A little while back, that jackass that runs Venezuela said he was going to back out of the IMF. Unfortunately(?), many of Venezuela's outstanding bonds contained a provision promising to maintain IMF membership. Backing out would have been an accelerating default event. In other words, debt the state had decades to pay would all become due immediately. When informed of these facts, the jackass blamed America and pretended like he never said anything about backing out.
This absurd chain of events made me wonder if other sovereigns' bonds had similar clauses, or if it was just the ones run by bloated 'tards. I quickly discovered that less emotionally-guided states' bonds made similar promises. So, I did a little study and wrote a little paper.
Here are links to the paper and the underlying data:
http://www.scribd.com/doc/43737740
http://www.scribd.com/doc/43737963
Make what you will of this. I see it more as a basis for further research than a resolution to a question. If, as it appears to me, IMF membership clauses have little to no value, why are they there? Lazy lawyering? In my (correct) opinion, all legal documents, particularly contracts covering hundreds of millions of dollars, should be somewhat readable by the layperson, and should not contain any of the meaningless language lawyers are infamous for.
Perhaps I am too quick to blame lawyers, but I doubt it. I could be looking for too simple an answer. Just because a clause has no visible effect on interest rates or loan duration does not mean it has no effect. The aspects of the bonds that I did not analyze far outnumber those that I did.
That's about all I have to say about that. Hopefully N Korea did not just start WWIII, and I will be able to post again.
Tuesday, November 23, 2010
Monday, November 22, 2010
Marijuana and Sovereign Debt
I am a staunch advocate of the legalization of marijuana. "Staunch," while a great word (like Kafkaesque and zucchini) is not strong enough to describe my feelings. While I am very politically active, drug law reform is one of the two or three issues I actually put time and effort into.
But I digress, all because of this article : http://www.bostonherald.com/news/regional/view.bg?articleid=1297999 What do potheads in Massachusetts have to do with sovereign debt? Nothing, but there is an interesting parallel between the two.
Mr. Loudpack owes the state $1000 for some unpaid possession citations. The state, quite understandably, needs its money. So they go to Mr. Loudpack's house. Loudpack is unemployed, like many of his drug-using friends, who get high when they can to relieve the intense stress and boredom of not having a job. He has no savings, no car, no jewelry. His only possessions (pun intended) are some blunt wraps, a ratty couch, an old CD player, and a bunch of burned CDs.
So what can the state do? It could take Mr. Loudpack's couch and CD player, but it would cost manpower to pick up the items from the house and cash to store them somewhere. Then what would happen? The city could sell the items for about $50, far less than they have already spent confiscating them, so Loudpack would still owe the $1000 and the city could be out even more money.
The city could send Loudpack to jail, but what would that accomplish? Our prisons are overcrowded precisely because we imprison minor drug offenders. Even if there was room for our hero, the state would spend $10-30K per year housing, feeding, and "correcting" Loudpack. The original ticket would not be repaid, the state would be out the cost of the imprisonment, and Loudpack would probably come out of jail and cause even more problems.
So what can the state do? Nothing. At least, nothing intelligent that would put the state in a better position than where it started. No one, particularly the state, can wave a wand and put $1000 in Mr. Loudpack's pocket. If he does not have the money, he cannot pay. Let me say that one more time: if he does not have the money, he cannot pay. This is a crucial, but almost completely ignored, fact in sovereign debt.
It is now the year 2050. For the sake of easy math and me not having to look up the actual projections, let's say China owns $10 trillion of America's outstanding debt. America has continued to grow steadily but slowly, and has done little to reduce its overall deficit. What could China do if America started acting like Massachusetts potheads?
The answer, as I have said before, is the reason I am unconcerned about the deficit: nothing. If we do not have the money, we cannot pay. Like you the last time you loaned Uncle Larry $50, China will slowly understand that it will never see its money again, be pissed for a long time, but in the end, will never get its money back.
This situation is slightly different from Mr. Loudpack, but the variations are slight. Ignoring America's absurdly powerful army, could China come over and confiscate our most valuable assets? Institutions of higher education are hard to transport. Military equipment would be great collateral to seize, but like Loudpack and the plant growing in his closet, as soon as we heard a knock on our door we could hide it all pretty well.
As much as the state and China would like this to be the case, it is impossible to make Loudpack and Americans in general work harder, and it is idiotic to think that anyone could say the magic word and money would pop up to pay everyone's debts.
So, ease up, Massachusetts and China. We're jamming out to some Eric Dolphy, and we'll get you your money when we have it. In the meantime, can we borrow $50 for cab fare to an interview tomorrow?
But I digress, all because of this article : http://www.bostonherald.com/news/regional/view.bg?articleid=1297999 What do potheads in Massachusetts have to do with sovereign debt? Nothing, but there is an interesting parallel between the two.
Mr. Loudpack owes the state $1000 for some unpaid possession citations. The state, quite understandably, needs its money. So they go to Mr. Loudpack's house. Loudpack is unemployed, like many of his drug-using friends, who get high when they can to relieve the intense stress and boredom of not having a job. He has no savings, no car, no jewelry. His only possessions (pun intended) are some blunt wraps, a ratty couch, an old CD player, and a bunch of burned CDs.
So what can the state do? It could take Mr. Loudpack's couch and CD player, but it would cost manpower to pick up the items from the house and cash to store them somewhere. Then what would happen? The city could sell the items for about $50, far less than they have already spent confiscating them, so Loudpack would still owe the $1000 and the city could be out even more money.
The city could send Loudpack to jail, but what would that accomplish? Our prisons are overcrowded precisely because we imprison minor drug offenders. Even if there was room for our hero, the state would spend $10-30K per year housing, feeding, and "correcting" Loudpack. The original ticket would not be repaid, the state would be out the cost of the imprisonment, and Loudpack would probably come out of jail and cause even more problems.
So what can the state do? Nothing. At least, nothing intelligent that would put the state in a better position than where it started. No one, particularly the state, can wave a wand and put $1000 in Mr. Loudpack's pocket. If he does not have the money, he cannot pay. Let me say that one more time: if he does not have the money, he cannot pay. This is a crucial, but almost completely ignored, fact in sovereign debt.
It is now the year 2050. For the sake of easy math and me not having to look up the actual projections, let's say China owns $10 trillion of America's outstanding debt. America has continued to grow steadily but slowly, and has done little to reduce its overall deficit. What could China do if America started acting like Massachusetts potheads?
The answer, as I have said before, is the reason I am unconcerned about the deficit: nothing. If we do not have the money, we cannot pay. Like you the last time you loaned Uncle Larry $50, China will slowly understand that it will never see its money again, be pissed for a long time, but in the end, will never get its money back.
This situation is slightly different from Mr. Loudpack, but the variations are slight. Ignoring America's absurdly powerful army, could China come over and confiscate our most valuable assets? Institutions of higher education are hard to transport. Military equipment would be great collateral to seize, but like Loudpack and the plant growing in his closet, as soon as we heard a knock on our door we could hide it all pretty well.
As much as the state and China would like this to be the case, it is impossible to make Loudpack and Americans in general work harder, and it is idiotic to think that anyone could say the magic word and money would pop up to pay everyone's debts.
So, ease up, Massachusetts and China. We're jamming out to some Eric Dolphy, and we'll get you your money when we have it. In the meantime, can we borrow $50 for cab fare to an interview tomorrow?
Saturday, November 20, 2010
Found On Road Dead
Did anyone really think GM's full issue wouldn't go out the window? THAT NEVER HAPPENS. EVER.
Yes, GM is deeply troubled. It has massive long-term debts and a product line that isn't improving fast enough. But, it is an American institution that too deeply embedded in the old-money set the runs wall street to fail. GM owns land, raw materials, and technology, and would liquidate for a substantial amount of money if it ever came to that.
Since the offering would clearly sell out, any investor who does not know that first day increases are always 3-10% should stop investing. Flipping issues can always be avoided, slightly reducing gains, but buying 100K in the morning and selling 103,000 in the afternoon is a good day to me.
Yes, GM is deeply troubled. It has massive long-term debts and a product line that isn't improving fast enough. But, it is an American institution that too deeply embedded in the old-money set the runs wall street to fail. GM owns land, raw materials, and technology, and would liquidate for a substantial amount of money if it ever came to that.
Since the offering would clearly sell out, any investor who does not know that first day increases are always 3-10% should stop investing. Flipping issues can always be avoided, slightly reducing gains, but buying 100K in the morning and selling 103,000 in the afternoon is a good day to me.
Wednesday, November 17, 2010
Sovereign Debt Pt. 1 (Or, How I Learned to Stop Caring About the Chinese)
If you had not heard, countries borrow from each other. This borrowing is called sovereign debt. The lending and borrowing governments are the “sovereigns” I refer to below and in future posts. I have already wasted too much time and too many words on background information. Learn to use Google so I can get to the interesting stuff.
What I find interesting about sovereign debt is the sheer amount of money involved, and the ultimate unenforceability of the debts. Most borrowers, be they individuals or corporations, cannot obtain a five-figure loan without collateralizing tangible property of substantial value. Sovereigns, by contrast, routinely borrow hundreds of millions of dollars without any form of collateral.
The lack of collateral is why I am almost completely unconcerned about America’s massive deficit. Yes, we owe the Chinese googol dollars, but who cares? America is not a person, nor is China. The only way to “force” debt repayment is by physically taking a person’s hand and guiding it across their checkbook. This obviously cannot occur between abstract constructs like countries.
But couldn’t our creditors just start a war with us, you may ask? Yes, of course, I may respond. However, war is an unlikely and probably futile step in sovereign debt collection. Research (that I do not feel like linking to at the moment, but might later) indicates that military force is rarely, if ever, used to collect overdue debt from a sovereign.
Why? I’ll tell you later.
In the Beginning
Unlike most lawyers, I do not enjoy talking about myself. So, this will be a short introduction.
I am a funemployed Duke University School of Law graduate, Class of 2010. Law school and economic woes were unsuccessful in their quest to destroy my interest in law, politics, and finance. I am pretty damn cynical, though.
Anyhow, the purposes of this blog are to: 1. Get me a damn job. How, I do not know, but the time-tested BLOG=>???=>PROFIT model is sure to work out; 2. Give my brilliant thoughts an outlet; 3. Do something productive with my time.
So, read this crap and give me a job. I am a distressed asset with high intrinsic value crossed with Google’s IPO. You will regret not buying me when whoever does gets rich.
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