In the summer of 1972 Montgomery Mall in Bethesda, MD., like its bigger counterpart across the Potomac River, Tyson’s Corner, was brand spanking new, a vision of things to come in suburbia. Transplanted from an established mid-west town with a Main Street that seamlessly accommodated famous names like Marshall Fields along side mom and pop shops, a mall fit perfectly with the barrage of culture shocks assaulting my young sensibilities, an apocalyptic collection of commerce with parking lots conglomerated under a single roof.
Yet and still, that doesn’t mean there wasn’t cool stuff to see, nor comfort to be found with brands transcending the places they were exhibited. One of those was Sears, which prominently occupied two floors on the north end of the shopping complex, covering the full range of product offerings, and highlighted by a snack bar that provided the best chili dog to be found, resplendent in a lumpless, beanless chili that was to die for. Were they to have a chili dog eating contest at the facility, I surely would have been competitive in the junior division. As years passed, Montgomery Mall both expanded and matured, becoming a fixture in the area, and Sears remained a touchstone, friends worked there, and the chili dogs remained as tasty as ever.
Now Sears Holdings is bankrupt, another failed retail business done in by the internet and superstore competition that encroached into its generalist territory with specialized inventory priced to move and unconcerned with the intangibles tradition creates. As the corpse decays, investors and creditors are left to fight over the pickings, some looking to recoup investments, others actually bent on maximizing the returns on their bets against Sears’ survival. What was a fixture of US commerce is now, not just a cautionary tale of the economic violence progress can inflict, but possibly a watershed of a future fiscal crisis other spectacular failures may ignite. For while the death of Sears signifies the end of how business was once done, the fight over its dissolution surely presages broader threats associated with investment instruments so complex as to literally defy description.
Calling the derivatives market complicated is like calling a 5-egg brie omelet rich, the complexity of products like credit-default swaps makes for light-headed dizziness. Yet the ramifications of this marketplace that few understand could initiate another global economic panic. The example of Sears shows why.
Credit-default insurance is meant to provide the protection necessary for lenders to keep credit flowing through the financial system, enabling the creation of various products investors can wager on, which in turn provides creative financing for companies like Sears restructuring operations to remain competitive.
However, as the chickens come home to roost with the Sears failure, conflicts have arisen regarding what exactly does and doesn’t qualify to be insured. A 15-member “determinations committee” exists to rule on such questions; I hope it’s members are financial geniuses because one could sit for days studying the questions at hand and still be as confused as when they started. But the gist of it comes down to whether Sears, through “intercompany notes,” can essentially redefine what its debt was and how much its lenders can be recompensed through their credit-default insurance. But, according to economics writer Sebastian Mallaby, permitting Sears such leeway threatens to turn the $11 trillion credit-default industry into another financial Jenga tower, with global crisis the result of jittery insurers unwilling to honor agreements they contend do not accurately reflect what they initially expected to cover. In other words, 2007’s mortgage swaps madness all over again.
All of this plays out as the Trump Administration moves aggressively in lock step with the GOP to gut reforms the hard lessons of the Great Recession presumably taught lawmakers. The conclusion we all thought was reached concerning moral hazard, the accountability Wall Street and corporations must abide for the great capitalist system our pols constantly worship to function properly, appears to no longer be a done deal. In fact, listening to any Republican speak on the issue, one would be forgiven to mistake the subject for climate change, such is their certainty that the issue is still clouded in uncertainy.
So here is where we are: an Administration and Congress brought to power by a nihilist base of voters, far more concerned with whitening America and denouncing those with the secular temerity to exclaim “happy holidays” than anything economically substantive. Forget about derivatives, most in this group don’t have a 401K. And instilling their champions with the confidence to once again foist untenable vulnerability on, not just ours, but the world’s financial future, may indeed be their most destructive legacy… and that is saying something. Lame duck congressional sessions are capable of much malevolence, and there’s plenty of reasons to expect this vanquished caucus to do their worst.
Come 2019 Democrats will run the Longworth, Cannon and Rayburn buildings. After they slice up each other picking a new leader, and placate young turks not content to wait their turns, they would do well to discuss the best way to investigate and confront overt Republican sabotage of measures designed to prevent a crisis similar to the one they created a decade ago. Few priorities are more important. BC