Silver lining

In the course of a pretty wonky piece on CDOs, Felix Salmon points out that the modern financial environment weakens the political position of creditors. Back in 1975, when New York City was on the verge of default, its bonds were uninsured, and held mostly by the city’s rich and its biggest banks. Both sets of bondholders were relatively few in number and invested in the city’s long-term survival. The creditors were able to come together and speak with one voice to force wage cuts and layoffs on the unions and service cuts on city residents. Today, bondholdings are dispersed around the world, so it’s hard to imagine a similar workout in 2009.

There’s an interesting parallel with Argentina’s deliberate default early this decade (a default which followed the script laid out in this LBO article “How to default.”). Because Argentina’s debts were held mostly by bondholders all over the place, many with rather small holdings, the creditors were in a very weak bargaining position. The contrast with the debt crisis of the early 1980s was stark. Then, a dozen bankers, backed by the IMF, could face down a finance minister in a conference room and demand the concessions for which neoliberalism became famous. But that was no longer possible in a world dominated by bond finance.

And in today’s securitized, derivatized world, mortgage holders often don’t know who their creditors are. In fact, it could even be easier for debtors in a single neighborhood to organize than their creditors, who could be anywhere from Frankfurt to Abu Dhabi.

3 Comments on “Silver lining

  1. Here’s a question for you, Doug: What’s happening with GM in this area? The NYT says that GM’s proposed debt-to-equity swap would make the Treasury Department and the unions the overwhelming shareholders. Meanwhile, the NYT also reports that the talks with the “big bondholders” are going badly. Does that mean the Treasury and the unions are letting the remaining private bondholders sabotage the swap? If the T-men alone would own more than half the results, why aren’t they doing it? Is Obama keeping Treasury bonds from being used for conversion to equity/management rights?

  2. #

    No doubt the political position of creditors is weakened in the current environment, but isn’t political position of municipal labor lousy too? Look at Vallejo, California, which entered Chapter 9 bankruptcy last year and where a judge recently allowed the city to toss out its labor contracts with city workers. Sure, unions can organize to make their case but politically it’s an uphill battle… and Vallejo is surely not going to be the last city to go down this road. It’s the debtors screwing the workers this time, instead of the creditors doing it.

  3. There was that case down South where a woman avoided foreclosure because the servicer/lender couldn’t prove it actually owned her mortgage. I was surprised more people didn’t try that tack.

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