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European Loss Re-Syndication: ECB, EU, IMF All Playing the Game

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There is no common goal in Europe; it has become a world where my loss is your gain and vice-versa -- and everyone from individual voters to banks is involved.

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"It is all about the re-syndication of loss."

I don't know how many times I have said this line over the past four years either in writing or when speaking to groups, but it must be in the hundreds at this point.

During 2008, as the size of the banking crisis grew, we watched as the old restructuring and bailout rules books were thrown out and losses were syndicated first to shareholders, then preferred stockholders, then subordinated debtholders and ultimately senior debtholders and taxpayers.

The bigger the problem became, the wider losses were spread.

Still, the number of public policymakers and members of financial elite re-syndicating the losses was surprisingly small – by my count there were no more than 50-100 people globally who determined how, when and to whom losses were imposed. And, not immaterially, this small group all had a relatively common goal: to put a floor on asset prices and protect the strength of the global economy.

That was 2008.

Looking at Europe today, not only is there increasingly no common goal, but there are far more people involved in the loss re-syndication effort. It's become a world where my loss is your gain and vice-versa, and rather than a handful of policymakers making the re-syndication decisions in hushed, wood-paneled conference rooms, individual voters are going to the polls and into the streets to influence the final outcome.

In 2011, it is a loss re-syndication popularity contest and needless to say, it all feels like a game of beach volleyball with everyone hoping that the ball falls on the other side of the net.

And its not just individual voters who are playing the game. Even the lifeguards (the ECB, the EU and the IMF) are now playing, and it feels like they too are at the net trying to spike the ball in an effort to place their potential loss elsewhere.

And then there are the private sovereign debtholders and the European banks who now realize that they can no longer sit by hoping that they will be granted immunity because of their "interconnectedness." Even they are suiting up for the game.

So once again "It's all about the re-syndication of loss" and how the various groups can burden share their pain with others.

And judging by the rhetoric from various European leaders over the past two weeks, the situation has the potential to get very ugly very quickly. From the ECB's very-public rejection of "re-profiling" to Jean-Claude Juncker's comment this weekend that "Henceforth, the European Union will escort Greece's privatization program as if we were conducting it ourselves," the testiness is transparent.

Like the fall of 2008 here, now that it is clear that what Europe has is not a liquidity crisis, but a solvency crisis everyone is jockeying for position – including voters at the polls as we saw in Spain this past weekend.

But I would be very cautious in relying on historic precedent in predicting the outcome. As we saw in our own banking crisis and the bankruptcy of General Motors (GM), public policy is highly situational, especially as governments don't have friends, but interests. And with so much of the support for Europe's troubled periphery in the form of either contingent, unfunded guarantees or progress payments there is a huge opportunity for the supposed lifeguards to renegotiate terms. And then there is the clear risk of outright political reversals in which voters in both weak and strong nations eject one group of elected officials in exchange for another more "taxpayer aware" team. And with the rising risk of contagion, I would not underestimate the lengths to which sovereign nations will go to "firewall" their public treasuries and financial institutions. And did I mention the CDS traders and the rating agencies?

Now that everyone knows that the loss is real, it's all about how that loss is going to be re-syndicated. And it's a game everyone wants to play.

So with Greece being the birthplace of the Olympic, let's light the torch and let the games begin.
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Position in SPY options, SH and JPM.
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