s OUR conscious decision to reclaim our individual responsibility and accountability that is the ONLY path to build A MORE PERFECT UNION!
If you didn’t know about ISDA before reading this, send this blog link to 10 of your friends and see if we can all start waking up!
To understand the importance of this group, you may want to refer to this sample Auction document to get a clearer picture on how the economy in which you’re participating actually works.