A Modest Proposal: The Fed Dead Mice Trade that Saves Greece and Therefore The World [Sarcasm on]

1. Joseph Coterill of FT Alphavile has a couple diagrams of the Finnish proposal to collateralise Greek assets. He discusses the negative pledge problem which basically says that Greece is not allowed to seek further foreign law bonds that are prejudicial to existing foreign law bonds. And if Greece doesn't get a waiver of this clause from the bondholders and then gets another foreign law bond, then it will be in default. Beautiful self snooker.

Source: Joseph Coterill (Aug 30, 2011) http://ftalphaville.ft.com/blog/2011/08/30/664341/finlands-greek-collateral-plan-breaks-negative-pledge/

Coterill then states that the Finns are spinning this negative pledge block into an opportunity to obtain more credit enhancement. So question is who and what will be used for credit enhancement? Earlier today, Zerohedge made the same point from a bit broader perspective:

"So instead the country's banks need direct foreign capital. However, this capital needs hard collateral pledged. Collateral which would have value in a worst case scenario, i.e., liquidation. Instead, what the EFSF has offered as "collateral" is the equity of the very same firms which will be immediately insolvent once this house of cards collapses, sending the bank equity collateral worthless, and buried under billions of debt liabilities, and in turn impairing the ECB which suddenly finds itself with hundreds of billions in worthless Greek paper, making additional funding for Finland, once it finds itself in a liquidity crisis, next to impossible."

Source: http://www.zerohedge.com/news/europes-ponzi-takes-twist-wacky-greek-bank-equity-be-used-loan-collateral

Source: Ibid.

3. How about a super credit enhancement? Why not borrow some AA+ US treasuries using the US Fed recently re-opened swap lines? A fiat currency denominated debt paying 100% value (after whopping fat Swiss commissions of course) for Greek assets. During TARP, the US Fed conducted the "dead mice" trade where it would pay 100% for RMBS having no tradable value. The US Fed could, should and maybe even would again "save" the world by accepting the "dead mice" from Greece. By the way, this does not have a nice ending.

Recommended reading: Kindleberger on Manias, Panics and Crashes.