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| Making A Bad Economic Situation Horrific |
| 2009-03-07 |
| But it turns out that one of the features of the 2005 Bankruptcy bill was to put derivative counter parties at the front of the line ahead of other creditors in bankruptcy proceedings. Actually, from what I can tell, they don't just go to the head of the line. They got to skip the line entirely. As the Financial Times noted last fall, "the 2005 changes made clear that certain derivatives and financial transactions were exempt from provisions in the bankruptcy code that freeze a failed company's assets until a court decides how to apportion them among creditors." If AIG were to go down, derivatives counterparties would be able to seize cash/collateral while other creditors and claimants would have to stand by and wait. But separate from the immediate financial implications related to AIG, it does point us toward the larger political economy point: the self-reinforcing cycle in which financialization leads to vast sums of money concentrated in the hands of paper-jobbers, who then mobilize that money in Washington to rewrite the laws to privilege them for even greater profits. Put in simple terms, this means the generally unregulated derivatives market, which is about $150T in debt, has first call on all bankrupt company assets even before the judge can divide assets to a bankrupt corporations creditors. This means that when a company goes bankrupt, it will likely drive many or most of its creditors and supplier companies bankrupt as well, because they cannot recover anything, ever. |
| Posted by:Anonymoose |
| #4 And the Gods of the Copybook Headings said "If you don't work, you die". |
| Posted by: g(r)omgoru 2009-03-07 01:51 |
| #3 Omoter is right. AIG and others made massive bets on low probability events. Anyone with an elementary knowledge of probability could tell you that they would make a lot of money for an indeterminate period then get wiped out. This was like gambling with other peoples money, where you got a percentage of every win, but could walk away from the inevitable big loss. |
| Posted by: phil_b 2009-03-07 01:06 |
| #2 Let me mark that in my book of failure for DC. |
| Posted by: newc 2009-03-07 00:20 |
| #1 What is worse is that many derivatives like Credit Default Swaps, though very useful for parties to debt, were exempted by Congress from the gambling restrictions so that parties who had no insurable interest could take them out. Thus rather than being available only to the parties to a transaction, anyone could take them out. Then AIG when on a massive unhedged gamble to just build profits in an area they didn't understand. Now we have this debacle. |
| Posted by: Omoter Speaking for Boskone7794 2009-03-07 00:13 |