This is beyond ridiculous.

ISDA—the organization that determines when a credit event has occurred—announced this morning that a credit event had not yet occured to trigger payouts on $3.25 billion in Greek credit default swaps.

However, that does not mean that a credit event may not be triggered in the future.

Two questions were asked of the committee: first, if making the European Central Bank a preferred debtholder by not including it in the debt restructuring constituted a credit event, and second, if the retroactive inclusion of a collective action clause (CAC) in the terms of Greek bonds had triggered a credit event.

In other words, the terms of a contract does not matter; unilateral changes to those terms are not a "credit event" and the "insurance" you allegedly bought to protect against this is worthless.

Who sits on the committee?  The majority are the very banksters who have been writing these "policies" and thus would have to pay.

That's kind of like buying homeowner's insurance and then after a tornado occurs having the "committee" (which happens to include the firm that wrote your policy) "determine" that this particular tornado isn't really a "tornado" under the definitions they used (oh, we'll call it "the finger of God" instead!) and thus it is excluded under the "acts of a*****ed off belligerent" clause.

Yeah, you'd be inclined to buy insurance again after that..... and you wouldn't be inclined to find the committee members and hold their heads under water until all of their "witchiness" was excised..... right?

This sort of wordsmithing is not a surprise to me.  But the impact, is, or at least should be, a different matter.  Removing the value of these hedges -- which is exactly what this sort of "determination" does -- would be expected to destroy this market and expose the positions allegedly "hedged."

It probably won't, because as I have maintained since it was disclosed that Wachovia was writing credit-default insurance themselves and selling it bundled with subprime tranches writing fire insurance on your own house, where all the assets necessary to pay the insurance are in the house, is a pure scam as if the "event" happens the assets necessary to pay will have gone up in smoke!

In other words, it is and has been my opinion that these sorts of "policies" are really nothing more than a complex (and perhaps legal although if so it shouldn't be) form of a "side letter." 

"Side letters" are a practice in the insurance business that is explicitly illegal because they are fraudulent.  The company issues a "policy" but then also issues a "side letter" in which both the insured and company agree that no claims will be filed.  In effect what has happened is identical to you paying a company $100 for a card that says you have auto insurance to meet a regulatory requirement (e.g. "you must have insurance to drive") but in fact you have no insurance; the entire purpose of the alleged "policy" is simply to present the appearance of coverage. 

The usual purpose for this in the "side letter" game is to screw with regulators who (properly!) demand coverage of risks in order to meet capital ratios.  When the risk is too expensive to actually insure a "side letter" is used to scam the regulator into believing that a hazard is covered when it really is not by failing to disclose the existence of the side letter to them.

There was a major scandal in this regard in the middle part of the 2000s; the problem from a regulatory standpoint is that the regulators, as a general rule, seem to always find a way to not treat the representation that an entity has coverage against an event that turns out to be crap as an act of perjury -- either by not demanding that all statements made to it be made under the penalty of perjury in the first place, or simply looking the other way at what amounts to bank, insurance or securities fraud.