Back To 2008?

So, after all of that wrangling, after all of that "too big too fail" jibber-jabber we are already 2+ years later talking about another Lehman moment? Does anyone see the irony?

From the beginning of the so-called reforms put through Washington in order to stem the collapse of major institutions, you knew they never once addressed the most important way to bring down the institutions: credit default swaps, the taking out of insurance on a company or a country where you win money if it fails. Some of that win might be because you have an insurable interest -- i.e., you own the bonds -- and some of it might be because you just wanted to make a directional bet against an instrument.

Throughout the hearings on Dodd-Frank and throughout the discussions about what made institutions fail, we never addressed head-on the idea that some could be rooting for institutions to fail or bonds to fail so they could cash in. Think about all of those hearings castigating GS in the Senate. What were they really about? Most people probably don't even know but a lot if it was about setting up a security that could fail so that it could be bet against by a very important client.

The big money then, and it looks like the big money now, is being made betting against something. In 2007-2008 it was first betting against mortgage securities that were wildly overvalued if not worthless. Then it was about betting against the institutions that brought the stuff public or insured it through credit default swaps, instruments that let you cash in on the downfall of something.

Now the downfall isn't mortgage bonds or the bonds of Lehman Brothers but the bonds of countries. Same difference though. Greece might as well be a big mortgage bond. Those who offered you a way to bet against Greece, through credit default swaps, are now about to be forced to pay out on that wager. I am using the word "wager" because while some of the insurers might own Greek paper, a lot of insurance is owned by hedge funds who need Greece to fail to have good quarters. It was never outlawed. It was never made transparent. Yet, in retrospect, the hidden insurance was the proximate cause of the disaster that crushed Lehman and brought down so much more in its wake.

The only real difference this time isn't that we have legislation or that we have transparency. We don't. We just have guesses who wrote insurance. And guesses about who took it out. And guesses about if anyone has the collateral against the policies. No, the difference is, alas, at least AIG isn't involved! They wrote insurance on everything and everyone which is why that bailout was so painful!!

Everything else is pretty much the same. We didn't do anything to stop the process of insuring financial instruments for both defense and offense. And we didn't make banks put up enough capital for, heaven forbid, a real default that they were insuring against.

That's why, as absurd as it seems, if we get an actual "trigger" event, meaning an event that makes the insurers -- whoever the heck they are -- pay out on Greek bonds, a Lehman financial tragedy might and can occur. It will hurt a lot of the world's economies, just like last time, but the real danger is to the European banks and insurers that might have written the policies or might have taken them out and are afraid of not being paid -- think Goldman Sachs versus AIG, which The New York Times has chronicled a gazillion times.

So, where does it put things? We know two things: You simply can't own any European financial institutions because they are even worse than ours, and you shouldn't own any of our big banks because we have no idea whether they need insurance or wrote insurance.

European banks are shorts; pretty much all of the majors. I just wish I owned credit default swaps on them all. That's the trade. And believe me, plenty of people are making it.....