Stricter Regulations Will Keep Reckless Banks From Killing American Jobs

It's a sad fact of life when today in the United States, a small group of irresponsible investors can wipe out tens of thousands of jobs before the business day is over.

That's what nearly happened to 30,000 Teamsters who work at the country's largest trucking company, YRC Worldwide (YRCW). Because they owned credit default swaps -- what I call a weapon of mass job destruction -- investors had an interest in forcing YRCW into bankruptcy. And bankruptcy would have certainly meant liquidation.

Credit default swaps are basically wagers that a company won't be able to repay its debts. This egregious practice allows investors to make MORE money if a company goes belly up instead of surviving.

It makes no sense to give our financial system special treatment and at the same time to allow them to sell financial products that destroy jobs.

This is what nearly happened at YRCW, which has been in financial trouble. YRCW is the parent company of YRC, which is made up of Yellow and Roadway. Holland, Reddaway and New Penn are also part of YRCW.

To stay afloat, YRCW needed to exchange its bonds for stock. That's when financial service companies created and sold the credit default swaps on YRCW's bonds.

What that meant was the investors who bought the credit default swaps could have made a bigger profit if YRCW went bankrupt. The investors held on to their bonds.

By exposing this shameful behavior, the Teamsters pushed the bondholders to take part in the exchange of bonds for stock. In the end, enough of the investors participated to keep the company alive.

This is why we need stricter regulations of reckless banks. And thankfully President Obama is fighting hard to change the rules that allow banks to act contrary to the interests of their customers.

The Senate is looking at ways to prevent such egregious practices by financial institutions. One thing they could do is to subject derivative products like credit default swaps to comprehensive oversight.

How can we create new jobs in America if we don't get rid of practices that let irresponsible banks destroy them?

 

Comments

[TGC]

02:49 PM on 01/27/2010

Talk about manufactured populism. What about the YRCW employees who've taken 10%+ pay cuts, loss of benefits and brieflly had their hours cut to keep the Teamsters paid? Nor have they had raises in, at least 5 years. That sounds more like a shameful practice than any motion to protect one's investments. Does that sound fair to anybody?

BTW, Glass-Steagall STILL rules applies to banks, so let's try to be honest.

[nova07]

12:16 AM on 01/27/2010

The credit default swaps didn't put YRCW in financial trouble, so why can't YRCW bondholders protect part of their investment in YRCW? If it's not in the bondholders best interests to take stock in the company in exchange for their debt, then why would they? The YRCW management is responsible for the company's employees, not the bondholders.

[coolaid8]

11:22 PM on 01/26/2010

As much as I hate banks, I am convinced that unions cause more jobs to go overseas than banks kill.

[macweenie]

01:34 AM on 01/27/2010

Only the weak ones that get into bed with the companies they work for.

[JoeTheProgrammer]

09:06 AM on 01/27/2010

So the ones that hold their company hostage in order to negotiate unaffordable deals have nothing to do with it?

What businessman in his right mind would start a business in a non right to work state?

[whitemale08]

09:45 PM on 01/26/2010

You need to put Goldman Sachs and JP Morgan and others out-of-business.

Why does the mass-media talk 'respectful' of Goldman Sachs?

It's a criminal enteprise that's worse then Enron.

Credit-default swaps are no different then 'bucket-shots' that were outlawed early last century.

You can't make a bet and then bet-against-a-bet - that's like saying: I'll sell you a house and keep it.

Come on! I know our common sense is better then this.

[oldgeek1]

09:40 PM on 01/26/2010

How about the reckless consumers, buying houses either too expensive or leveraged to the hilt.

Blaming banks is easy and an excuse for far too many people who were greedy and stupid.

Buy high sell higher was a suckers bet and all the politicians that bragged about new home starts and the jobs built on ponzzi economics share a whole lot of the blame.

[blacktea]

07:58 PM on 01/26/2010

No federal pencil pusher is capable of "regulating" the financial industry. The politicians simply use the rules to hook up their friends at the expense of the rest of us. We should stop trusting the government and start using our rights as free citizens.

[J G H]

07:32 PM on 01/26/2010

I support tougher regulations on financial institutions, including ressurrecting Glass-Steagal. However, there is another lesson we need to learn from the Reagan and W., presidencies. Regulations are only as good as the people appointed to enforce them. Reagan and W disapproved of regulation and appointed lax enforcers.Remember the S&L failures on Reagan's watch; stories about the problem began appearing at least two years before the collapse began, but Reagan's economic team did nothing. Further, under Reagan, the law did not change, but approval for mergers became almost automatic because of the ideology of the Reagan regulators. This is when the financial institutions began merging and became too big to fail (a term actually used during the S&L debacle.)
The hostility of Republicans to regulation and their refusal to enforce the existing rules must be a major campaign point in the elections.