April 2, 2010

Death Ships

In B. Traven's novel The Death Ship, a misbegotton sailor finds himself cast out to sea on an old scow whose purpose, as he learns, is not to reach port, but to sink--the owners having decided that it is worth more at the bottom of the ocean while they disport themselves with the insurance money. So, a death ship born to die.

I've been reflecting on death ships lately as it dawns on me that they may be more common than we think. Specifically I've read two accounts of the late financial uproar, in which the authors identify transactions which, as they argue were designed to fail. I choose my words advisedly--designed not just with reckless disregard of their prospects, but with failure as the end in view, and design feature and not a bug.

One is Yves Smith's account of Magnestar which (per Yves) designed investment vehicles with such a high probability of failure that the promoter could make money by shorting its own creation. That is, designed to fail.

The other is Gary P. Gorton in Slapped by the Original Hand, where he makes a comparable argument about the adjustable. Recall (forget so soon?): in the ARM, I take a 30-year mortgage at a two-year teaser rate. At the end of the two years, the rate adjusts up--but not adjust "up;" rather, up so far that I can't come close to servicing the old debt. So I have two remaining choices. One, default. Two, cut a new deal, perhaps with the same bank--which the bank, perhaps surprisingly, is happy to do because the property has gone in value and under the new deal, the bank effectively captures the new equity.

Per Gorton, this "new deal" scenario is not just a happy accident. Rather, he argues, the deal was structured that way from the start--the bank foresaw default and wanted default, because that was the bank's route to the ballooning equity stake.

So now I'm up to two now in my count of financial death ships--devices designed to screw up the economy not just by accident but on purpose and as a matter of policy.

Are there more death ships on Wall Street? I wouldn't be surprised; once you start looking for death ships, you see them everywhere. Consider Mel Brooks' The Producers, where the naughty boys undertake to get rich by producing a show that will fail: the comedy is that they fail to fail, and wind up in jail. Hell, consider the chicken: the fastidious among us may cringe at the thought that we get our dinner by breaking the neck of an innocent creature. The Marengo-and-Tetrazzini crowd will say: hey, the chicken wouldn't have been born to begin with if we hadn't intended to kill him. So, we did him a break. Or, a death ship.

I would want to distinguish those activities that harm others by fatal indifference as distinct from general plan, though the distinction may be hard to isolate. For example, I assume the tobacco companies know that they are in the business of killing people, but I assume this counts more as an unfortunate side effect than a settled business purpose--if they could make all that money through a non-lethal form of addiction, they'd be perfectly happy to do so. I would also distinguish those who make money off the misfortune of others. As a bankruptcy lawyer, I hear a lot about that, but I don't know of any bankruptcy lawyer who structures deals so he can profit from the debtor's bankruptcy.

I hesitate to include the Republican Party, because its nihilistic behavior has become something close to a meme. But I think you'd have to concede that the Republican campaign against Obamacare was more about destroying Obama than it was about his plan--and that, indeed, there must have been Republicans thanking their lucky stars that they President wanted something so bad that they would have the opportunity to try and destroy it. Query, was there ever a case where an entire economy, an entire polity, counted as a death ship?

It is dangerously tempting to raise this whole analysis to a higher plane--to consider whether we are all characters in somebody else's drama where we have no idea of the plot, nor least of all the denouement. Or as I say on my Facebook page (though the line is not original with me)--perhaps the rapture has already happened and we are the ones left behind. Or perhaps it is all just a giant rust-eaten garbage scow, on which somebody else hopes to collect the the insurance.

[Cross-posted at Underbelly.]