Where is Danny DeVito when you need him?
March 27, 2013 § 86 Comments
Suppose I am the manager of a large investment fund, ZipFund. I have a little of my own personal money in ZipFund; but the vast majority of it is investments from small Mom and Pop investors.
Suppose my fund had invested in Cyprus Corp a few years ago by buying interest-bearing bonds. We’ll call these Zip bonds.
Cyprus Corp has other bond investors. Many of them are small investors like the majority of investors in ZipFund: we’ll call their Cyprus bonds Mom-n-Pop bonds. There are also some larger Cyprus investors who bought FatCat bonds. Mom-n-Pop bonds are senior to FatCat bonds: they are insured by the company, so they get redeemed at face value before the uninsured FatCat bonds are entitled to any proceeds.
Cyprus Corp is in big financial trouble, and the board of directors has been replaced by a judge. The new board has a fiduciary duty to make the best possible financial choice for existing Cyprus bondholders, and complete authority to make decisions. The company is about to go belly up if it doesn’t get an infusion of cash, which will make Zip, Mom-n-Pop, and FatCat bonds all virtually worthless.
The ZipFund partnership has voted to allow a deal to provide that additional cash, buying WhiteKnight bonds from Cyprus, as long as in doing so the value of Zip bonds is preserved going forward. Our goal is not as much to make a profit as it is to minimize losses on the capital we have already invested.
I offer the Cyprus board of directors a deal, and after shopping around a bit ZipFund is the only offer of new cash they get. Our deal preserves the value of both Zip bonds and Mom-n-Pop bonds. FatCat bonds are required to take a 40% haircut.
New cash from the deal would immediately change the viability of Cyprus going forward. It might not create overall value; but the board thinks it has a good chance of preventing wholesale value destruction. If they don’t do my deal, any Cyprus bondholders will be lucky to get pennies on the dollar and the uninsured FatCats will most likely get nothing at all.
If the Cyprus board accepts the deal, has anyone done moral wrong?
Zippy Catholic 
There is an opportunity cost to accepting the bailout that isn’t reflected in your analogy.
Cyprus Corp might not have any tangible assets, but Cyprus Nation does. Cyprus Nation has its sovereignty, its commodities, its people, its produce, and its national pride. These are all things it stands to lose if it accepts a desperate deal from the locusts that want to feed upon it.
It’s the equivalent of pledging your house in return for a pay day loan. Sure, it sounds like a good deal now, when you’re frantically trying to pay your electricity bill. But you will miss the next payment and then the loan sharks will be back, demanding you move out and hand over your keys.
I tend to avoid these conversations because V is smarter than me and Zippy is way, way smarter than me.
However, I think what is happening here is that you’re talking past each other. Vanessa is looking at the implications from a moral and national perspective.
Zippy is basically saying that if the law is being honored and all involved parties agree to a particular deal or settlement (whether in ignorance or not) then the deal is acceptable, let the chips fall where they may.
As I am admittedly out of my depth, I am open to being corrected.
Vanessa:
These are all things it stands to lose if it accepts a desperate deal from the locusts that want to feed upon it.
Show your work. What part of this deal involves giving those things away? Is the worry that if things go south again and Cyprus does decide to default – because the cost/benefit no longer works in their view – that the EU would send in troops and scoop up commodities?
AFAICT the only Big Stick here is ejection from the EU.
Pope Benedict XVI wrote:
“The heart of this fidelity to the divine word consists in a fundamental choice of charity towards the poor and needy: ‘The good man takes pity and lends … Open-handed, he gives to the poor” (vv. 5, 9). The person of faith, then, is generous; respecting the biblical norms, he offers help to his brother in need, asking nothing in return (Deuteronomy 15: 7-11), and without falling into the shame of usury, which destroys the lives of the poor.’”
If you know that someone is so unproductive that they cannot repay any loan you give them, then you should offer them a gift in charity. If you do not wish to do so, then it is better to leave them alone than to ply them with draconian debt obligations that will end with their enslavement.
Elspeth:
This post was more of a response to The Deuce’s contention in the comboxes below that there is something manifestly immoral in the deal. It is entirely possible (pace Vanessa) that some of the weak are getting screwed and the strong are thriving — though that is hardly obvious given that it is only the FatCats taking a haircut in the deal which was actually struck. But it is quite a lot more complicated to show that, and reasonable people can and do disagree about the assumptions driving the conclusion.
But as far as there being something manifestly immoral in the terms, that isn’t obvious at all. Which is the point of the post.
Vanessa:
If you know that someone is so unproductive that they cannot repay any loan you give them, …
I haven’t seen any evidence that anyone actually involved in the deal thinks that though, nor have I seen any reason why I should think it. The whole point of the deal is to maintain solvency, preventing wholesale value destruction, so that various parties ultimately get out with something to show for it.
No, these countries have gold reserves, gas exploration rights, currency reserves, etc. The threat of ejection from the Euro — and all of the horrors that they tell the people to expect in such a situation — is what they are using to convince people to sign up to these new debt deals, with the conditions naturally worsening with each reiteration. The wealth is being leaked out of the country, drip by drip, and the whole time they peddle new loans as the Final Solution.
This new loan is so much better than the last one, but since you defaulted on the last one, it makes sense for you to offer us a bit more collateral…
“The whole point of the deal is to maintain solvency”
Nobody thinks that they are solvent, or that they will be solvent again in the near future. That isn’t what the loans are about. They’re trying to keep the Eurozone together just a bit longer, for who knows what reasons. I have my speculations, but I can only offer the obvious pointlessness of the loans and their consistently short shelf-life as evidence.
The people on the ground in Europe, at any rate, are starting to wake up to the game that is being played in their name. Finally.
Are gold reserves (for example) explicit collateral on this loan? If so, the Wall Street Journal didn’t mention it.
There is no question that taking on more debt can – as always depending on all sorts of facts on the ground – be an imprudent choice. Again, I haven’t done the due diligence to say what I think of this specific deal prudentially.
Are you agreeing that there isn’t anything immoral about the scenario and explicit terms in the OP?
Vanessa:
Nobody thinks that they are solvent, or that they will be solvent again in the near future.
Well, I can only read articles; I can’t read minds.
It is entirely possible (pace Vanessa) that some of the weak are getting screwed and the strong are thriving — though that is hardly obvious given that it is only the FatCats taking a haircut in the deal which was actually struck.
It is a temporary reprieve, nothing more, and the result of people taking to the streets. The locusts will be back shortly for the rest.
I’m not reading the WST. I’m reading Der Spiegel and Sueddeutsche Zeitung. Sometimes Financial Times Deutschland. I have not seen any German articles which suggest that anyone is expecting to see this money back again. These bailouts have become a running joke in the German press. They’ve been going on for years. Every few months is a new one and every year adds another country to the bailout line. And with every bailout, the measures become more draconian. Everyone can follow such a straight line and see where it’s going.
That is why most Germans are now against the bailouts and Merkel got smacked in the last regional elections. There’s even an anti-bailout party staffed with leading economists because everyone agrees that this is financial madness.
Are gold reserves (for example) explicit collateral on this loan?
No, but their gas exploration rights were under consideration as capital.
Are you agreeing that there isn’t anything immoral about the scenario and explicit terms in the OP?
Yes, but a country isn’t a company.
Also, if the goal was to stabilize the Cypriot banks, as you contend, then this bailout was the anti-solution. As if attacking individual depositors is a sensible way to prevent bank runs. And if they were trying to keep the mobsters from extracting their money, they went about it the worst way possible. They froze the accounts of the mom-and-pop depositors in Cyprus, but left the London accounts open and free for unlimited withdrawals. The Russians were able to pull all of their money out from there, with nearly a week of warning, without having to worry about the Cypriots depleting the funds from the other side.
Either the people doing this are stupid, crazy, or evil, and I don’t know which one is worse.
Vanessa:
No, but their gas exploration rights were under consideration as capital
Under consideration but not actually in the deal, then?
People throw all kinds of crap at the wall when they are negotiating. The metal meets the meat when they sign on the dotted line.
If anything a sovereign country has much more borrowing latitude than a company; because it can always pull
the rip cord and go back to its own sovereign currency.
Either the people doing this are stupid, crazy, or evil, and I don’t know which one is worse.
Or they know better than to mess with the Russian mob.
Here is a Spiegel article about the pointlessness of the Cyprus bailouts and the fact that Malta, Luxembourg, and Slovakia are going to be next under attack. It’s in German, but I can translate it, if you like. People are saying, at the highest levels of government, “We are next. We are next and the Germans are going to strangle us to death.”
That article is the headline today, and that is the most widely-read news magazine in Europe.
Well, I’ve long thought that the Euro should just be renamed the Deutsche Mark. But if Cyprus decides it is better off staying part of the Reich for a while, who am I to gainsay them?
Again, though, where is the manifest moral wrong as opposed to prudential conflict with no obvious resolution?
I don’t buy it when the people at the top claim ignorance.
Pretending to think that the Cypriots are solvent is the equivalent of Jamie Dimon’s game where he claimed he just had no idea at all what was going on in his company. Why is he in charge then? Why doesn’t somebody pay me a few billion a year to be clueless, sit at a desk picking my nose and sipping Armagnac? In the same way, why do the financiers get to cut impossible deals and then pretend that they didn’t realize that they were impossible?
They’re playing a different game. They know that these deals are going to go belly-up and they’ve calculated that into whatever underlying spiel they’ve got going. The same way they issued securities and then shorted their own securities. They make money on the fail. The house always wins. These people aren’t stupid. I’m not buying it.
This weighs very heavily on my heart because I am German. Everybody hates us now and we know it. We claim to be saving them, but they spit in our faces, and they are right to do so. We rape them and pay them some hush money, and expect them to be grateful for our generosity. It’s sick.
But if Cyprus decides it is better off staying part of the Reich for a while, who am I to gainsay them?
Of course they do! They’ve been threatened with tanks in the streets and a hail of fire if they don’t, same as happened in the US when TARP was considered. Frightened people rarely think… but what about next year?
Pretending to think that the Cypriots are solvent is the equivalent of Jamie Dimon’s game …
Could be. I actually don’t know (for the hundredth time). But I know that insider trading scams at the top like you accuse whomever you are accusing are a lot more difficult to hide in real life than they are in the movies. Especially the “set up failure and open a massive short position” sort you describe.
I think the simpler theory – that lots of people really do think the unwinding of the Eurozone would be a disaster – is probably just as good here. It might even mean – seems likely to mean – that Cyprus got far cheaper money than it could have gotten purely on its own merits.
And of course none of the fear is warranted?
The Cypriot financial sector is 8 times GDP, so perhaps. It doesn’t really have anything to offer other than offshore banking anymore. Cyprus was the warning, and the central Eurozone finance ministers have made that clear to the others. They’re next.
We will see, after it all collapses, whether there was an underlying plan or just incompetence at all levels.
And of course none of the fear is warranted?
I did not say that. There will be riots either way, poverty either way. But it is one thing to riot against your own government, another to riot against a foreign occupation.
Are you predicting a German invasion of Cyprus, literally?
This is from Zerohedge, based upon an excerpt from Der Spiegel:
A Furious Cyprus Begins Investigating Who Breached The Capital Controls
Are you predicting a German invasion of Cyprus, literally?
You don’t have to invade anyone anymore, in order to take over their country.
Russian Mafia. That’s been the distant rumblings all along — that Cyprus had basically turned itself into a sovereign territory for the Russian mafia to store and launder money. If that’s true then this whole thing has just been theater.
Here is proof that even the Americans know how pointless the Cyprus deal is: Moody’s: Cyprus Euro Exit Risk Substantial
“While the risk of a euro exit by Cyprus is substantial, Moody’s does not consider it as its central scenario. Following the economic dislocation that will be caused by the restructuring of the island’s two largest banks and the imposition of capital controls in the country, it is possible that the risk of euro exit will increase further. If that were to occur, the maximum rating Moody’s would assign to Cypriot securities would fall further.”
I.e.: We don’t think Cyprus will exit the euro, but this new bailout increases the risk of them doing so, so we will downgrade their debt.
If that’s true then this whole thing has just been theater.
The entire eurozone is a theater now. Well, the dollarzone isn’t much better, with our major banks laundering money for the Mexican cartels.
Zerohedge is on a roll today. You were speaking of Deutschmarks? Well, I have my money in a German savings account, so I should be fine when the currency reform finally happens. LOL
The last time we were in Germany, over Christmas, we were astonished at the building boom. Money is pouring in from all over Europe. Everyone who is liquid enough to invest in Germany, is doing so. Everybody knows that it’s all coming down, and they want to be sitting in the right chair when the music stops. The only people with liquid assets in the peripheral countries are the common people, and they are being placated with these bailouts while the wealthy scramble to liquidate everything and move their funds.
BTW, the Cypriot banks are still closed. It’s been twelve days. They open again tomorrow. Might get interesting.
Yeah pass the popcorn.
LOL
This is what I mean, about how people see the Germans now. Luckily, many Germans write in English, so the comment threads are full of denials.
Southern Europe lies prostrate before the German imperium
Margaret Thatcher had a point about Germany
It’s very quiet there. Now TPTB know that they can do this and people will just accept it, so the plan will get rolled out across the continent. Savings taxation for all. The problem they’re going to have is that everyone’s going to keep taking money out, but not put money back in.
Reminds me to visit my local ATM today.
Vanessa,
It’s very possible that the ECB wants to get people in the EMU used to the idea that savings don’t belong in banks. Banks are for currency and currency are not savings. The ECB may want to subtly (or not so subtly) suggest that people steer more of their long-term savings into wealth assets rather than currency and debt (perhaps one particular wealth asset that is not taxed and is shiny and yellow).
There is much evidence that the ECB is gearing up for a new international monetary paradigm that will operate differently from the current one (explaining why it’s in the interests of those nations in the EMU to remain there). Recall Wim Duisenberg’s statement when the euro was first launched that that the euro is the first currency to sever its links from the nation state and from gold.
Scary thought. New World Order sort of stuff. The new NWO?
I don’t think the European peoples are going to go along with it. Everyone is yearning for independence; for regionalism. Tired of being played by foreign puppet-masters. That’s the sort of thing that would lead to war, I think.
Also, there’s a PM bottleneck right now.
The ECB is reactive and adaptive, they are not setting the agenda. The global capital markets are. International trade requires a new system that is not based on debt-savings and the ECB is merely trying to position itself to be first in line for when the current system ceases to function altogether.
The global capital markets are.
Agreed, although I think the ECB is acting on behalf of its handlers. There is definitely some corruption there. Look how fast the conservative German bankers kept getting chased out of the Bundesbank by Merkel. The DSK scandal. The way Italy’s democracy was undermined with a bankster plant. Etc. It’s nauseating.
We’re going to have currency reform and nobody is facing up to it. They’re all just scurrying around, putting out fires. Recovery summer 2013!
It’s surreal and I’m running low on popcorn.
This weighs very heavily on my heart because I am German. Everybody hates us now and we know it. We claim to be saving them, but they spit in our faces, and they are right to do so. We rape them and pay them some hush money, and expect them to be grateful for our generosity. It’s sick.
My mother just told me how the Portuguese are the slaves of the German since they can’t produce much anymore and are bankrupt.
We will see, after it all collapses, whether there was an underlying plan or just incompetence at all levels.
I’d say most are incompetent and few knew the plan all along. The knowers are just using the incompetent as bullet proof shields.
I think what they are finding is that when a bunch of countries attempt to unite under a coalition currency while maintaining individual sovereignty, what happens is that the country or countries with the strongest economies become de-facto sovereign. What will be interesting in the long run is France, not all the little guys.
Yeah, France doesn’t give up without a fight.
/snark
“Sovereign is he who decides on the exception.”
— Carl Schmitt
Interesting interview with the leader of the new German anti-euro party.
http://www.businessinsider.com/bernd-lucke-alternative-fur-deutschland-interview-on-cyprus-2013-3
France under de Gaulle was the first nation to publicly sound the alarm bells over the dollar in the early 1960’s, the first to pull out of the London Gold Pool in the mid-60’s, the first to officially mark its currency to the market against gold in the early 70’s and Jacques Reuff, economist and attache to the French government for decades in the mid-20th century, was one of the original architects of the euro. I don’t think the French are going anywhere.
But if they stay in, then they have to submit to Germanic (not just German, but also Dutch and etc.) leadership. There’s a Germanic alliance against the spendthrift Latins, and both sides are starting to grate under the partition. They feel like slaves and we feel like we’re babysitting spoiled children. Something has to give.
Best to resolve this peacefully by dissolving the union.
I am guessing medium-term though that the Euro — if it sticks around long enough — will create a serious conflict of sovereignty between France and Germany. They are the two big dogs in the pack.
I’m no expert[*]. My posts are about the moral situation, not political-economic “what ifs”, though nobody seems interested in taking the bait on the former.
The Euro looks like an attempt to create a non-sovereign, democratic, transnational reserve currency. In practice of course what this means is a de-facto sovereign currency where sovereignty is denied. As in all liberal experiments there are de-facto kings and aristocracies; it is just that these must operate under the pretense that kings and aristocracies are illegitimate. The interesting question medium-term (to me) is whether France is willing to bend its knee to Germany. Much as it would be advantageous for the US if all other countries just gave up their sovereign currencies and used the dollar, it is advantageous for Germany that everyone in the Eurozone has given up their sovereign currencies and are using the de-facto deutsche mark called the “euro”. Everyone must kiss the König’s ring.
France is highly ideologically invested in the experiment; and it is always interesting when deluded ideologues start to encounter reality. It is also possible that Germany may self-destruct out of liberal guilt — being the Emperor is becoming the devil.
___
[*] I do have my views, of course. For example I think gold-as-universal-currency is dead, dead, dead and is never, ever coming back as long as civilization lasts.
I agree with you about gold, actually. I wrote a blog post about it once. It is a good store of wealth, though, which is why I always ask for PM jewelry as presents now. I couldn’t convince anyone to buy me coins.
which is why I always ask for PM jewelry as presents now
<snicker>
It’s not bling, it’s diversification of my portfolio that I can carry on my person!
Instead of a go-bag, its go-bling.
I would not characterize the euro as an ideological creation but rather a pragmatic one. The story here is not the piddling imbalances of a few Mediterranean nations (the Eurozone in aggregate is in remarkable balance) but instead the maintaining of the continuous, uninterrupted flow of oil in global trade which sustains the economic valuations of most all viable enterprises. The flow of oil requires a large, elastic, functional transactional currency that can also be used to purchase real wealth (savings) with which to replace diminishing oil reserves. This is why gold went parabolic in 1979-80. Oil was bidding for gold in the open market and the dollar was failing to replace spent oil reserves with real wealth. The Europeans called time-out before reaching def-con1, read Volcker the riot act (this meeting is public knowledge), fast tracked the euro (a loose collection of ideas at that point) and committed to funding our trade deficits (at great cost) until things were in place.
From this perspective the euro was created not as a leftist power grab but as a way to ensure the continued flow of oil after the dollar/reserve system collapsed under its own weight. Or put another way, it was created as a corrective to the unintentionally disastrous 1922 monetary conference in Genoa which set the stage for making dollar reserves the means by which to settle international trade balances. Or put still another way, it was created as a way to move on from the dollar without war. Anyway, in the future things could change. Once the existential threat is gone it may become viable for the euro nations to return to their own currencies without threatening trade flow.
There are certainly some moral questions embedded in that story.
Gold as universal currency never again? Never say never, but I basically agree. Now, gold bullion as universal wealth asset above all others? This is a different question. I would argue it is true, has been true throughout the dollar’s various instantiations, and that the euro is structured around this reality.
The worst thing is that I always forget to wear it, which ruins my cover story. I figure everyone will realize how clever I was when they can melt down my personal decorations to buy food.
Rich girl prepping. LOL
http://traditionalchristianity.wordpress.com/2011/09/21/you-cant-eat-gold/
On gold as currency.
“My posts are about the moral situation, not political-economic “what ifs”, though nobody seems interested in taking the bait on the former.”
I already addressed that. I do strongly feel, however, that the intentions and plans of the “saviors” is also a moral issue.
@Vanessa.
Well, it’s the end game of the euro. If Zippy will bear with me doing a bit of a rant…
The NordEuropa countries have (with a couple of exceptions caused by having to use Soviet Rubles) generally wanted to run a strong/stable currency and keep inflation down since the current neoliberal consensus was forged by Thatcher and Regan. The Pound was fairly stable, and the DM was very stable. Britain could have easily entered the Eurozone. It chose not to.
During the global financial crisis the Pound devalued from about $4 NZ to under $2 NZ. This has consequences. People have moved to NZ (and OZ because we are currently more stable). But as the Pound is NOT a reserve currency and the UK printed money (Quantative Easing) the market devalued the Pound and the UK is paying the price with 1970s style stagflation.
The Germans, if left alone, would do what they generally do: run a very lean state, minimize expansion of benefits, and export machine tools (no, I do not mean guns. That is what the Austrians and Czechs do :-). I mean the machines that make things). Most of the products they make are relatively price insensitive: for instance the new Leica Monocrom is 10K and the newest lenses for it are 7k — 11K each. In US bucks.
The Germans, Dutch, Poles (to an extent) Austrians and Czechs can do this. The smaller countries (Ireland, Iceland, Cyprus) have had to see their financial systems impolde — and here Iceland did the right thing and DID NOT GUARANTEE ITS BANKS. If you deposit money with a bank, you take a risk. The rest did (incl Cyprus) and thus are in the hole.
You see, Guaranteeing a bank increases moral hazard. Vanesssa and Zippy, individually, may be a good risk (perhaps I can make money selling your houses. Not) but ZipCorp is a bad risk — not because Zippy is immoral but because the banks there will loan to Johnny CuteDrummer to fund his drug habit and to Janey SingleMom for her house. It’s a win-win to the bank. They cah charge Johnny and Janey a higher interest rate that they will be able to charge Zippy or Vanessa and if they default the government will rescue them.
Banks therefore have discounted risk, even though the risk is real.
OK… end rant.
I’d advise Merkel to simply tell the ECB to frack off. Let the Euro fail. Other paneuropean currencies (the Lira, the Mark) have also failed. The the Greeks and cypriots can instantly default, devalue, and hyperinflate. (Their choice).
(As an aside, the US owes too much to be a reserve currency. Buy gold, silver, camera lenses, good tools, good electronics (audio stuff does not go obselete) and farmland. And stay away from crowds)
@V: in case you had not seen this.
http://maxkeiser.com/2013/03/28/kr423-keiser-report-plunderball-new-euro-banking-game/
I haven’t seen that one yet, but I’ve seen all his others. He has some interesting things to say, but I cringe a bit at the tiresome anti-popery and his chronic assumption that we Germans are all aiming for world dominance.
It’s not that we want to take over the world, but that the world messes everything and we’re reduced to fixing it back up. Besides, Germany is so awfully crowded.
Easy for you to say, Chris. You don’t live in the neighborhood.
Nobody’s talking about what happens within the EU the day after economies of its Latin members implode. But thinking about the question, “and then, what?” is the engineer’s way. Anybody up for a reversal of the barbarian migration that sacked Rome? I doubt Chancellor Merkel is.
http://www.zerohedge.com/news/2013-03-29/and-scene-big-cypriot-depositors-face-complete-wipe-out
The uninsured deposits are being completely liquidated. Every last dime. The foreigners apparently withdrew every last cent while the banks were closed and now there’s nothing left.
I’m tempted to go buy up some of the “bad bank” shares.
Micha Elyi:
Anybody up for a reversal of the barbarian migration that sacked Rome?
Heh. There is that little bit of check-and-balance. But my guess is that our clever Teutonic friends will not allow ideology to trump pragmatism: they’ll find a way to wall up the borders under some rationalization that doesn’t require apostasy from liberalism.
We’re good at building walls.
@ Micha. True. I don’t live in the neighbourhood, but the neighbourhood almost bankrupted my country. We had a nice living selling lamb to the Brits before they joined the common market. I’ve seen the end of subsidies and sat at my parents table (in the 80s, when I was an intern) as they talked about friends who had suicided because they could not keep their farm.
Breaking the Euro is going to suck. But…
I cannot see this remaining stable, and the more you do to shore it up the worse it is going to be. Let the PIGS invent the Lira again. Or the Florin (a nice word, that) and the Northerners go back to Francs and Marks. Because you cannot have monetary union without financial union, and no sane nation state will let Brussels run that.
The Italians are not stupid. They are getting their money somewhere safer. better negative two percent from the Swiss than haircuts.
http://www.zerohedge.com/news/2013-03-30/whos-next-italys-monte-paschi-admits-billions-deposit-outflows
Zippy,
Remember how you asked me: Are gold reserves (for example) explicit collateral on this loan?
Well, they weren’t for that loan. They are for the next one, though.
More on it here: Cyprus Central Bank In Shambles Following Third Board Member Resignation
Hmmm. That doesn’t look like collateral to me. Selling assets to make good on a loan – because the borrower prefers that to the consequences of default – isn’t the same thing as collateral, at all.
Collateral is property posted at the initiation of a loan, which the lender can (backed by sanctioned government violence) seize if the borrower defaults. Fire sales on chronically overvalued gold are like broke aristocrats selling their jewelry to buy food.
Of course part of the problem with unsecured lending (usury) in general is that it muddies distinctions between what is and is not collateral.
So as I am constantly trying to demonstrate, “the problem” isn’t debt generally speaking, or fiat currencies, or budget deficits, or national debts, or any of the things that fiscal conservatives go on about. The problem is something that fiscal conservatives generally defend: the practice of usury.
If Cyprus wanted to tell the ECB to f*** off, they could. It isn’t like the Wehrmacht is going to invade. The reason the ECB can kick the Cypriots around is because the Cypriots still want to be kicked around.
That doesn’t look like collateral to me.
Not directly, no. My point was that plundering the country is part of the official plan.
More here.
The Wehrmacht didn’t show up and “save” people. It rolled in with tanks. It was, at least, an honest invasion.
I’m not disagreeing with your substantive point as much as with characterization. The country can’t be plundered unless it wants to be plundered. Again, we aren’t talking military invasion here. I have a lot less sympathy for a voluntary “victim” of codependency than I do for a real victim of a real crime.
This isn’t rape, it is “date rape” – the sort where regret and a long face turns a voluntary participant into a victim.
I don’t know… the first loan agreement was nearly pushed through without parliamentary review, and they only got it through in the end by harassing the leader in Brussels (so, away from his compatriots and surrounded by financial locusts) until he caved. The second one is being pushed through despite central bank disagreement, and the board members are resigning in protest at their loss of independence.
Doesn’t sound all that voluntary to me. Sounds to me more like they’re being raped and are in too much shock to fight back. Individuals are responding, but there’s not yet a collective response. Even if Cyprus and the smaller countries cave, Italy would rather go to war than give up its wealth, and the Spanish are known for being proud.
In other words, get more popcorn.
Vanessa:
Doesn’t sound all that voluntary to me. Sounds to me more like they’re being raped and are in too much shock to fight back.
Tommyrot. Denial of moral agency; the devil made me do it; the usual crap.
There is a nontrivial difference between actually being violently forced to do something on the one hand, and caving in to social pressure doing it voluntarily on the other; and I have no sympathy for the conflation of the two in any domain.
Unless there are German tanks rolling through the streets – or at least some remotely credible threat of it, which there isn’t – this is not a rape. I actually do have sympathy for a whore, in some circumstances; but I don’t have any sympathy at all with conflating prostitution or drunken fornication and legitimate rape.
Okay, they deserve it then.
Vanessa:
Okay, they deserve it then.
If you say so. Whether a slut deserves to be screwed is an entirely different question from whether she chooses to be screwed.
I have no intention to offend anyone. I am taking your statements literally. I know I may have little success in explaining myself but I will give it a good try anyways.
My short answer ZipFund and Cyprus Corp should be allowed to go bankrupt and FatCat bond holders should consider some hedging of their FatCat position.
I will explain why going line by line and attempt to clarify the many unclear statements. On occasion, I will give my opinion. I am sure I will make many errors.
*You are the manager of ZipFund.
*Little professional capitol is in ZipFund. (This is a very big red flag saying…..STAY AWAY!)
*ZipFund purchased an unknown amount of bonds from Cyprus Corp, the term “Zip bonds” is confusing, rename to Cyprus Corp bonds.
*Cyprus Corp has other investors mostly small investors and a few larger ones. The term “Mom-n-Pop bonds” is confusing, replace with investors in Cyprus Corp.
*The larger Cyprus Corp investors bought FatCat bonds. Not much of a hedge but better than nothing, maybe…
*Cyprus Corp bonds are senior to FatCat bonds, it is unclear why this is.
*”The Company” is the bond insurer for Cyprus Corp, the terms of this are unknown. (later it seems very little was actually bought)
*FatCat bonds are uninsured.
*Cyprus Corps financial troubles will impact ZipFund according the percentage of total capitol it invested.
*It is unclear why Cyprus Corps financial troubles would have any impact on FatCat bonds.
*ZipFund is buying White Knight bonds from Cyprus Corp who has big financial troubles and may go under.
*I see no reason why the value of Zip bonds would be improved by buying more bonds from a bankrupt company with bad management, namely Cyprus Corp.
*Cyprus Corp’s value has been already been destroyed, there is not much more value destruction to be had.
*Why are Fat Cat bonds taking a 40% haircut?
*Cyprus Corp bought little bond insurance from “the company”
If anything is morally wrong it would be ZipFund’s gross financial mis-management.
Bill:
My short answer ZipFund and Cyprus Corp should be allowed to go bankrupt and FatCat bond holders should consider some hedging of their FatCat position.
Are you suggesting that ZipFund should be forbidden to lend money (even though it has plenty to lend), and Cyprus Corp borrowing should be forbidden even though the loan is freely offered? How specifically should the contract be prevented from happening despite the fact that both parties want it?
My comment is not on how ZipFund or Cyprus Corp should be regulated by some government entity.
For instance, remember a few years back there was a guy named Bernie Madoff, (large investment fund with no institutional participation) his financial statements and actions very clearly gave him away. Professionals steered clear of him. Government regulators (trained as lawyers not as traders) were given very detailed accounts of his frauds, but because the regulators involved had no idea how any of it worked they could not see the clear fraud. The government regulators were going by status and social position. Even though ZipFund says it has money who knows if its true.
ZipFund and Cyprus Corp can do what ever they want, I would just look at them as high risk.
“FatCat bond holders should consider some hedging of their FatCat position.” If the risk goes up you can add more insurance and or reduce your position size.
Money, equity finance, debt finance, derivatives/insurance – all this is an attempt to keep people honest with each other. To counter the natural tendency to cheat and lie.
Bill:
Even though ZipFund says it has money who knows if its true.
It is true because I defined the hypothetical that way in the OP.
(Incidentally, I didn’t define ZipFund as something especially risky or as something avoided by institutional investors. Many or even most institutional investors are ultimately investing significant amounts of mom-and-pop money, from pension funds etc. The point to posing the hypothetical the way I did was to forestall the false premise that only greedy bigwigs have a vested interest.)
Yes, people do bad stuff in finance. Yes, there are ways to hedge, and smart investors should do so, generally speaking.
But what does any of that have to do, specifically, with the moral question I posed at the end of the OP?
Is it morally wrong to lend money to someone who has no intention or ability to pay their debt? If you fully disclosed this to your investors I guess it would be ok. At this point it is really more of a gift rather than an investment. It would fair to give ample time and notice to the participants so they could opt out.
If this was purposeful hidden then it would be a fraud. Don’t underestimate how much stupidity is out there. The question really is, is it immoral to be stupid? There is no shortage of dumb institutional investors who make bad investments.
All have there own interest in mind and will be biased to this.
Bill;
If you ever get a hankering to engage with the scenario in the post, let me know.