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Felix is on Fire


Felix Salmon, Reuters, How do you restructure a contingent liability? here.

Lee Buchheit and Mitu Gulati have another great paper out on the subject of how on earth a sovereign is meant to restructure its contingent liabilities.

Here’s the problem, in a single chart:


What you’re looking at here is the way in which European countries especially have turned tosovereign guarantees as a way of masking the true size of their national debt. Many of these guarantees, once upon a time, would have simply been sovereign loans: the nation would have borrowed the money, and then lent it on, at a modest profit, to the borrower. But European countries want to do everything in their power not to borrow money right now. So instead of lending and borrowing, they simply guarantee a borrower’s debt instead. That brings down the price of debt for the borrower, but it doesn’t show up in any national debt-to-GDP statistics.

Information wants to be expensive, here. Information can change faster than the blink of an eye. Maybe put a government tax on reading information so people don’t get so much of it before regular people get a chance to figure out what it means?

The logic here is simple: information is good for markets. It improves price discovery, and in doing so helps to optimize capital allocation. But detailed information does not come cheap, and there are lots of reasons why paying for information directly is a much cleaner and much more sensible way of doing things than hiding the payments within the cross-subsidy arrangements of investment banks. As we saw during the Blodget era, investment banks have their own incentives, which aren’t always aligned with those of investors.


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