A fox caught in a trap is capable of gnawing off its leg to escape. The French football squad can do the same. And wthout the need for a trap.

Regulators too, it seems, sport the same self-harming skill set. Take this piece from the New York Times, for example: Volker Rule dilution is imminent. JP Morgan, apparently negotiating to buy hedge fund Gavea Investimentos of Brazil, appears to think so. Even the polite pretence of an uncertain outcome seems not worth their efforts.

There is related form for this sort of thing: the evolution of the USA's Chapter 11 bankruptcy "reorganization" legislation that every large company it was made for has claimed (in this crisis at least) it is too big to suffer though.

Enacted in 1978 it initially allowed a mere 8 exclusions from creditor protection. But that was never going to be enough for bond holding institutions concerned about assuming their risk waiting around to be made good (maybe) while a company gets itself in order.

Which helps to explain how, over the years, Chapter 11 exclusions from creditor protection rose to 34. That the broadest of these related to derivative transactions (none are covered) and included derivative instruments not yet invented is, well, depressingly normal when one takes a gander at the lobbying power behind such outcomes.

Course, 34 exclusions or not, sometimes there just are not enough assets to honour obligations. And for those times when you absolutely must get your capital back - without regard to the health of the underlying economic entity you lent to - credit default swaps were invented. Thank the 1990s era JP Morgan boffins for that. AIG and the US taxpayer certainly have.

But that cautionary tale of regulatory largesse is so 2008 - for now we are getting the Volker Rule. Unfortunately, with no oily pelicans or foreign oil companies in sight the scene is well set for another regulatory goalkeeper Jabulani-moment in the World Cup of finance.

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2 comments

  1. Dennis Jones // 6/27/2010 03:52:00 PM

    Not sure if you are a fan or, or user of, Twitter, but I put this up there anyway.

  2. Admin // 6/28/2010 11:20:00 AM

    Thanks Dennis! Was in transit, hence slow reply.

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