Mike Dugger

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TOBOP or TNDOGA? That is the question!

Alfred is Da Man!
I recently read a rather long blog post by a man whose writings I've enjoyed for quite some time. His name is Alfred Adask and I find the things that he writes to be interesting and his writing style to be quite engaging. You can read his thoughts as well at:
In this particular post Adask is analyzing a section of a lengthy legal treatise entitled A Treatise Upon Some of the General Principles of the Law written in A.D. 1877 by William Wait. He attempts to relate it to our modern system by translating it, if you will, into something that we can make sense of since the text and subject matter are rather dense to most of us. That is, to those of us not well-versed in arcane legal and financial concepts.
A particular section of Adask's analysis struck me, kind of like a slap in the face, as particularly relevant to certain events in the financial world over the last couple of years. Adask's post predates those events so I'm pretty sure he couldn't have recognized the significance of the concept at the time. In fact, as luck would have it, he posted his analysis in mid-2009. This was right on the cusp of a change that I'm going to outline below. If he's made the connection since then he has yet to write about it. Here's the section I'm referring to where he is quoting a section of the treatise (bold emphasis is mine, comments in [brackets] are Adask's):

Another illustration of the equity for contribution is found in the *doctrine of general average. This, in the sense of the mari­time law, means a general contribution, that is to be made by all parties in interest, toward a loss or expense, which is volun­tarily sustained or incurred for the benefit of all. The principle upon which this contribution is founded, is held not to be the result of contract, but has its origin in the plain dictates of natural law. Abb. on Shipp. 342; 1 Story’s Eq. Jude., § 490 ; Stirling v. Forrester, 3 Bligh, 590, 596 ; Louisville Ins. Co. v. Bland, 9 Dana (Ky.), 147 ; Nimic v. Holmes, 25 Penn. St. 371.

[“Natural law”?! “Natural law” implicates the Declaration of Independence and the “natural law” of our Father YHWH Elohym.]

The circumstances under which this equity arises are where a ship [vessel?] and cargo are in imminent peril, and a portion is intentionally sacrificed for the security of the rest; as, where goods are thrown overboard, or a portion of the ship’s rigging cut away, to lighten and save the ship, or the ship itself is intentionally stranded, to save her cargo from a tempest or an enemy, or a part of the cargo is delivered up by way of ransom, or is sold for the necessity of the ship. In all these cases the impending danger is common to all, and the means by which it is averted ought to be a common burden. If, therefore, the ship and the residue of the cargo are preserved by the sacrifice, the parties interested in the ship, her freight, and the merchandise on board, must make good ratable shares of the loss, proportioned to the value which their own goods and the goods sacrificed would have borne, after deducting freight, had they safely reached the port of discharge.

To the uninitiated this may seem like an obscure reference to ships at sea, but I think that view is too narrow and therefore mistaken. I think Adask's bracketed question "[vessels?]" is both relevant and correct. If one can conceive that when we place our money in the care of a financial institution we have formed a trust relationship you'll see what I mean. We have entrusted our funds into the care of the institution for our expected benefit, presumably at some future date. All trusts are "vessels" which contain "cargo" (res consisting of our deposits) on board.
Where the concept gets pretty sticky in the context of financial institutions is in the ideas I've highlighted in bold. What happens when your friendly commodity broker (MF Global) or (Cypress) bank runs into some (cough!) unforeseen difficulty and finds itself on the brink of insolvency? Well, in 2008 you had what came to be known as a "bailout" when such a situation occurred and the government came to the rescue; allegedly for the greater good. Basically, taxpayers, including millions of taxpayers who had not entrusted their funds to the affected entities, were called upon to save the system from the ruin caused by the mismanagement and/or corruption of those who ran certain financial institutions (into the ground!). In my opinion this sort of option quickly came to be viewed as politically unacceptable.
The New Paradigm
As a consequence, some other means had to be devised to deal with such contingencies after 2008. It looks to me as though someone decided that the "doctrine of general average," referred to in the passage above, was just the ticket. The, by now well known, term coined for this is "bail-in." You have to admit that it does roll of the tongue quite a bit more smoothly than "doctrine of general average." I guess in a dumbed-down world served by a dumbing-down mainstream media the idea of pumping water into a sinking ship is viewed as a good analogy. But it's not.
What we're really dealing with in these instances is risk, and that all-but-outlawed concept known as responsibility. Virtually everything involves some degree of risk. Just walking down the street involves risk. I know of a tragic incident that illustrates this but I'll spare you the gruesome details. What the doctrine of general averages seeks to do is equitably assign the responsibility for certain risks in life; in particular, our financial life.
It's going to force "depositors" to recognize and accept their new status as "unsecured creditors" and cause them to act accordingly.They'll either have to choose carefully or they'll wind up with a bad "haircut." And I don't mean the sort that the girlies these days appreciate either.
I challenge everyone to consider their reaction to the old "bail-out" paradigm, as well as to the new "bail-in" paradigm. Now I want you to make a relative value judgement as to which paradigm you would consider to be the most just. Go ahead and take a minute to think about it.
I'll wait...
Don't rush...
There's no hurry...
"the... most... just"...
Okay, time's up!
Which paradigm are you ready to "own" as your paradigm of justice? (I realize this assumes these are the only two choices. Humor me.) I'm now going to take the "risk" of offending you by telling you what I think your choice says about you. I accept full responsibility for the consequences - at least so far as they involve any degree of vituperation, as opposed to physical violence. Sticks and stone, right? Nothing wrong with a healthy exchange of opinions, eh?.
To wit:
If you chose the old "bail-out" paradigm (TOBOP!) then I say you're a sociali..., no, I say you're a freakin' communist. You believe that everyone else should bear the consequences of your failure to exercise due diligence in your financial affairs. You believe that you have a "right" to the property of others to replace the property you've lost through your ignorance or negligence with respect to your financial dealings. You wouldn't know a moral hazard if it walked up and stuck its tongue down your throat - but just look in the mirror if you want to see what one looks like!
Mind you, this does NOT apply if you've legitimately paid a premium to insure some financial action you've taken. Taxes are not insurance premiums. Not even Social Security. The courts have (correctly) held that Social Security "premiums" are simply taxes and that the government is not legally bound to provide you with any benefit down the road. If you believe otherwise then don't blame me twenty years from now when your delusion comes back and chomps your ever-loving booty-licous - only to find another mouth already sewn to it!
Go ahead and call me whatever name or names you feel appropriate. I'll wait...
Do you kiss your mother with that mouth?!
Alright, that's enough. I hope you feel better, but get over it and move on.
Now, for those of you who chose the new doctrine of general average paradigm (TNDOGAP!)... Congratulations, you are a free-market true-believer who understands the concepts of responsibility, risk/reward, and . . . Justice! It's my sincere hope (and belief) that you also know the meaning of empathy, charity and grace. In any event, you don't feel that it's someone else's responsibility to involuntarily underwrite your foolishness, laziness, bad luck, or mistakes without due consideration.
Twenty years from now you will be enjoying the reward of not sharing in mass delusion and having made your own preparations for your retirement. If not, then you will do what you must to provide for yourself, and/or your friends and loved ones will help you out. And you will do this without (or a least with minimal) whining.
So how do you like that! Go ahead and tell me.
I'll wait.
Mmmm, hmmm.
De nada, my friend!
Well, hey! You're not half-bad yourself.
Okay, we'll have to get together and discuss it further another time.
All kidding aside. I don't pretend to know what all the ramifications of this paradigm shift are going to be. But there will be ramifications. The most obvious one is that people are once again going to have to recognize that trust is earned and not simply presumed. That it's their responsibility to exercise due diligence in deciding where and how they entrust their hard-earned savings. And hopefully, they'll recognize that "too big to fail" equals "too corrupt to trust." Some of us knew that well before 2008.

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