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Nice reply! I love HN sometimes. What impact does this have on contracts in general? When I give my word, I keep it. When I sign a contract, I honor it. There

by johnnyg 12y ago

Nice reply! I love HN sometimes. What impact does this have on contracts in general? When I give my word, I keep it. When I sign a contract, I honor it. There's a social contract that assures me that the counter party will too. There's a court system setup to ensure they do. There is force behind that if it is taken even further. If I should instead shape every contract with a 20% hedge that assumes the counter party will not keep their word, doesn't that introduce a significant amount of inefficiency in the entire system. Isn't it long term better and in fact just that those who give their word, spend all of their money and then run out take the consequences of it? For systemic risk to be properly moderated, the individuals or even individual counties must suffer the consequences of their actions. You can opt to not allow this, but you ultimately suffer as a whole when you do. I see no better way through. Do you?

Daishiman 12y ago
Umm, that's the entire reason the financial and insurance systems exist. Credits are assigned an interest rate depending on the probability of the receiving party's risk. Credit default swaps protect lenders from defaults. Elliot Capital's position is basically that of a broker buying junk bonds and then chasing after money through the courts when the company inevitably goes under. Sure, it could go your way, but they were well aware of the risks, and honestly the strategy of buying junk bonds on a defaulting country and expecting compensation through courts is not something that seems to be in "good faith".
lmm 12y ago
So there's currently an interesting case going on with Caesar's bonds because someone accidentally put "and" in a contract where they meant "or".[1] If you have to spend lots of time having a group of expert lawyers and grammaticians going through your contracts before you sign them and checking for every possible edge case, that's a significant inefficiency and cost in the system as well. The 2001 restructuring was reasonable; most of the bondholders agreed with it, and got a fair price for their bonds. The holdouts knew this when they bought the same bonds. Imagine a court system that applies common sense and equitable principles and tries to interpret contracts in a way that's as fair as possible to everyone involved, rather than going by the strict letter of every contract document. This removes the ability to rip someone off when you spot a hole in their contract, which makes some things less efficient, but I can see it working better overall. [1] So it's something like: there's a provision in the contract that says that certain guarantees are invalidated if this subsidiary is reabsorbed into its parent corporation and it's sold to a different company, and some other conditions. Which is obviously nonsense because there's no way those things would both happen. But it's also what the contract says.
- bmelton 12y ago
  > a way that's as fair as possible to everyone involved, rather than going by the strict letter of every contract document. Presumably, this is in place to keep colluding with judges who will interpret your claim "fairly", for a fee, to a minimum, as well as mitigate the hedge against those who defend contract discrepancies with "Well, that's what we meant", when in fact, that was neither what was meant or ever said. The Halbig decision bears on this matter. There's a law, which is effectively a contract, and the IRS attempted to interpret it how they needed to to make the ACA work. What this means now is, right or wrong, that we have a group of Senators and Representatives who voted on a law to be enacted as it was written, and when that was no longer viable, they simply 'interpreted' the text of the law to mean something new so that it could work. Ignoring who's right or who is wrong, some additional lawyering up front would have prevented this, but that was not done because it would not have been politically expedient. Contracts are a way of keeping people fair. If the contract is written in a way that isn't fair, then it would be unenforceable regardless of how well it was written, so that 'fairness' is built in to contract law already.
nabla9 12y ago
>If I should instead shape every contract with a 20% hedge that assumes the counter party will not keep their word, doesn't that introduce a significant amount of inefficiency in the entire system. Of course it does and it should, because there is real risks involved. Banks make their money by evaluating risks correctly. >For systemic risk to be properly moderated, the individuals or even individual counties must suffer the consequences of their actions. You can opt to not allow this, but you ultimately suffer as a whole when you do. This would only work if the parties involved would be fully rational. As long as you have imperfect actors with limited information that have limited ability to learn lessons, optimum way to limit the risk for borrower is by bankruptcy laws and procedures so that everyone involved knows the risks. There was solid international effort to deal with the situation during the Argentine Great Depression and IMF was involved in making the deal. Because there is no bankruptcy law for countries, it was impossible to negotiate bankruptcy deal for Argentine that would bind everyone. These hedge funds are exploiting this. Going forward, we should make example of them. If majority of debtors agree, better to take the deal. This would generate de facto bankruptcy procedure.

by johnnyg 12y ago

Daishiman 12y ago

Umm, that's the entire reason the financial and insurance systems exist. Credits are assigned an interest rate depending on the probability of the receiving party's risk. Credit default swaps protect lenders from defaults. Elliot Capital's position is basically that of a broker buying junk bonds and then chasing after money through the courts when the company inevitably goes under. Sure, it could go your way, but they were well aware of the risks, and honestly the strategy of buying junk bonds on a defaulting country and expecting compensation through courts is not something that seems to be in "good faith".

lmm 12y ago

So there's currently an interesting case going on with Caesar's bonds because someone accidentally put "and" in a contract where they meant "or".[1] If you have to spend lots of time having a group of expert lawyers and grammaticians going through your contracts before you sign them and checking for every possible edge case, that's a significant inefficiency and cost in the system as well. The 2001 restructuring was reasonable; most of the bondholders agreed with it, and got a fair price for their bonds. The holdouts knew this when they bought the same bonds. Imagine a court system that applies common sense and equitable principles and tries to interpret contracts in a way that's as fair as possible to everyone involved, rather than going by the strict letter of every contract document. This removes the ability to rip someone off when you spot a hole in their contract, which makes some things less efficient, but I can see it working better overall. [1] So it's something like: there's a provision in the contract that says that certain guarantees are invalidated if this subsidiary is reabsorbed into its parent corporation and it's sold to a different company, and some other conditions. Which is obviously nonsense because there's no way those things would both happen. But it's also what the contract says.

bmelton 12y ago
> a way that's as fair as possible to everyone involved, rather than going by the strict letter of every contract document. Presumably, this is in place to keep colluding with judges who will interpret your claim "fairly", for a fee, to a minimum, as well as mitigate the hedge against those who defend contract discrepancies with "Well, that's what we meant", when in fact, that was neither what was meant or ever said. The Halbig decision bears on this matter. There's a law, which is effectively a contract, and the IRS attempted to interpret it how they needed to to make the ACA work. What this means now is, right or wrong, that we have a group of Senators and Representatives who voted on a law to be enacted as it was written, and when that was no longer viable, they simply 'interpreted' the text of the law to mean something new so that it could work. Ignoring who's right or who is wrong, some additional lawyering up front would have prevented this, but that was not done because it would not have been politically expedient. Contracts are a way of keeping people fair. If the contract is written in a way that isn't fair, then it would be unenforceable regardless of how well it was written, so that 'fairness' is built in to contract law already.

nabla9 12y ago

>If I should instead shape every contract with a 20% hedge that assumes the counter party will not keep their word, doesn't that introduce a significant amount of inefficiency in the entire system. Of course it does and it should, because there is real risks involved. Banks make their money by evaluating risks correctly. >For systemic risk to be properly moderated, the individuals or even individual counties must suffer the consequences of their actions. You can opt to not allow this, but you ultimately suffer as a whole when you do. This would only work if the parties involved would be fully rational. As long as you have imperfect actors with limited information that have limited ability to learn lessons, optimum way to limit the risk for borrower is by bankruptcy laws and procedures so that everyone involved knows the risks. There was solid international effort to deal with the situation during the Argentine Great Depression and IMF was involved in making the deal. Because there is no bankruptcy law for countries, it was impossible to negotiate bankruptcy deal for Argentine that would bind everyone. These hedge funds are exploiting this. Going forward, we should make example of them. If majority of debtors agree, better to take the deal. This would generate de facto bankruptcy procedure.