Eric King always does a good interview, and Bill Laggner is a hedge fund manager (Bearing Fund, LP) who has been on top of the credit bubble and bust. He comes at things from an Austrian perspective.
Listen here.
Some take-aways:
- People of wealth around the world have lost faith in their respective governments.
- There is a limit to government borrowing, but establishment economists and politicians are very complacent right up to the end.
- Goldman’s swap transactions on Greek debt.
- Good luck getting Greece to go from 14% deficit to 3%. Mathematically impossible — Greece must default like Argentina did in 2001. They’ll probably leave Eurozone, and this may be best for each of them.
- Portugal, Ireland and Spain face the same issue. Spreads blowing out. Puts heavy pressure on European banks.
- Politicians and talking heads are saying sovereign debt issue is contained, just like they said sub-prime was contained.
- European banks are at least as levered as US banks were two years ago.
- We’re at a juncture where we can print and delay or default and get it over with.
- Some countries may realize they are better off defaulting than taking IMF money and being slaves.
- GS people have been hired by Greek government to advise on bailout.
- Monetary elites like GS face a risk of the structured finance business, their bread and butter, disappearing.
- GS and others don’t produce capital. They speculate and then siphon money from taxpayers when they lose.
- Goldman’s proprietary trading book is highly lucrative, much more so than most other investment banks’. They make money over 90% of the time – how is that possible if it’s all honest?
- Goldman was a credit facility for New Century, one of the worst loan originators in sub-prime. We’ll find out more about their roll in helping build a market for junk mortgages. Possible exposure of fraudulent practices.
- Goldman sold a lot of this mortgage paper on leverage — they provided loans to funds to let them go levered long CDOs.
- Civil litigation will open up Pandora’s Box. Where there illegal activities within Goldman? Possible reputational risk. If they survive, they’ll be a shell of their former self.
- US has the same problems as Europe. US cities and states are just as bankrupt as Greece.
- Local politicians are corrupt and clueless and bankers took advantage of them, as in Jefferson County Alabama.
- Criminal proceedings in Italy against Deutsche Bank should provide insight into possible bribery and fraud related to derivative transactions.
- Expect litigation related to US city and state derivative transactions, as in Jefferson County Alabama.
- Expect increased outrage towards bankers.
- No transparency in US financial system.
- As states and cities go bankrupt, expect them to default on derivative transactions and enter litigation.
- (My own note: what about government employee unions? If you’re looking for an explanation for municipal and state bankruptcies, look there first.)
- US financial reform bill doesn’t solve anything. Still have the moral hazard of too-big-to-fail.
- Geithner is walking moral hazard.
- Amazing rally in risk assets over the last 14 months. Complete about-face in sentiment. New low in bearishness.
- Bill and partner Kevin Duffy are two of the few remaining bears left on the planet.
- VIX is ticking back up, Fed has ended a key lending program, sentiment is too extreme, leading economic indicators are rolling over. Stimulus will wear off like any drug, and there has been nothing done to sustain economy.
- If central banks hit the accelerators on their printing presses to bail out bankrupt governments we could enter a hyperinflationary mode. If we go the route of default, that could be avoided (deflation).
