‘When the Attorney General of the United States admits some banks are simply too big to prosecute, it might be time to admit we have a problem — and that goes for both the financial and justice systems.
Eric Holder made this rather startling confession in testimony before the Senate Judiciary Committee on Wednesday….. It could be a key moment in the debate over whether to do something about the size and complexity of our biggest banks, which have only gotten bigger and more systemically important since the financial crisis’1
Corporations live and die in law. Corporations live and die in national law. The word is made flesh by means of articles of incorporation and despatched by means of legal dissolution. The body of national law is the womb that gives birth to the capitalist corporation and it is its grave.
Imagine for a moment, the passing away of a corporation without the amenity of a decent burial.
For example, the collective creditors of Fallowfield Fashions Ltd become aware something is wrong. Perhaps a bill has not been paid on time. Perhaps a rumour is circulating that the company is having trouble completing an order or getting a loan from the bank. Worried creditors descend en masse upon the premises; ripping out sewing machines from the floor, carrying away computers. Chairs and even the tea kettle are seized in recompense for what they are owed, like wolves tearing at a crippled deer in the forest.
Of course, from the German point of view this is hardly civilised. Given that passing away has become inevitable, whatever assets of Fallowfield Fashions remain must be distributed among creditors in proportion to precedence and the amount that is owed.
And so it is done. This is the one and true Germanic Sacrament; as holy to every Capitalist as the Last Rites are to a Catholic.
But how precisely is it done?
The court appointed receiver cannot simply hand out a computer to this creditor as recompense for cloth, or a sewing machine to that one in return for accounting services, as he sees fit. There has to be a way of generalising the value of assets and of course there is: selling the assets and converting them into money. Now there is a means of relating liabilities to assets in monetary proportion and distributing them ‘fairly’ under the law.
There could be no equitable matching of assets and liabilities without the facility of state issued money.
What would happen however, should a nation, especially a capitalist nation, go bankrupt? Are capitalist nations subject to the same rites as capitalist corporations at the moment of their passing?
Certainly nations can be said to have assets, arable land, water, wildlife and mineral resources. Even the people themselves could conceivably be considered assets of a nation. In the same way, nations are thought of as having collective liabilities; usually referred to as the national debt.
Which gives rise to the question: Is there some means of making a nation bankrupt and dividing its assets among creditors?
Imagine representatives of creditor nations arriving at a national border, to carry away machinery, raw material and even people. This sometimes does happen; it is called ‘war’. These days ‘war’ is usually avoided wherever possible especially by Germans, especially when there is a possibility of the victim fighting back. But perhaps there could be some way to achieve something like a ‘legal’ bankruptcy?
It would require the conversion of national assets into currency notes; just like traditional bankruptcy. But the currency notes in question are national as well so creditors have a big problem. Italian debts are paid in Lira, or used to be. This means all the bankrupt nation has to do is simply print as many notes as are necessary to pay off the debt! All the creditor will get is an enormous pile of paper. At which point the creditors will not accept any more of this national currency, (as famously in Weimar Germany), leading to no more foreign imports and what is called ‘hyper inflation’.
When creditors no longer want a nation’s paper money they only accept hard assets in payment for trade. This arrangement might work in a few limited cases, but when it came to losing rivers, fields and oil to creditors, citizens of a nation would not stand for it. More importantly they could not be made to stand for it except by force. This brings us back to war. Government simply does not have the authority to give assets like this away.
This means essentially that governments can go bankrupt but nations cannot; which means that any ‘purchase’ creditors have on national assets is indirect. Creditors make deals with the legal/political/economic system of a nation but not the stuff of the nation itself. We can characterise this national or sovereign debt as intractable.
The single most important characteristic of intractable debt is that it cannot be assigned to creditors proportionately.
Sovereign debt is intractable and different from all other kinds of debt because of its legal character. National debtors have their own bankruptcy courts and an independent legal system, one that can be overthrown only by force or by will of the people. The link between people and assets is sovereign.
From the point of view of a liquidator, nation states are ‘too big to fail’
Now where have we heard that phrase before?
The phrase ‘too big to fail’ cannot refer to the actual size of a given enterprise. Up until now, even though the largest corporations have greater nominal value in trade and assets than many developing countries, these corporations can still be made bankrupt in their country of origin and liquidated along traditional lines. No nation, no matter how small can be liquidated.
So what does ‘big’ mean in this context?
Corporations no matter what size, fall under the authority of national currency. Their assets can be collectively sold- converted into national currency. National assets cannot be converted into any other national currency.
In light of this we can consider the finance industry as it is now constituted. It is not a co-incidence that much of world finance is now conducted under ‘off-shore’ banking institutions. It is not a co-incidence that that the phrase ‘off-shore’ is used to describe these institutions. They are in fact, sovereign financial islands.
Financial instruments such as derivatives function as sovereign currency because the relationship between assets and liabilities embodied in them is intractable in the same way that sovereign debt is.
A derivative is not a claim against an asset. It does not have a direct relationship to an asset. A derivative issued by Morgan Stanley has the same relationship to an asset as a dollar bill has to the Grand Canyon. You cannot go to the American government and cash in a dollar bill for a piece of the Grand Canyon. You cannot cash in a derivative and get a piece of the house the mortgage it is derived from refers to.
Intractable debt like this can only be issued by a sovereign entity; an entity that does not stand under anyone.
By issuing debt like this an entity declares itself sovereign.
Sovereign intractable debt is money. Derivatives are sovereign intractable debt. Derivatives are privately issued money.
All governments in the Germanic empire violated the fundamental principle of capitalism en masse by allowing finance corporations to reorganise themselves in a way which meant they could not be legally liquidated! These governments at the same time fundamentally violated their legal obligation to protect the civil benefits conferred by their respective national currencies.
Is this simply an interesting legal point?
Just in the same way that the currency notes issued by the Weimar Republic could became worthless because they had no purchase on the national assets of Germany, so derivatives are intrinsically worthless. They rest entirely on the faith of the person who uses them, just like a national currency.
‘Too big to fail’ also means is that nothing legally stands behind the derivative or currency note. If derivatives fail to maintain confidence they are worthless.
There are hundreds of TRILLIONS in Dollar denominated derivatives existing in the world economy. If they lose the confidence of their owners they are totally and utterly worthless. But more importantly if they lose the confidence of people who do not own them they are totally worthless. Currency is uniquely vulnerable in this respect. A private cheque rests on confidence in the individual writing the cheque and confidence on the currency it is issued in. The currency stands behind the cheque. it guarantees the cheque. Nothing stands behind a derivative, nothing guarantees it.
The New Augean Stables
Imagine for a moment that an agency were given the Herculean task of cleaning some of this mess up. (Just that bit which is derived from sub-prime mortgages for example). All the derivatives that have been issued (trillions of them!) are gathered up and put in a pile. Then all the properties that these derivatives refer to are put in another pile. Our hero would soon realise there is no direct relationship of any kind between the paper liabilities in one pile and the assets they refer to in the other pile.
To return to the classical analogy it would be like asking Hercules not only to clean out the stables but to force the manure back up the animal’s backsides and have them spit it out as grass! The receiver would be reduced to giving one creditor an apartment for this bit of paper and another creditor an Edwardian terrace for that bit of paper, as he saw fit. Just like the chaos I described at the beginning of this piece.
This shows conclusively that derivatives are bullshit on a very big scale.
But I am afraid the situation is worse even than that. Derivatives are sovereign. This means that although they can be denominated in Dollars or Euros or Yen in actual fact they have anything to do with any of these national currencies any more than they have anything to do with actual mortgages or houses. A derivative valued at 100.000 is actually worth 100.000 ‘I don’t know what’s’!
I suggest the following annotation for derivatives: ?100,000 or ?1.5 trillion etc. as a means of quantifying their value.
This is a serious proposal.
In real terms derivatives do not actually have a legal unit of accounting. They are the currency of an invisible nation. The legal and financial relationships they represent can never be disentangled.
From a practical point of view for bankers and politicians in the Germanic empire there is no legal way back, only forward.
Here in broad form are the legal definitions of Money Democratisation
The Legal Framework of Money Democratisation
- In capitalist states, all legal entities are forced by the constituted national authority to relate debt instruments issued to assets owned.
- In capitalist states legal entities are not allowed to issue debt in relation to assets they do not own.
- These are matters of criminal, not civil law.
- An entity which is able to issue debt instruments without relation to assets owned is sovereign.
- Any restrictions on debt instruments issued by a sovereign entity are voluntary.
- Debt instruments issued by a sovereign authority are money unless they are voluntarily restricted by that authority.
- Debt instruments issued by any sovereign entity cannot legally be brought under the jurisdiction of any other sovereign authority except voluntarily.
And what about making a nation bankrupt?
‘Despite Greece’s extensive privatisation programme, it has been suggested that Greece should be prepared to sell off even more of its assets to help reduce its debt obligations to other countries.
Josef Schlarmann, a member of Merkel’s Christian Democrats party, has warned Greece that, as with insolvent individuals, it should expect to sell everything it has to repay its creditors’2
I am afraid even that is becoming possible.
A country like Greece could not be liquidated while it had the Drachma. There would have to be a currency standing above the government of Greece to allow this to happen- and now there is:
Greece can now have its assets sold and converted into Euros!
Greeks together with all the other nations that stand under the Euro have effectively allowed themselves to be open to liquidation under the rules of capitalism. Or rather their governments have.
This is treason.
‘Greece’s lenders will have the right to seize the gold reserves in the Bank of Greece under the terms of the new deal. Greece has 111 tonnes of gold. In other words Greece has given up on its “money in extremis”, gold. If they default they will have nowhere else to go.
Its international assets will be seized and it will not be able to trade internationally at all’.3
‘Treason doth never prosper, what’s the reason?
For if it prosper, none dare call it Treason.’
1Huffington Post US Edition 9 Mar 2013
2Telegraph 9 march 2013
3Silver Doctors February 22 2012