Monday mornings bring us back to reality from the free and easy weekends. We work all week so we have the luxury to forget the past five days with our blurry eyed activities. Go for a ride, climb a rock face, ski on what snow might be left, drink ourselves into oblivion, whatever gets the job done. Then comes Monday and it’s back to the grindstone. With enough coffee and shots of energy drinks we make it through the day, productivity lagging behind as a symbol of our effectiveness delayed by excess. But Tuesday comes and the world is ready to show us its state of affairs, something that would be too much a shock for our tender nerves. Will Bibi really be re-elected today? I think that is something the Israelis could only do on a Monday. One needs a sense of doom to properly elect idiots. God knows. look at all of our Tuesday elections, most turned out to be real disasters. The presidents were have elected in the past fifty years we could have done better if we had adjourned to the local pub, hefted a quite a few pints, started a couple of fights, and then went to the poles. What’s that saying, the political candidates all look better at closing time. Yes, you may borrow my phrase, use it in good campaigning.
Bloomberg finally got around to telling us what is happening in Austria, something a few of us who actually follow important events rather than cheerleading fluff actually knew. I covered this in another post but it should be reviewed again. When is a contract not a contract? Our Supreme Court says contract law does not exist when it is inconvenient for the government to invoke contract law, such as rescuing General Motors by making the bond holders eat the losses. Now I don’t care how big your company is, I don’t care if the entire world works there. When you are insolvent, when you are bankrupt, you don’t bankrupt the law to save yourself. Either law stands for something or it’s every man, woman, and child for themselves. As any woman knows, there is not such thing as being only a little pregnant. Either you’re going to have a baby, assuming you don’t do the abortion thing, or you are not going to have a baby and no abortion need be considered. So when the states and the federal governments write laws that govern what a contract is, we should not take that law so lightly as to destroy its purpose when we feel that exceptions are in order.
A contract exists when: 1, there is a meeting of the minds; 2, when there is consideration; and 3′ there is performance. A meeting of the minds. You offer to sell me a bond for a stated amount and for a stated duration with a stated coupon rate, that says in any event of default on such bond, I am first in line to receive any and or all your assets to satisfy that bond and accumulation of coupons or interest due. There is consideration: I agree to give you X-amont of money for said bond that represents the loan (that is what a bond is, a loan) and the accumulation of the coupons or total interest dues. That is consideration, I promise to do something and you promise to do something in return. I’ll mow your yard for twenty dollars and you will pay me twenty dollars when the job is complete. The third condition is called performance: that is, performance on my part is the actual mowing of your lawn to completion. I have mowed every part, left no grass uncut. Performance on your part is when you give me twenty dollars in the common currency of the realm. I did’t agree to twenty pesos. I said dollars and you said dollars. This is basic contract law and to intercede on behalf of one party to change the conditions in an adverse way to the other party is to say that law doesn’t matter. The Supreme court should never issue its decisions on a Tuesday, they are all too like to shock our sensibilities.
So when the European Commission changed the laws governing bonds and obligations, funny, we shown them how to do it through our very own Supreme Court decision with the General Motors Bonds, who would have envisioned the end of the financial world. When a bank becomes insolvent, the government agency tries to wind down the affairs of the bank. Now understand that a bank really engages in two different types of contracts. Before it may open its doors the bank must accumulate a certain amount of capital, both working capital and depository capital or pledged capital, if you like. The point being that capital on deposit with the Federal Reserve System is to insure that the bank is solvent, relatively speaking. Working capital is that which the bank may invest. By invest, we mean buy stocks, bonds (government, state, local, corporate) or loan (such as home mortgages, corporate paper, mortgages on machinery, plant, and even account receivables). Then there is the depositors, those who deposit their money in saving accounts, checking accounts, timed certificates of deposit, trust funds, and so forth. Only a percentage of these funds may be lent, the rest to be held in reserve on a demand basis. Now capital for a bank can be raised by issuing stock or certificates of ownership. A share of stock is, in contract law, the right to participate in the earnings of the corporation. The other part of that contract is that stock ownership has a limited liability. That is, the most an owner of a share of stock can lose is that share of stock. Again, our world is filled with contracts. We even speak of social contracts that each man, woman, and child have in common with each other, although enforcement is a bit vague as are the conditions and the agreements.
So why the long argument? The Austrian bad bank, the one that the Austrian government agency was suppose to wind down has a slight problem, or not so slight. Funds are missing to the tune of 7 billion or so euros. That would be bad enough but the bond holders for that bad bank now face a forty percent haircut or loss on their bonds. That is, the state government of a small area in Austria was supposedly guaranteeing the bonds when they sold them. But the EU commission has changed the law after the fact (that’s like passing a law and the trying the suspect who committed the act before the law was passed, it’s just not done when you are talking law and justice in the same breath) and instead of all the residents of that Austrian state being on the hook for the government guaranteed losses, the bond holders will have to take the losses. This is the new “bail-in” regulations. If a bank becomes insolvent, depositors whose deposits are more than X-quantity will have anything in excess confiscated to put the bank solvent again. That has already happened in Crete and enforced by the IMF and the ECB. When the financial system gets to a point where governments deem its failure to be catastrophic and takes precedence over law, the we live in an unlawful state. That financial system should be dismantled. Banks that are too big to fail should be broken up and made smaller, more manageable. And those who sought to make this institutions unmanageable should be brought to the bar of justice, condemned, and sent to jail. There should be no excuses. If we were willing to wait until after a war to try war leaders and generals for war crimes, the laws of which were never in existence prior to the war, then we can damn for banksters. The CEO have committed crimes, crimes against humanity for their own enrichment. They deserved to be stripped of all possessions and given life sentences in federal penal institutions. Furthermore, their subordinates should suffer the same consequences. Why isn’t john Corzine in jail? Because he is too busy being the Clinton’s bag man. He who robbed hundreds of thousands of their savings and investments by gamboling their accounts to feed his greed. He walked away from criminal wrong doing with millions, if not billions. But hey, when you are a friend of the Clintons then law makes no matter. You want to elect Hillary, you’ll be a tax slave the rest of your life cleaning up the financial messes. Do you think she will make her financial cronies eat the losses? In a way, the EU commission, without intending to do so, took a populist line by making the bondholders ea the losses. It was a defeat for established law but a win for the people. That’s a judgment on a razor’s edge.