Le Droit Du Seigneur & Economic Royalty

In feudal times, all who worked for the lord of the land submitted to droit du seigneur, which demanded, among other things, any virgin woman to be married was offered to the manorist first, in order to deflower her (aka prima nocti, or law of the first night).

Should she be silly or unlucky enough to become pregnant, well, that was her family's burden. In addition to spreading his genetic material (believing that peasants and serfs were of lesser blood, so "improving" his people), it was also a form of suppression: by humiliating his charges, they would be less likely to rise up in revolt or even to ask a boon of the lord.

Well, to no one's surprise, this elitist, royalist tradition continues today, albeit in a mutated form:

A Treasury-backed plan to stabilize a vital segment of the credit markets has been shelved, the banks involved said yesterday.

The strategy called for banks across the globe to create a $100 billion fund aimed at jump-starting the troubled market for short-term loans, acting like a credit card for companies.

But the architects of the plan, which was developed by Citigroup and other leading financial institutions at series of meetings convened by Treasury officials this fall, struggled to recruit other banks and called it quits this week.

This plan was a key privatized element of Bush's mortgage "bailout" plan, supposedly directed at borrowers but in truth, designed more to protect lenders.

The larger commercial banks, like Citibank or JP Morgan Chase, could afford to absorb some of the shortfalls and defaults that would cripple smaller lenders. The $100 million fund would limit their losses to this amount, and that risk would be spread out across a number of banks around the world.

Makes sense, right? This way, the credit markets don't dry up so quickly, and might even weather the storm.

So why is this being shelved?

Earlier this week, Paulson and the banks behind the plan said they were committed to its establishment. That changed yesterday after Treasury officials and the banks, which included Bank of America and J.P. Morgan Chase, said that the fund was "not needed at this time" because market conditions had improved.

Subtle, that.

Market conditions have improved, a little (read: bank earnings have stabilized), but the economy itself (and the money that goes to pay mortgages) has not. In business-speak, the banks took a look at the risk and realized they were a lot more likely to lose the entire $100 million than they were a month ago:

The plan would have helped major issuers of asset-backed commercial paper called structured investment vehicles (SIVs). These semi-independent funds, set up by Wall Street banks to make complicated investments, have suffered deeply from the credit crunch.

The SIVs issue short-term loans and invest that money in securities backed in many cases by mortgages. But after a wave of defaults and foreclosures swept across the nation, the value of the securities held by the SIVs plummeted. The debt markets panicked, and the SIVs found it impossible to sell off any holdings.

With those large losses and a climate of fear in the marketplace, the SIVs were unable to issue short-term loans.

Since then, many banks, in particular Citigroup, have moved more than $100 billion in troubled assets from their SIVs onto their own balance sheets, alleviating a key rationale for the rescue fund. The transfer means the banks are agreeing to back loans made by the SIVs.

Prima Nocti, indeed. These guys pumped the American homeowner full of their vile seed, and now walk away with millions of pregnant mortgages about to come due, which they can easily write off their books now. Essentially, the banks are telling Paulson, the Treasury Department and the Bush administration, "Screw you, this is your problem, you fix it!"

George Will, a man no one really need admire, has said one admirable thing in his life: the American capitalist system is designed to privatize profit, but socialize losses, except when it comes to the individual wage-earner. If a business loses it's headquarters in a foreclosure, that business can write that loss off. A human family? Eh. Not so much. If a bank forecloses on a mortgage it holds, it can write off that loss. I lend you a $100, and I have to go through hoops and garters to prove to the IRS there was indeed an actual loan if you can't pay me back. And our transaction was probably better documented than the banks!

Next year will be a pivotal year in the mortgage and credit markets. This move tells me the banks are expecting bigger problems than anyone anticipated.