Re: Chrysler related comments by Professor Bill Black


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>   
>   On Sat, May 2 and 3:48 PM, Bill wrote:
>   
>   I want to amplify a couple of Warren’s points that the media that I’ve seen has
>   missed. To me the key is the internal inconsistency of the Obama
>   administration’s reasoning. Contracts were sacred (AIG bonuses). Now, secured
>   creditors, who negotiated for a lower yield in return for priority (i.e., the prudent
>   lenders), are attacked by the administration as morally evil for not giving up their
>   rights.
>   
>   It’s one thing to use bankruptcy powers against unsecured creditors (and that
>   includes secured creditors to the extent they are undersecured). That’s an
>   inherent risk of being an unsecured creditor, particulary in a nation like the U.S.
>   that allows Chapter 11 reorganizations. (Reorgs may be the interest of unsecured
>   creditors as a class, but they can be hell on particular unsecured creditors.)
>   
>   Secured creditors are not the same, particularly where they are fully secured. The
>   Supreme Court has emphasized that the bankruptcy laws cannot be used to
>   commit a “taking” without just compensation.
>   
>   But the point I want to emphasize is this — why is the same administration
>   refusing to wipe out risk capital (equity and subdebt) in favored banks and instead
>   providing them with myriad federal subsidies while demanding that fully secured
>   auto creditors take a deep haircut? To state the obvious, risk capital has the
>   lowest priority — none. Moreover, it is supposed to be wiped out to create the
>   proper incentives. Conversely, senior debt is not supposed to be wiped out (or
>   extorted into serious haircuts) — that creates perverse incentives. Does anyone
>   seriously believe that if Goldman or Pimco held the large senior debt positions in
>   Chrysler the administration would have extorted and demonized them?
>   
>   Best,
>   
>   Bill
>   


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Financial Sector


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I like this line from Bill Black:

“These Democrats want to maintain America’s pre-eminence in global financial capitalism at any cost.”

Yes, they think it important for some measurement of ‘power’ that has nothing to do with our real standard of living. Like pyramid building or something like that.

I do think with net interest margins now north of 4% (thanks to government policy) and GDP stabilizing due to deficits in excess of 6% of GDP, and more fiscal on the way, the banks can now earn their way out of just about anything.

All they need is a year or two of very modest GDP growth. And it doesn’t bother me a bit that the legacy issues and past frauds might keep their net earnings depressed during that recovery time.

What does bother me is that it seems nothing has been done to remedy the fundamental flaws that support the ‘more trouble than it’s worth’ financial sector.

These include tax advantaged ‘savings’ incentives including pension rules, ira’s, corporate reserves, etc. as well as laws that support and enforce the trading of financial instruments.


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