New Posting on Credit Slips

New discussion on Credit Slips with yours truly commenting.  Topic is the brouhaha over whether Chase Bank is actually a secured creditor in the GM Chapter 11.

This Car Needs Polished, Let's Junk It

...or, Typical Austro-Chicago Logic.

This is cross-posted from a discussion at Credit Slips.

Omri Ben-Shahar of the University of Chicago Law School has fired the latest round in the US class wars in a paper alleging that clauses in consumer sales contracts mandating arbitration (usually in a distant jurisdiction) and barring class action suits are good for consumers because litigation costs are actually regressive taxes that are passed along to consumers whether the consumers reap any benefits or not.  Looks like more of the Austro-Chicago rubbish that got us into this mess.

1. A firm can't pass litigation costs through if its competitors don't have them.  It would put the firm at a competitive disadvantage.  Given that, how can litigation costs become a tax, as opposed to an expense incurred by firms that do shoddy work?  Are the shoddy firms to be shielded from these expenses to the detriment of not only consumers, but competitors?  Further, if it isn't just a firm but an industry that is engaged in bad practice, regulation is warranted, but the Austro-Chicagoans can't have that.  So they come up with the oh-so-logical proposal that shoddy firms be allowed to externalize their costs on consumers and competitors, which frankly is par for their course.
2. Markets aren't a unified mass, even for a particular product.  They are segmented, and you can't identify market forces and effects if you don't bother to properly map the market you're examining.  Ben-Shahar ignores this little nicety.  In other words, Ben-Shahar has created a model that doesn't reflect reality terribly well but does deliver the results he wants.  Quelle surprise.
3. Contrary to Ben-Shahar's version of reality, arbitration routinely costs more than litigation, especially if proceeding under panel rules and a choice of forum clause.  Couple such clauses with a loss of class action rights, and the average consumer has zero access to justice.  And if you couple that with nonregulation, shoddy operators have carte blanche.
4. And contrary to the slack Adam Levitin gives him, Ben-Shahar knows full well that this piece will be used as a pseudo-intellectual foundation for anti-consumer legislation similar to how Reinhart and Rogoff were used to justify austerity.

Ben-Shahar has identified, at most, minor problems that need minor corrections. In other words, the car needs polished. But since the car is counter to the Austro-Chicago faux pure market dogma, it must be junked.  The Austro-Chicagoans love to preach about "rights," but I'm compelled to quote "The Princess Bride": You keep using that word; I do not think it means what you think it means.  Were the Austro-Chicagoans to have their way, rights would be nothing more than what the holders can afford to enforce.  Rights would be something only the rich could afford. To paraphrase "Lord of the Rings": The way is shut.  It was made by 1%ers, and 1%ers keep it.  The way is shut.

Latest Financial Industry Comments

Over on Credit Slips, we're discussing the CDS mess in the Greek default.  No one over there thinks we've seen the end or even the beginning of the end.  More like the end of the beginning.  I'm sticking to my position that anyone who was relying on a CDS to cover his position was willfully ignorant and deserves the haircut he'll be getting.  I've added that anyone who really wanted insurance for his investment should have been able to buy something from somewhere, and that if no such insurance were available, that a CDS was the only option, we now know as an absolute fact that the markets are nothing but a crooked casino.

On London Banker's blog, we're discussing how to fix regulation methods.  Following up on another comment, I've said that the touchstone should be whether the financial industry can explain an investment to the regulators.  If it can't, the investment doesn't fly.  After all, if the regulators can't understand it, how can the investors?

Only So Long I Can Hold My Tongue

Adam Levitin posted a great piece on Credit Slips ripping on proposed "solutions" for the financial crisis (And yes, kiddies, regardless of the pablum they're shoveling your way, we're still in a crisis.). Basically, he compares these proposals to prescribing an aspirin to someone with a knife in his chest and then giving the aspirin to the attacker. First comment out of the box blames the mess on those evil, nasty borrowers. To quote the Interweb meme, "Don't know if trolling or just stupid." Probably a shill, actually. Anyway, I and a few others declared a free-fire zone. Enjoy.

I Really Don't Care What Paul Jackson Says

A new article over at Credit Slips comments on Paul Jackson's chest-thumpings over an Alabama trial court decision on a chain of title issue. I'll let you read about it over there. I'm posting here because I couldn't get my links to work over there. Here it is, with links:

Jackson is a long way from an objective observer. In law practice, he represented banks and servicing shops. He thinks that second mortgages are the chief problem with short sales, not the endless feedback loops within the first position lender and its servicers. He's a leading proponent of the theory that strategic defaulters are going off on shopping sprees (No comment on whether such opinions are why he remains ABD in the consumer behavior doctoral program at USC.). If you have Yves Smith and everybody else, including Janet Tavakoli on one side and Paul Jackson on the other, I'm backing Yves.

On the substantive side, I think you're exactly right. I practice in two non-judicial foreclosure states, and once that sale closes, you don't get it unwound. The debtor came to the game too late. In the cases where the debtor gets to court before the sale, the banks are losing.