Friday, August 12, 2011

If You Didn't Want to Go to Providence, Why Did you Get on the Train?
Bondholders Get Themselves Paid Twice in Rhode Island

Honestly, am I the only person (outside of the Rhode Island public employees) outraged at the insolence and arrogance of the bondholders who have decided they won't be getting enough on their contracts in prospective Rhode Island municipal bankruptcies? Faced with the prospect of a shortfall the bondholders have just shoved through a piece of legislation that bumps them to the head of the queue.  As Reuters explains:
The law adopted last month gives municipal bondholders a lien on taxes and general revenues collected by the cities and towns whose bonds they buy.

This means the bondholders would be repaid before other creditors such as workers, suppliers and pension fund beneficiaries if the municipalities went bankrupt.
I've got a better idea.  Let's pass a law giving first priority to all bloggers whose screen names begin with "B."   It would make about as much sense as prioritizing precisely those people most likely to have the motive, the opportunity and the wherewithal to estimate this risk and (this is important) to price it into their original loan?  Assuming (as I should think we are permitted to assume) that they have already charged for this bankruptcy haircut, if we now let them stick it to the general fund, aren't we just paying them twice?

I suppose I could be wrong if we find a document in the file that says "and besides, boss, if there ever arises a real risk of default, we just get our lapdogs friends in the legislature to change the law."  Then again, I guess if they really did plan it that way, then they weren't getting double paid after all.


Ebenezer Scrooge said...

I share your outrage at your gall, and some substantial doubt as to its Constitutionality under the contracts clause. But . . .

Apart from the fact that the bondholders are evil, is there really any difference between this and a critical vendor order? A more identifiable and sympathetic victim class, I suppose.

Buce said...

Well in both cases, I suppose there is an ex post v ex ante problem--but by now you'd have to say the critical vendor rule is pretty well known.

My main focus on critical vendor is the guy in his law office drafting the Ch 11 petition, looking out his window to see trucks unloading at the debtor's dock knowing that (without critical vendor) these guys will get hosed.