At 4AM this morning, futures indicated the Dow would open up about 40 points.  Then, it dropped down to negative 6 points.  At 7AM, futures are flat.  The market is slowly twisting in the wind, waiting for the G-20 in general and Sarkozy & Merkel in particular to announce their “bazooka plan” to save the European financial system.

In July, they agreed all bondholders of Greek debt should receive 21% less than the face amount or take a “haircut” of 21%.  Now, they are arguing whether it will be 50% or 60%.  The first concern is that European banks will not be able to take such losses without collapsing.  The current estimate is that they will need at least another $140 billion in capital.

The second concern is who is holding the bag on the credit default swaps (CDSs)?  As over-regulated as the financial services industry claim they are, there is still precious little transparency to the derivatives market.  If I own bonds issued by Greece and am worried they might not be repaid in full, I can buy insurance called a credit default swap, that will repay me if the Greeks cannot.  So, I have transferred my risk of loss to somebody else, which is a good thing.  The bad thing is that somebody else now has that risk of loss.  The question is who?  In all probability, it is another bank, insurance company, or hedge fund.  But, which one?  Which bank am I safe owning?  Which insurance company is safe?  Are there any safe hedge funds?  There is very little transparency; too little!

The third concern is whether they are focusing too much on the size of the haircut and not enough on ring-fencing the problems of Greece from Italy and Spain, which would be many times worse than Greece.

“Sarko & Merko” did not produce their “bazooka plan” this weekend as hoped, promising to release it this Wednesday.  So, stay tuned for the show.  It will be on channel G-20.