Moon of Alabama Brecht quote
April 22, 2009

Lenders Press For Chrysler Bankruptcy

I postulated that by securing lenders, credit default swaps will create bankruptcies. Something that the Obama administration seems not to get.

Chrysler will now be a likely victim of this:

A group of big banks and other lenders rebuffed a Treasury Department request that they slash 85% of Chrysler LLC's secured debt, proposing instead to eliminate about 35% in exchange for a minority stake in the restructured car maker and a seat on its board.
In making their case for a significantly smaller sacrifice than what the government wants, the lenders have argued that their fiduciary duty to their own shareholders and investors requires them to recoup as much as possible from the car maker. The lenders have told Treasury officials they believe they could recover at least 65% of their loans if Chrysler is liquidated in bankruptcy.

It is very doubtful that the 65% could be recovered in a normal bankruptcy. If Chrysler closes down, there is not that much left to sell. Very likely these lenders have insured their loans and are confident that their  insurer will pay them when Chrysler goes into bankruptcy.

The only way the Obama administration could rein in those lenders and prevent more harm for the real economy is by declaring these insurances null and void. That is easy to do. As I wrote:

The administration could simply declare CDS contracts to be "contrary to public policy" (i.e. immoral) which would make them not enforceable in court. The CDS would immediately lose their value as no-one makes such businesses when they are not enforceable. (Keep in mind - every contract you make involves three entities: you, the other side and the government that makes you and the other side stick to the commitment. If the government finds the contract to be void on public policy doctrine grounds, it is useless for you and the other side.)

Most societies find usury harmful and to be "contrary to public policy" and outlaw it. Likewise insuring a loan, which lifts the need for responsible lending, is harmful and should be forbidden.

Posted by b on April 22, 2009 at 7:04 UTC | Permalink


We could've let them do this in 1978. Instead we made a national hero out of Lee Iacocca and set a standard for sub-standard industry.

Posted by: ralphieboy | Apr 22 2009 7:35 utc | 1

Something that the Obama administration seems not to get.

Why do you think they don't know what's going on? Maybe they want those CDSs to be triggered; it could be the mother of all bailouts. Citi and AIG will have to pay trillions, which they can't. But the government can't let them fail. So the taxpayer will have to jump in and save the day. Right now Congress - under pressure from the public - probably wouldn't approve such a thing, but as Naomi Klein taught us, a good disaster will make their minds ready.

Posted by: Qlipoth | Apr 22 2009 8:44 utc | 2

(The lone voice, well almost, as far as I can gather):

I think Obama is doing the right thing. The only way to regain some semblance of sanity, and to facilitate a recovery, is for the West to throw money at the problem but to tighten the rules dramatically for all future financial transactions.

If after WWII the Allies had told Germany: "You are silly buggers, you've caused untold misery, now we're going to make you pay and suffer forever", we would have had a repeat of the effects of the Versailles Treaty. The whole aim of the Marshall Plan was to forgive and to start afresh by pouring tons of money into a nation that didn't deserve it. (Yes, I know, there were Cold War considerations as well, but I'm dealing here purely with economic cause and effect).

I apply the same theory to the current morass. Letting more major companies go bankrupt will have a snowball effect with unimaginable consequences -- maybe even worse than the chaos caused by the previously unimaginable derivatives mess.

It's easy to pontificate, to punish and to seek vengeance, but trying to solve an economic mess by creating an even bigger one is self-defeating. The national economies of the West cannot function without properly functioning financial institutions, so yes, imprison the 'evildoers' and slap them with huge fines, but don't bankrupt companies in an irresponsible manner that would guarantee unemployment rates of 30 - 50 % throughout the Western hemisphere.

Posted by: Parviz | Apr 22 2009 13:03 utc | 3

Over the sixty some years since America emerged from WWII as the biggest industrial nation and biggest creditor on the planet, the effort has been to make the US economy and almighty dollar the maypole of the global economy.

Especially in the developing nations, America's influence has been to twist their economies into export-driven systems that have given up their previously more or less sustainable systems. Everything gets organized and privatized to feed resources and debt payments toward the IMF, World Bank, and America -- owner and operator of these two "international" organizations.

This process applies to some degree as well to the European economies, although they have managed to stand with America in arranging the world's emerging global economy to feed their bottom lines.

In other words, every national economy leans over, leans on America's economy, and depends on America policing and maintaining this global economy. Which America does -- it enforces cooperation, if you hadn't noticed.

If America's hyper economy falls over, all the other economies fall over as well. They are no longer organized to stand up straight.

So it may be the easiest way out of this global mess to do whatever has to be done to keep America from collapsing, if this will keep the other 192 'leaning' economies from collapse.

It took six decades to build the current system. Letting it fall flat on its face -- when there are clean or dirty tricks that can prevent that -- probably doesn't look like an agreeable option to Obama, or to any other world leader.

That's why we see criminal frauds like the AIG bailout, and PPIP going on. Completely outside the law, but the powers that be know damn well what the alternative is, and they won't go there until they get there in spite of themselves.

The hope in world capitals is that these shenanigans actually succeed in forestalling complete global collapse. It ain't likely, but hope springs eternal. We're all going to see in the coming 18 months.

But if anyone thinks that Obama or anyone else in the US government is actually going to put a stricter regulations regime in place once things stop deflating, forget it.

The very lawlessness they are engaging in now sets aside the rule of law in favor of the rule of autocrats. Rule by those who have power and use it. When the time comes, the powerful will find ample reasons to suit themselves, and continue to dispense with the law when convenient.

The rule of powerful people in place of the rule of law is not a trap easily exited. Outlaw regimes don't reform themselves.

They are reformed by revolution.

Posted by: Antifa | Apr 22 2009 13:38 utc | 4

parvis, the way i read it there would be bankruptcies either way. b is arguing for canceling the insurance on these bankruptcies. the insurance doesn't save the company does it? or just the bad investors?

Posted by: annie | Apr 22 2009 13:48 utc | 5


I'm so ignorant of economics I've managed to stay poor even when America was "winning" but I have often wondered what the fallout of an entire economic collapse would be?

Both Germany and Japan benefited from retooling their economies after collapsing at the end of the war. I wonder if it wouldn't benefit America to hit the reset button also? The huge number of unemployed would be horrible, but I wonder if it would really get as bad as you say, and if it did, for how long?

I'm not trying to be a complete twerp by asking this – I'm really curious. Everyone is making predictions and I feel most are based on old ideas of economic theory... I can't speak for the world, but I know that America has the basics in place to reinvent the way business is done. I have a shop full of tools that cost me almost nothing (thanks to chinese children making them at gunpoint) and it is cheap tools that might be what rebuilds the good ol' U.S.A.

There are plenty of resources in America, from oil to metal ores, that can be used to rebuild our industry. If the economic world did go topsy-turvy, it isn't like we're living in a vacuum lacking the materials to reinvent our nation. What we seem to lack the most is the ability to imagine a different world. We've been stuck in the corporate greed groove for so long we forget there are other ways of living that may be better for everyone.

I think there are better ways of doing our financial business than letting a few rich assholes continually skim what ever amount they decide they want from our business's profits. b mentions usury which I agree is a huge challenge facing any new business starting out – in fact I'd argue that it's usury that has been the root of most evil in our economic world.

Just the idea that investors are so concerned about maximizing their profits they'd prefer a company fold than take a smaller piece of profit is the sick mindset of our corporate masters. Right about now I wish I could start quoting Marx... That damn redneck (really more a pinkish color after rafting six hours yesterday) never read any of Karl's works... Hopefully I'll find some time soon, because I'd bet he'd have a few choice words about this current mess.

I'd love to rant on and on about usury, and about my experience fighting a credit card company (I remember a conversation with the card's rep who said the state allowed 38% interest but that he felt soon they'd be able to get 49%! ARRGH!) and how this awful experience opened my eyes to what real criminals credit companies are.

If there were any fair and honest financially connected dudes or dudettes in the world, I'd bet they'd make a killing from starting a credit company whose business plan was designed to help people get a leg-up rather than bleeding as much money from a business as possible before that business dies. The financial assholes think they make business stronger by doing this; I say they are just rat fuckers who... well I go back to those wearable cages and lots of spittle when I think of what should be done.

And this is the point where I should admit I've too much coffee in me... visions of Versailles burning keep coming to mind and I speculate (a good choice of word) that the only number that really matters is the number of warm bodies you can muster to your cause... all those freaking trillions locked in silicon on a mainframe aren't worth shit if they can't muster warm bodies.

Doonesbury has a pretty funny view of the TARP bailout. Yesterday's was the set-up for today's and is a hoot too.

Posted by: DavidS | Apr 22 2009 14:14 utc | 6

@ Parviz and Antifa, another angle, tangent:

Fritz Haber (1868-1934), A German Jew, was perhaps the most important man of recent history..

A Nobel prize winning chemist, he worked on poison gas. Haber personally organized some gassings - at Ypres, for example. (His wife was appalled and shot herself.) He also developed explosives. Much later, he supervised the creation of Zyklon B. His heritage is honored today at the Fritz Haber Center for Molecular Research, which is in Jerusalem. He was a Christian convert, and a very loyal German. Nevertheless, he was always considered Jewish, and left Germany in 1933 under pressure, dying a few months later of a broken heart.

Haber was a supremely gifted all-rounder. Urbane, witty, linguistically gifted, a wonderful collaborator, organisor, administrator, no problem was too big or too small, and he managed to marry brilliance in the lab with engineering skills and the setting up of industrial processes, as his achievements show. To him, science and applied science were one.

Without him, the Germans could not have hoped to win WWI and would have lost or given up much sooner - the outcome would have been quite different. Possibly, WWII would not have occurred, or taken another form. (No treaty of Versailles, or a different one.)

His importance, however, goes far beyond all this. There is a good chance that many of us would not be alive today if it wasn’t for Fritz.

He invented the Haber-Bosch process, which permits us to produce ammonia, or chemical fertilizer, from nitrogen in the air. (Without this process the Germans would probably not have gone to war at all; the Allies had access to ammonia from Chili and elsewhere, the Germans had to make their own. It is an essential ingredient of gunpowder and explosives.)

The manufacture of synthetic nitrogen changed life on earth, for plants and animals, the soil itself, the whole food system, completely and for ever. About 2 *or more* billion people alive today are so because of the human engineered nitrogen in fertilizer.

If you are Chinese, though, you should also thank Nixon for accepting China’s opening to the West. The first thing China bought from the West (and most likely the reason for its opening) was 13 massive fertilizer plants. Nixon is a key figure in the recent history of Man for another reason as well: he appointed Butz Secretary of Agriculture. Another story for another day.

Industrial agri. and industrial warfare are intimately tied together.

Posted by: Tangerine | Apr 22 2009 16:26 utc | 7

annie, if Company A is technically bankrupt because it manufactures a bad product, I say: Let it go bankrupt, because it has no hope of long-term survival barring a miracle. If company B is in trouble because of Management fraud, but essentially has a good product, you dismiss (imprison) the managers and replace them with new ones. You also introduce much stronger auditing procedures to prevent a recurrence. In the meantime you give the company (under new management) what it needs to develop its already established potential, either by squeezing the creditors (as occurs in Chapter 11) and/or by pumping in new cash. Company B is the U.S. Economy.

Since there are few investors available to bail out the U.S. economy the lender of last resort (the Government) has to step in.

Now, if the Government "cancels the insurance", as b. suggests, it will not only reduce that company's ability to survive (unless it replaces that insurance with hard cash, which destroys the purpose of the exercise), but will cause enormous collateral and consequential damage by throwing every other type of financial instrument into question. Today, CDS contracts, tomorrow, every other type of derivative and, eventually, the whole concept of insurance itself!

What needs to be done is REGULATION to impose discipline on financial markets, to enhance the future integrity of the markets, not the annulment of already signed contracts, many of which were signed legally and in good faith, and would create yet more uncertainty at a time when normally sound financial institutions (I'm not including the investment banks) are already on life support.

DavidS, I hope I answered your lengthy message as well. If the Government simply annuls CDSs issued and bought by financial institutions that are already over-leveraged (because of poor regulation), it will create a wildfire of bankruptcies and the economic Armageddon scenario many (but not I) have been predicting. The focus must be on saving as many companies as possible and in radically tightening accounting rules, loopholes and the quality of company audits.

Posted by: Parviz | Apr 22 2009 16:26 utc | 8


A few weeks ago when I was commenting on CDS, you differentiated between CDS held by affected parties and CDS held by speculators. I think these would fall under primary parties, the holders of these pier loans. Of course the US government could nullify these on a case by case basis, but the knock-on effects would be too great for other sectors of the economy. The better tack would be to say to these holders, 'OK, you can see if you can get your 65%, but we are going to audit everylittle thing you do from here on in and prosecute all transgressions.' Just enforcing existing laws under accepted interpretations would go a long way.

Posted by: biklett | Apr 22 2009 16:49 utc | 9

Now, if the Government "cancels the insurance", as b. suggests, it will not only reduce that company's ability to survive

That is miss-statement of what I said. I wont to delete the insurance the lenders have so they will have to accept the big haircut the Obama administration wants them to take. That is the only way to cut Chryslers debt WITHOUT putting it in bankruptcy (where it would die.)

Posted by: b | Apr 22 2009 16:51 utc | 10

parvis, assuming in your scenario both company A and company B have lenders. they invested in the company for eventual profit. however, they also bought insurance for their investment so if things went downhill the insurance company would cover their ass, that way they do not have to accept the loss of the company either from mismanagement or product default. if i am not mistaken b is suggesting the government not use bailout money to payoff the insurance claims so the investors don't have to eat it. that is different than pumping money into the business is it not?

if the lenders insurance only kicks in when the company goes bankrupt they are acting as hovering carrion waiting for the death of the company so they can swoop in and accept the governemnt money covering for the defunct insurance companies, like AIG or something. i don't see how you think this scenario would be helping the company. these investors took a gamble, it didn't pay out. why should our taxes be compensating lenders who it turns out made a bad investment? especially when many of those same taxpayers lost all the money in their 401k's. if the governemnt is going to be bailing out bad investors maybe the money would be better spent propping up those who lost their pensions directly.

Posted by: annie | Apr 22 2009 17:30 utc | 11


Thanks, yes you make sense to me. But who decides what's a bad product? I know there are probably lots of formula for deciding this, it still leaves open the door for malfeasance from the regulators.

I guess I see so much corruption I've lost hope that honest regulators can be found to sort this mess out... I see a man with a lamp wandering the world in search of these magical beings and wearing out lots of shoes in the process :)

Posted by: DavidS | Apr 22 2009 17:34 utc | 12

How would America fare under an economic collapse scenario?

A solid resource

Posted by: Antifa | Apr 22 2009 18:52 utc | 13

From a policy perspective, Why should I care whether firms survive? If a firm is reorganized in bakruptcy, it can continue with a new cost structure and management. If it's liquidated, its assets will pass to other managers at a cost structure low enough to boost profitability. The transition of skilled workers from one firm to another need not be any more painful than a slow bleed of labor from propped-up husks of firms. You can't just swat the mosquitos, making examples of today's Milkens and Levines and Kozlowskis; you have to drain the swamps, because continued existence of the firm means perpetuating corrupt corporate governance.

Posted by: ...---... | Apr 22 2009 19:42 utc | 14

D 6) As above, so below. When you're young, you can 'retool, and rebuild your career'. When you're old, it's all about propping up your position, until your pension kicks in. It's about convincing everyone you're still kicking and sober.

I started in the trades and watched building costs far outstrip incomes, so that between a larger pool of trade labor, (for whatever reason, we all live in USA and all pay union dues and income withholding), and shrinking opportunities compared to a hey-day when my dad's trade job fed and housed and put the kids through college, the manufacturing and trades sectors aren't going to rebound the American economy.

I moved into service, or got 86'd out of the trades, however you want to look at it, we retooled and retrained and came out swinging in the Silicon Valley to Dot Con boom. That was fun, fast, furious so much so, I have no memory of those years, and the only people I have left to talk to about them are help centers in Mumbai.

There are service studios, I mean everywhere, all across the country, with folks flipping pencils, and free scoping, and check bidding, working on spec, just for the opportunity to bid on a project in the future. With Chindia and wage slavery, service and retail sectors aren't going to rebound the American economy either.

The Green Energy thing is a scam, I'm telling you. All real energy initiatives are already complete. All the EPA regulations were written in the 1970's and overlooked since then. Their "global warming gases are hazardous" is proof junk science is in control of government. They will do or say anything to keep government research and the whole policy and regulatory function system alive on loss-leading tax welfare. And they're going to pay for this GE'ing with a new egregious regressive carbon tax.
So don't look for green and government and war to rebound the American economy.
How could they? overhead and administrative costs are >90% of their budget!

No, Bush Jr and his ilk in government and finance had all the stats, in real time, and the best thinkers and prognosticators as welfare tax wonks. They knew when the Dot.Con burst that the wheels had come off the chariot. So they staged everything after that: the WMD.con, the PeakOil.con, the Credit.con, one tsunamai of junk debt after the other, taking down the Baby Boomers before they could retire expatriate.

We are far more than 100% of our GDP in debt now! Just our interest debt on the deficit is growing faster than our economy, not to mention our income tax base!!
The Fed is even bailing out the hedge bets on their cons, with OUR equity!

Some days I sit by the front window weeping that Americans are so deaf, dumb and blind. This entire American Dream, California in the 70's, Don't Stop Believing. They took US to the cleaners. They crapped US out. 7 generations debted-forward.

It's not a U recovery, what the hell are people smoking?! There's not going to be a resurgence of post-WW2 American Dream, what the hell are people drinking?! You're going to pay rent while you have a job, then sleep under an overpass while you're on unemployment, and if you can't claw back into a rental wage, you'll join the growing army of migrant workers, because that's all that's left, unless you have a forever-job-with-pension-for-life, then you don't give a fuck about nuthin'.


Politburo who don't give a fuck about nothin' aren't gonna save the Grand Ol' USA.
They're gonna raise taxes and cut programs and bubble up the org charts with empty boxes and low-hanging junk science they can point to as "efficiency reduction cuts" then everyone will nod their heads, and the Nightly News will talk about how the stock market is improving, because more layoffs means higher corporate efficiency, and, well, "We simply need more taxes!" Well, you would, you welfare tax whores!!

US economic management theory is junk. US metrics are junk. American government is junk. The US military is junk. Most of our American products are junk. AmerIndian 'services' are horrifying! Retail is 'take it or leave it' 400% markup China junk. Look around you! The only thing we make decent is Chateau Lafitte and Audi...oops!

The only thing US made decent is the Dodge Challenger Hemi, the International 1110, and if you've never cruised the back roads of Wisconsin late at night in a Chevelle SS 396, headered, looking for an open bar and fish fry, you ain't lived in America.

Time to take 'Baby' out for one last spin ... smoke 'em if ya' got 'em!

Posted by: Hoodie Bramford | Apr 23 2009 0:55 utc | 15

a "reset" of the American economy is pretty much inevitable and everyone more or less agrees. Its been apparent that its inevitable through the last 20 years of robust industrial growth in South-East Asia & especially China. The question is whether we get there via a crash-reset or a soft-reset. And a key metric lies in the relative cost of one to the other. The cost to the average American, the cost to America's relevance in a re-aligned global economy & the cost to the dollar ... Bubbles & gimmicks (over the last 20 years) come & go but the essential fact remains.

going with the soft-reset also buys time and very importantly also spurs a localizing effect. The main parties to the politicization of the Chrysler issue are essentially all American. And outside the USA, they are probably saying "F**k the Americans. We ca'nt wait for them to resolve the global economic crisis. Here's what we're going to do to to unwind our economy out of this mess". On the long run, a localizing effect can be a very good thing.

Posted by: jony_b_cool | Apr 23 2009 1:32 utc | 16

b (#10), this is precisely my point: Exactly who are "the lenders" of CDSs? They are not individual speculators but financial institutions, such as banks. If you declare CDSs null and void you create multiple bankruptcies among the very financial institutions needed to revive the economy.

The only solution, as I see it, is for the U.S. government (which caused the mess through gross accounting negligence) to "take a bath", bail out the CDS-exposed corporations, imprison the worst offenders and tighten regulations to prevent a recurrence.

Biklett (#9) demonstrates the difficulty of distinguishing between innocent countrer-parties and speculators. Moreover, so many guilty corporations have already been bailed out (GS, AIG, etc.,.) that the U.S. Government would be demonstrating clear favouritism by belatedly deciding to punish those "not too big to fail". The guiltiest offenders have already escaped retribution.

annie (#11), practically speaking, there is no difference between CDSs and normal insurance. Let me put it another way: Lenders (to Company A and to Company B) were permitted by the U.S. Government to insure themselves against the bankruptcy of Companies A and B. The lenders thus took out perfectly legally acceptable CDS 'insurance', which at the time was considered 'sound risk management'. Many financial institutions then re-purchased such insurance because of the high premiums, in order to boost income, and it is here that the line between insurance and speculation becomes very blurred.

It's not much different from the problems associated with the 'discounting' of cheques: The Dubai economy crashed in the Eighties because of the existence of billions of Dollars of cheques that were being used instead of cash to cover transactions. Many of these cheques were issued by first-class local corporate giants, so the possibility of default was considered virtually improbable. The first minor defaults had a snowball effect and eventually the economy collapsed. The Dubai government bailed out the economy but passed a law pronouncing automatic imprisonment for issuers (or even discounters) of bounced cheques. If the government hadn't stepped in the oil state would probably never have recovered.

Declaring CDSs as void would be the same as declaring cheques as void, simply because both instruments were misused.

Posted by: Parviz | Apr 23 2009 6:24 utc | 17

My post above, by the way, isn't really relevant to Chrysler which, like GM, is a totally different animal. Lenders need to be treated the same way as purchasers of GM bonds attracted by the 16 % junk bond premium. They knew 100 % the risk they were taking. Purchasers of CDSs from GS and AIG didn't.

Posted by: Parviz | Apr 23 2009 6:31 utc | 18

Let me put it another way, b: By your logic, the investors in Madoff's Ponzi scheme deserved what they got and shouldn't be bailed out, even those who lost their entire life savings, and should be made to suffer because of the SEC's unprecedented auditing melt-down.

Should bankrupted investors sue the SEC for having ignored, by one account, 29 red flags raised by junior SEC auditors whose warnings about Madoff were ignored by higher-ups?

Should AAA corporations which bought CDSs covered by GS/AIG be made to suffer because the U.S. Government transformed the financial markets into a gambling casino? And should unsophisticated CONSERVATIVE investors, who invested in what were purportedly AAA corporations, be made to suffer for their faith both in the AAA ratings and in the competence of the U.S. Government?

Do you believe the U.S. Government should simply tell investors: "You didn't know you were investing in AAA corporations with exposure to CDSs, and you wouldn't even know what a CDS is, but neither did we, so screw you!".

Posted by: Parviz | Apr 23 2009 7:09 utc | 19

If you declare CDSs null and void you create multiple bankruptcies among the very financial institutions needed to revive the economy.

Most of the CDS will probably be hedged and cancel out each other.

Do we really need all those financial institutions? Yes, as utilities, but not in their current form as gamblers. Do we need the jobs at Chrysler more than multi-billion speculators? That's the question behind this.

CDS in my view are a systemic error that must be corrected. They disturb the incentives that normally keep capitalism in the real economy healthy.

Do you believe the U.S. Government should simply tell investors: "You didn't know you were investing in AAA corporations with exposure to CDSs, and you wouldn't even know what a CDS is, but neither did we, so screw you!".


Posted by: b | Apr 23 2009 8:51 utc | 20

b, we're getting closer together on this. We both dislike CDSs and the speculative greed of banks that cast traditonal banking principles aside. Our sole difference is on whether to regulate them going forward or to declare them null and void right away, irrespective of the consequences to both corporations and individual IRA/401K holders.

So I have one question that might make you see things differently: You already responded 'yes' to my question Do you believe the U.S. Government should simply tell investors: "You didn't know you were investing in AAA corporations with exposure to CDSs, and you wouldn't even know what a CDS is, but neither did we, so screw you!".

O.K., so why should the U.S. Government bail-out depositors of banks that have gone under? Why does the U.S. Government insure deposits up to $ 100,000 each? Why should ANY investment be 'secure'?

Let us suppose that you insure your home against fire risk with one of the world's "biggest and safest" insurers. Owing to a major war (for which your home is not covered but which decimates the insurer's reasonably leveraged Assets to the extent that it is forced to declare bankruptcy) your policy becomes worthless. The bank that granted you the mortgage then forces you to take out a second insurance, which you cannot afford, and the bank begins repossession proceedings. Wouldn't you think the whole thing was fundamentally unfair?

Posted by: Parviz | Apr 23 2009 9:56 utc | 21

@Hoodie - Yep. Been there, done that. The Age of Burnt Rubber. Thanks for reminding me of the fish frys.

Posted by: Wolf DeVoon | Apr 23 2009 11:15 utc | 22

you got me thinking & overall it looks like the USA has some huge holes in its approach to providing risk-management for its citizens. FDIC insurance is available to every citizen but only the fortunate & more privileged have access to decent health-care insurance. Consumers ca'nt buy produce from local farmers but big-agro is licensed to put whatever it deems fit into food, including genetic modification and to ship it thousands of miles to people who have no consciousness of the risks buried in their food supply. Soldiers get sent to wars in which their primary mission is risk-aversion. The banks spend billions developing systems to manage-risk and it did'nt take them very long after the govt lifted regulations to come up with the ultimate risk-elimination instrument -- the CDS. Parents can't spank their kids anymore because it puts the childs future well-being at excessive risk. And if a child is really bad, he/she is a potential risk to society, no problem we just feed em psychiatric drugs. And its approach to law-enforcement earns it the highest incarceration rate in the world even though it costs more to keep a poor kid busted for selling weed in jail than it would cost to send him/her to Harvard.

I think I agree with you that the authorities should put at least as much effort into improving how they practice risk management as they put into busting easy targets.

Posted by: jony_b_cool | Apr 24 2009 2:02 utc | 23

Thanks, jony_b_cool, if the U.S. spent a fraction of what Europeans spent on educating, training and protecting its citizens the nation wouldn't have to spend so much money punishing them for their actions caused by a clear lack of opportunity.

Here again, declaring CDSs void is cutting off one's nose to spite one's face. It doesn't solve the problem. All it does is create a snowball effect among essentially viable corporations and among individuals with demolished retirement funds, many of them literally innocent of any wrong-doing. It's a feel-good move with ultimately disastrous results. What the U.S. needs is a complete re-working of its financial system, particularly its limits on corporate and individual risk, but only AFTER essentially viable corporations have been bailed out.

I don't have a 401 K or IRA, but I feel very, very sorry for those who do: The U.S. Government spent years talking up the stock market, creating an unregulated casion (at least in Las Vegas you know what you're doing and what the risks are), and formally announced to unsophisticated citizens that "everything is O.K.", bombarded the airwaves with trashy financial channels like Bloomberg and CNBC till the population was entirely brainwashed, then did nothing to protect its citizens from the disastrous effects of the government's irresponsible deregulation and economic cheerleading that caused many of its citizens see their entire life savings go up in smoke.

I'm sorry, b, I agree with you on virtually everything else, but I find your one-liner at the end of #20 extremely insensitive. You're out for revenge, but you're killing the innocents.

Posted by: Parviz | Apr 24 2009 5:22 utc | 24

@Parviz @21 sorry for the late answer.

O.K., so why should the U.S. Government bail-out depositors of banks that have gone under? Why does the U.S. Government insure deposits up to $ 100,000 each? Why should ANY investment be 'secure'?

Normal widespread savings have a social value. Banks are regulated as well as the insurance of saving accounts. The social costs of saving account insurance is relatively small.

CDS are unregulated, have no social value but high social costs.

No investment is secure. Savings can be easily eroded through inflation.

Posted by: b | Apr 24 2009 14:38 utc | 25

what if:

so the USA cancels international contractual obligations assumed by its financial institutions because the social costs are too high. Next other nations review the social costs of their institutions obligations (oil, gas, manufacturing, debt, dollar holdings, ...) to the USA and begin to cancel accordingly.

or they sue the USA govt. and if that does'nt work. maybe they come up with something else

I'm not suggesting these are likely scenarios, but they are'nt totally inconceivable especially if things take a few more bad turns.

Posted by: jony_b_cool | Apr 25 2009 1:48 utc | 26

b, (25), you claim "banks are regulated ......" Oh really? With only 8 % required capital:investment ratio, = the ability of banks to gamble over 12 x their actual capital, even without CDSs the banks are far removed from your oft repeated call for them to act like 'utilities'.

This brings me back to my point, which is that if CDSs are to be declared null and void, then any type of leveraging should be treated similarly and depositors should not have even one cent of their deposits insured. After all, every depositor knows by now that banks 'play' with depositors' money, and even the most unsophisticated depositor must have heard that 29 U.S. banks went bankrupt since the start of the crisis, and should therefore know that their deposits wouldn't be safe but for the Grace of the Federal Reserve and/or bail-outs.

Jony_b_cool mentions yet another good point, which is that any attempt by the U.S. Government to default selectively could (I say 'would') backfire dramatically and defeat the purpose of such a punitive measure.

Posted by: Parviz | Apr 25 2009 13:10 utc | 27

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