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Contrary to Public Policy

It is so easy to get distracted, especially when people in trouble want you to be distracted. George Washington gets back to the important question: What ARE the toxic assets everyone is talking about?
The answer is that the toxic assets include:
  • Credit default swaps (CDS)
  • Collateral debt obligations (CDOs)
  • Mortgage backed securities
In fact, these different classes of toxic assets are related. [He goes on to outline them briefly. - Ed.]

But what people should be discussing is cancelling the toxic CDS and CDOs. As I have written repeatedly over many months in different ways, the American people should demand that the government rescind the CDS and CDOs.

The government has that power. Indeed, the same arguments which have been made for the government's authority to cancel AIG's bonus contracts can be used to cancel CDS and CDO contracts. In order to receive any more bailout money (or to keep the money they already received), the CDS counterparties and CDO holders need to cancel their contracts. And for foreign CDS counterparties and CDO holders, the government could simply say "we will not loan your central banks any more money unless you cancel the contracts".
George Washington is correct, but you're not hearing talk like this coming out of DC. But these things need to be cancelled as being contrary to public policy. Meaning, since they threaten to collapse the world economy, they meet the criteria of being contrary to public policy.

The best explanation I ever read of this whole mess can be found at the Geronimo Manifesto.
First, a simple definition. A credit default swap is a form of insurance. A variant of mortgage insurance required of many home purchasers. An insurance policy that requires a company with financial strength to step up to the plate and pay the mortgage if for some reason the home buyer defaults.

A credit default swap is similar: If default occurs, an insurance company pays the income stream of the mortgage.

With one extremely important difference: Payments are made to the owner of the policy, not to the financial institution that stands to suffer a loss.

Financial institutions are allowed, through total lack of regulation, to buy and sell credit default swaps, or insurance they will be paid in event of default, on financial instruments in which they have no financial interest.

Start with a simple example. Assume I know the young son of the couple next door likes to crawl into closets and play with matches. I therefore see a reasonably good shot at "winning the disaster lottery" so to speak, by buying fire insurance on their $200,000 house.

In simple terms, I now have a financial interest is seeing that disaster occurs. If the house, for whatever mysterious reason, burns down an insurance company will pay me the insured value of the house - even though I suffered no loss, financial or otherwise. My neighbor's misfortune is thus magically transformed into my good fortune. A polite way of saying I was paid $200,000, the insured value of my next-door neighbor's house, after I paid the $400 insurance premium.

Being bright and suitably equipped with an MBA from a prestigious eastern university, I well and fully understand the desirable objective of maximizing my return on investment. I can accomplish this in one or both of two ways - increasing the return or decreasing the investment. [Aside, see here for where these clowns get their MBAs. - Ed.]

I can increase the return by artificially increasing the value of the house - say from $200,000 to $400,000. This will allow me to collect twice as much for suffering no personal loss. The easiest way to accomplish this would be to hire one of my buddies, who happens to be a real estate appraiser, to "document" the higher value.

I could also decrease my investment - meaning the premium I paid for the insurance, say from $400 to $200. The easiest way to do this would be to hire a widely acclaimed "fire risk rating agency" to send out an inspector who will look around (or perhaps only drive by without stopping) and then solemnly declare: "This house is fireproof".

Poors and Standard Fire Rating Company and Doomys Fire Rating Agency would be excellent choices, based on their prior experience.

In the real world, meaning Main Street as opposed to Wall Street, this would be illegal. Against the public interest, because it encourages houses to mysteriously burn down. The insurance policies owned by people without a financial stake in the fire would be declared null and void because they are contrary to public policy, which sees minimizing the number of mysterious house fires as a good thing.

Rather than a bad thing, as now occurs under America's predatory capitalist system.

Now change an assumption. Assume I tell 99 of my poker-playing gambler friends about the boy's strange and dangerous interest. Starting with my appraiser buddy, who's predatory income as a result of a mysterious fire will double, as a direct result of his appraisal.

Now assume the $400,000 house burns to the ground. One hundred or so insurance companies will collectively pay $40 million in claims on the loss of a single $400,000 house. The benefits of a $400,000 disaster are magically multiplied by a factor of 100 and transformed into a $40 million disaster - with one family suffering a loss and 100 families experiencing a gain.
That is what we are paying for. That is what we are bailing out with our hard-earned money. And everyone involved knows it. So somebody tell me, why hasn't anyone in power said this entire casino is contrary to public policy and therefore these contracts are Null and Void?


malcontent said…
Wait a sec. Didn't we just hear a chorus about the sanctity of contracts? If we keep flipping and flopping on our messaging people are going to get confused and all this anger will be wasted.

Anonymous Liberal has a couple good posts on this topic as well.

BTW, you are absolutely correct that these contracts need to disappear quickly and forever.
Anonymous said…
This is why: George Carlin said it best:

"Forget the politicians. The politicians are put there to give you the idea that you have freedom of choice . . . you don’t. You have no choice. You have owners. They own you. They own everything. They own all the important land. They own, and control the corporations. They’ve long since bought, and paid for the Senate, the Congress, the state houses, the city halls, they got the judges in their back pockets and they own all the big media companies, so they control just about all of the news and information you get to hear. They got you by the balls. They spend billions of dollars every year lobbying . . . lobbying, to get what they want . . . Well, we know what they want. They want more for themselves and less for everybody else, but I’ll tell you what they don’t want . . . they don’t want a population of citizens capable of critical thinking. They don’t want well informed, well educated people capable of critical thinking. They’re not interested in that . . . that doesn’t help them. That’s against their interests. That’s right. They don’t want people who are smart enough to sit around a kitchen table and think about how badly they’re getting fucked by a system that threw them overboard 30 fuckin' years ago. They don’t want that. You know what they want? They want obedient workers . . . Obedient workers, people who are just smart enough to run the machines and do the paperwork. And just dumb enough to passively accept all these increasingly shittier jobs with the lower pay, the longer hours, the reduced benefits, the end of overtime and vanishing pension that disappears the minute you go to collect it, and now they’re coming for your Social Security money. They want your fuckin' retirement money. They want it back so they can give it to their criminal friends on Wall Street, and you know something? They’ll get it . . . they’ll get it all from you sooner or later cause they own this fuckin' place. It’s a big club and you ain't in it. You and I are not in The big club. By the way, it’s the same big club they use to beat you over the head with all day long when they tell you what to believe. All day long beating you over the head with their media telling you what to believe, what to think and what to buy. The table has tilted folks. The game is rigged and nobody seems to notice. Nobody seems to care. Good honest hard-working people . . . white collar, blue collar it doesn’t matter what color shirt you have on. Good honest hard-working people continue, these are people of modest means . . . continue to elect these rich cocksuckers who don’t give a fuck about you. They don’t give a fuck about you . . . they don’t give a fuck about you. They don’t care about you at all . . . at all . . . at all, and nobody seems to notice. Nobody seems to care. That’s what the owners count on. The fact that Americans will probably remain willfully ignorant of the big red, white and blue dick that’s being jammed up their assholes everyday, because the owners of this country know the truth. It’s called the American Dream cause you have to be asleep to believe it . . .”
Sis said…
They're getting a two-for-one special out of the deal, that's why they are going through with this.

The multiple stimulus packages will create inflation - really nasty inflation - which will lessen our debt to foreign countries by paying it off with cheapened dollars. Of course, it will really suck for those of us who must still purchase bread, shoes, gas and beer with these watered down greenbacks, but there is really no other way out of this hole, short of crashing the system and scrapping the dollar.

Despite the talk of deflation, I'm sensing that hyperinflation is going to rear it's ugly head a bit sooner than I thought. We're already seeing pockets of inflation here & there and, by this time next year, we'll see it spread to the broader economy. Within two years, hyperinflation will begin it's spiral and our national debt will be chicken feed. Wah-lah! Solvency issue solved, then we head back to the world buffet with a clean plate to make pigs of ourselves once again!
malcontent said…
Another key point about that curious term "toxic assets" is that first and foremost, they have never been subjected to valuation outside the tight circle of players in the derivatives market. To continue the casino metaphor, no one has ever "cashed out" and tested these values in hard currency for another commodity. The settlements have traditionally been cast back into new derivative contracts through deferral. Now that these players are forced to cash out their piles of chips for actual money, the cash window teller has no more currency to give.

This is where you and I come in as taxpayers. Our Treasury department is the fence/printer who is hawking chips from the defunct casino for money they print. It's not counterfeit but it does directly dilute the value of all our existing money as this charade continues.

Welcome to the machine. The toxic assets are not totally worthless in the long term but these issues we have embraced by re-inflating this bubble are intended to minimize the fire sale mentality in valuation of these derivatives by letting them ripen a bit longer. Forcing the settlements now will wash all the money issues out of the system and bankrupt the banks with it. The world of high finance will vanish.

The Power Vacuum that would result from this disappearance would not resolve without bloodshed.

Keep your eye on the ball and remember that the more someone has to lose, the more dangerous they become.

Sis is right, hyperinflation is perhaps the only civilized way out.
A. Peasant said…
Also see Urban Survival, like on sidebar.
Sis said…
Sorry, Peasant. Checked out for a minute. Went to Kohls to buy my kids clothes for the next five years; certainly don't want them looking scrappy when they're standing on the street corner selling matchsticks for five bucks a pop.
A. Peasant said…
Ha, no problem. That's where I'm going in a few, and for the same reason. Well, at least they won't grow so fast, seeing as we will be too poor to feed them soon.
MarcLord said…
Oh hey! Hadn't realized Pez but thanks for the cross-post. Nothing like spreading some calmness. Seriously, Bernanke knows one lesson from the Depression: don't shut off the recovery spigot too fast. So he has no choice but to keep pumping money past the point anyone believes in the bonds, and we're kinda there already. For the record, 1,000% inflation was hyperbole, I hope. Maybe more like 100% in sectors.

The place to look for the next bubble might be commodities again. Banks have all this money, do they want to lend more to us? Didn't think so. Commodities has enough free volume to suck the stimulus inside and make a nice speculative bubble. And yes I did sleep inside a trading booth suspended above the exchange for half a year to understand this shit.

Which brings back to your last question, great post here btw. No one in political power understands the casino enough to say Null and Void. And to malcontent's point, there are NO CONTRACTS to look at, no trading post book to examine.
A. Peasant said…
OK, I understand the commodities bubble. I'm all for buying alcohol as the most fungible bartering substance ever.

Still a little confused about the nature of these non contract contracts, or whatever the hell they are. In any case there seems to be an urgent need to keep them perpetually undisclosed. I was reading my favorite intelligence porn, Global Analysis, and he says the primary motivation behind these bailouts is to avoid bankruptcy because that would involve appointing a trustee. Because a bankruptcy trustee has unlimited powers to investigate everything. In AIG's case, for instance, the 728++ offshore 'subsidiaries' that are actually holding accounts in the name of the bush/clinton crime cartel. So long story short, they're screwing us all to cover their own asses and keep all the little buckets of money with their names on them secret.

If I understand it correctly, and I'm not sure I do, but it makes sense to me that the reasons behind all this are thoroughly vile.
A. Peasant said…
Just came across an example of an AIG subsidiary in the news:

Dodd's wife a former director of Bermuda-based IPC Holdings, an AIG controlled company

No wonder Senator Christopher Dodd (D-Conn) went wobbly last week when asked about his February amendment ratifying hundreds of millions of dollars in bonuses to executives at insurance giant AIG. Dodd has been one of the company's favorite recipients of campaign contributions. But it turns out that Senator Dodd's wife has also benefited from past connections to AIG as well.

malcontent said…
Ian Welsh is writing about the plan to save the bubble too
MarcLord said…
Probably the strongest thread in all this is how the Bushes and the Walkers and Harrimans hid their money offshore when FDR went after their fortunes. They sure as hell didn't pay it in taxes and they don't have charitable foundations. AIG might just be the Umbrella.
A. Peasant said…
Yes, as I understand it AIG is the umbrella. Total CIA shop. You know, the George Bush Center for Intelligence at Langley. He still runs it.
Greg Bacon said…
The Fed and the Treasury Department is trying to cover the bets on the 500 TRILLION dollar derivatives "casino" and that's an impossible task.

But we'll be fleeced for every cent we have to help out these poor banksters in need.

All they'd have to do is to write back the bets/debts.

Sure, at some point, someone would lose the bet, but it wouldn't be any where near the 500 trillion dollar level.