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Trying to "pause" commitments would take years to implement. It would be like trying to go through the world's internet and "suspending" all user requests and s

Trying to "pause" commitments would take years to implement. It would be like trying to go through the world's internet and "suspending" all user requests and server processing. Instead the Fed and US government have a much simpler and near instant tool: act as the lender of last resort. A bonus feature of this implementation is it costs not much money. Big corporations have lots of assets and the government is sure to be re-paid.

derefr 7y ago
> Trying to "pause" commitments would take years to implement. It would be like trying to go through the world's internet and "suspending" all user requests and server processing. I don't see the parallel. Covenants, ultimately, have to be enacted through the courts. (I mean, presuming debtors' legal departments get the message from the government that they don't have to worry about covenants during this period, whatever their creditors demand. The creditors would ultimately have to take them to court to attempt to get their covenants enforced.) And, if the covenant enforcement hits the court system, then the government would already be "in place" to suspend traffic—it's "the wire" that court-system messages are flowing through! (Or, really, it's more like a judge is a router and the legislature controls a WAF module in said router. The judge, as router for motions, is required to deny any motion the law-as-WAF declares as illegitimate.)
- Danieru 7y ago
  Covenants are the smallest part of this. Without the flow of money the funds/banks/institutions which own those bonds are in-turn going to default to their creditors. Hence the internet analogy: you cannot just hack in a pause on your local machine. There is a world of complex interactions which would also need to be paused, so complex just figuring out who owes who would take years/decades.
  - derefr 7y ago
    I see covenants as important here because they're the component of the financial system that's most rigid and non-responsive to changing market conditions. The point of a covenant is to make a contract more inflexible, by declaring a point beyond which a creditor just won't accept "slack" in the debtor's performance. If you take covenants out, contracts become inherently more negotiable. And that's important, because frequently creditors have less pressure on them to perform, in exactly the same circumstances that cause debtors to face more challenges; and so creditors often find that their best option, EBITDA-wise, is to eat the losses from the challenges that their debtors are facing, rather than destroying their debtors through liquidation in a way that gets them, in the end, less money. You know how, right now, corporations are more willing to release previously-withheld "bad news", because they can blame their lack-of-performance on a suspension of work due to the virus? Those corporations are creditors, not just debtors (esp. in commercial paper); and the "slack" they earn like this, they can pass on to their debtors (e.g. other corporations)—but only if contracts work the "normal" way, that you see in small-scale non-covenanted contracts. In such non-covenanted contracts, where when the regular contract isn't working out, frequently the best thing to do isn't to sue for breach, but rather to just sit down and renegotiate the contract. That's what's going on right now all over the place—contracts between e.g. landlords and renters, or between suppliers and retailers, are being renegotiated, just for this temporary period, to the benefit of both parties. (Another good example, more generally, is personal debt forgiveness: debtors are willing to accept a renegotiation of a loan to an individual, over the much-less-likely chance of ever claiming the full original loan amount.) With a covenant in place, though, one party has no incentive to sit down to renegotiate (and in fact, that's what they wanted to avoid by adding a covenant); and instead can just pressure the other party to do drastic things like liquidation in order to fulfill the secondary contract stipulations under the covenant-breaking clause. Wouldn't it make sense to—temporarily!—take away the tool by which funds/banks/institutions force their debtors to liquidate, and instead force them to do the thing they'd have done if that tool wasn't there: to renegotiate performance expectations, to get what return they can get; and then, in turn, have those funds/banks/institutions renegotiate their performance expectations with their creditors?
- imtringued 7y ago
  You are completely skipping over the basics. If someone doesn't pay then someone else doesn't get paid. You merely shifted the problem to somewhere else. That somewhere else is usually something extremely critical such as the banking system.
  - nocorpwelfare 7y ago
    Last time, there was a big search for bag holders. Guess who the bag holders were? You and me and Fed.gov. It fucking sucks.
  - mistermann 7y ago
    This doesn't make sense to me at all. If you pause transactions temporarily and then resume them later once we've regained some stability, I don't understand how you see your points as being true? Who isn't getting paid? Where is the problem being shifted to? (Are you thinking the courts? That isn't being proposed, it is only mentioned as an illustration that that which is "impossible", is actually fairly routine, the difference is that in this case it would be done at massive scale. Does this increase risk? I would think so, but I think people should have an obligation to provide at least some evidence or logical reasoning as to why we must accept the particular flavor of corporate socialism we practice. If an idea is sound, it should be defensible.
- bjourne 7y ago
  It's also about what signals it would send. That contracts are binding is not only the foundation of Capitalism but of all civilization since antiquity. Invalidating contracts by government decree would roughly be as disruptive as a Communist revolution. A global recession is preferable to changing 2,000+ year old legal principles.
bjourne 7y ago
> A bonus feature of this implementation is it costs not much money. Big corporations have lots of assets and the government is sure to be re-paid. Says who? The whole point of loans is that there is a possibility that they will not be repaid. Banks thinks it is risky to lend money at the current interest rates so American taxpayers instead have to shoulder the whole burden. The assets owned by corporations is mostly in the form of financial instruments whose value is currently plummeting. The US government is taking on huge risks. If these loans weren't risky banks themselves would issue them. Since they aren't it stands to reason that they in fact are risky!
- rorykoehler 7y ago
  The fed have more options/levers to manage the situation as it evolves than banks do. I think it's less risky for the fed to do this than a major bank.
- rdtwo 7y ago
  The government can offer loans where they are superior to other borrowers. This is similar to what private equity does to strip assets out from under other bond/debt holders but less evil
  - bjourne 7y ago
    If so, what's the point of having banks in the first place?

derefr 7y ago

> Trying to "pause" commitments would take years to implement. It would be like trying to go through the world's internet and "suspending" all user requests and server processing. I don't see the parallel. Covenants, ultimately, have to be enacted through the courts. (I mean, presuming debtors' legal departments get the message from the government that they don't have to worry about covenants during this period, whatever their creditors demand. The creditors would ultimately have to take them to court to attempt to get their covenants enforced.) And, if the covenant enforcement hits the court system, then the government would already be "in place" to suspend traffic—it's "the wire" that court-system messages are flowing through! (Or, really, it's more like a judge is a router and the legislature controls a WAF module in said router. The judge, as router for motions, is required to deny any motion the law-as-WAF declares as illegitimate.)

Danieru 7y ago
Covenants are the smallest part of this. Without the flow of money the funds/banks/institutions which own those bonds are in-turn going to default to their creditors. Hence the internet analogy: you cannot just hack in a pause on your local machine. There is a world of complex interactions which would also need to be paused, so complex just figuring out who owes who would take years/decades.
- derefr 7y ago
  I see covenants as important here because they're the component of the financial system that's most rigid and non-responsive to changing market conditions. The point of a covenant is to make a contract more inflexible, by declaring a point beyond which a creditor just won't accept "slack" in the debtor's performance. If you take covenants out, contracts become inherently more negotiable. And that's important, because frequently creditors have less pressure on them to perform, in exactly the same circumstances that cause debtors to face more challenges; and so creditors often find that their best option, EBITDA-wise, is to eat the losses from the challenges that their debtors are facing, rather than destroying their debtors through liquidation in a way that gets them, in the end, less money. You know how, right now, corporations are more willing to release previously-withheld "bad news", because they can blame their lack-of-performance on a suspension of work due to the virus? Those corporations are creditors, not just debtors (esp. in commercial paper); and the "slack" they earn like this, they can pass on to their debtors (e.g. other corporations)—but only if contracts work the "normal" way, that you see in small-scale non-covenanted contracts. In such non-covenanted contracts, where when the regular contract isn't working out, frequently the best thing to do isn't to sue for breach, but rather to just sit down and renegotiate the contract. That's what's going on right now all over the place—contracts between e.g. landlords and renters, or between suppliers and retailers, are being renegotiated, just for this temporary period, to the benefit of both parties. (Another good example, more generally, is personal debt forgiveness: debtors are willing to accept a renegotiation of a loan to an individual, over the much-less-likely chance of ever claiming the full original loan amount.) With a covenant in place, though, one party has no incentive to sit down to renegotiate (and in fact, that's what they wanted to avoid by adding a covenant); and instead can just pressure the other party to do drastic things like liquidation in order to fulfill the secondary contract stipulations under the covenant-breaking clause. Wouldn't it make sense to—temporarily!—take away the tool by which funds/banks/institutions force their debtors to liquidate, and instead force them to do the thing they'd have done if that tool wasn't there: to renegotiate performance expectations, to get what return they can get; and then, in turn, have those funds/banks/institutions renegotiate their performance expectations with their creditors?
imtringued 7y ago
You are completely skipping over the basics. If someone doesn't pay then someone else doesn't get paid. You merely shifted the problem to somewhere else. That somewhere else is usually something extremely critical such as the banking system.
- nocorpwelfare 7y ago
  Last time, there was a big search for bag holders. Guess who the bag holders were? You and me and Fed.gov. It fucking sucks.
- mistermann 7y ago
  This doesn't make sense to me at all. If you pause transactions temporarily and then resume them later once we've regained some stability, I don't understand how you see your points as being true? Who isn't getting paid? Where is the problem being shifted to? (Are you thinking the courts? That isn't being proposed, it is only mentioned as an illustration that that which is "impossible", is actually fairly routine, the difference is that in this case it would be done at massive scale. Does this increase risk? I would think so, but I think people should have an obligation to provide at least some evidence or logical reasoning as to why we must accept the particular flavor of corporate socialism we practice. If an idea is sound, it should be defensible.
bjourne 7y ago
It's also about what signals it would send. That contracts are binding is not only the foundation of Capitalism but of all civilization since antiquity. Invalidating contracts by government decree would roughly be as disruptive as a Communist revolution. A global recession is preferable to changing 2,000+ year old legal principles.

bjourne 7y ago

> A bonus feature of this implementation is it costs not much money. Big corporations have lots of assets and the government is sure to be re-paid. Says who? The whole point of loans is that there is a possibility that they will not be repaid. Banks thinks it is risky to lend money at the current interest rates so American taxpayers instead have to shoulder the whole burden. The assets owned by corporations is mostly in the form of financial instruments whose value is currently plummeting. The US government is taking on huge risks. If these loans weren't risky banks themselves would issue them. Since they aren't it stands to reason that they in fact are risky!

rorykoehler 7y ago
The fed have more options/levers to manage the situation as it evolves than banks do. I think it's less risky for the fed to do this than a major bank.
rdtwo 7y ago
The government can offer loans where they are superior to other borrowers. This is similar to what private equity does to strip assets out from under other bond/debt holders but less evil
- bjourne 7y ago
  If so, what's the point of having banks in the first place?