From TPM Reader RB …

I’m glad to see TPM picking up on the question of what is to be done about the bondholders. I’ve had the feeling for a few weeks that this is the real Gordian knot the Administration can’t bring itself to cut, for fear that the rope is holding up the roof above all of us.

Here’s my next question, though: aren’t most of those bondholders holding not traditional bonds – straight debt from straight borrowing at whatever interest – but derivatives of and bets on those traditional bonds? And that being so, wouldn’t government, once the banks went into receivership, be able to institute rules that make holders of “real” bonds whole, and pay off the derivative gamblers at pennies on the dollar?

And if that in turn is so, doesn’t every day the government fails to bite the bullet mean another bunch of billions paid back out of taxpayer funds to the derivative gamblers rather than the institutions that made good faith investments?

With all the conversations I’ve had today, when I get questions like this, I’m tempted to reply: “You got me. No idea.” What’s far more troubling to me, though, is that I talked to a few world-renowned economists today who said pretty much the same thing to me when I asked them some of these questions.

I’ve been increasingly mystified and frustrated, bordering on angry, over recent days as I realized that the assumption behind all the would-be financial sector fixes is that the bondholders — i.e., the creditors of the big financial institutions, the folks who lent them money — should take at most a nominal hit, even though they lent money to companies that in every real sense of the word went bankrupt. And the money to pay them off has to come from American taxpayers.

I was expected to hear some basic skepticism about this assumption from the economists I spoke to. But I didn’t. They agreed that the danger was just too great, notwithstanding the unfairness to the taxpayer. And most of the fear stems back to what happened to the global credit markets after the collapse of Lehman Brothers last fall.

Now, as to RB’s point, I think he’s got a big part of the equation right. Having the bondholders take a substantial hit seems too scary to contemplate to these folks. The amount of money you’d need to make everyone whole just looks politically unfeasible. So it’s very hard to know just where to go.

What it all amounts to is that the bondholders have a gun to the head of the world economy. But it’s a real gun. And it may be loaded.

Who knows …

From TPM Reader NM …

Bobby Jindal is to Kenneth the Page as Michael Steele is to … Michael Scott.

Howard Dean dares GOP to filibuster health care reform: “Be my guest and let’s see how they do in 2010.” That and the day’s other political news in the TPMDC Morning Roundup.

Ahh, false alarm. Citi’s back in the black. No problem. Phew …

Not just Citi. Mini-Madoff Sir Allen Stanford says: We’re hiring!

From TPM Reader MD …

I find it interesting that reader RB makes a moral distinction between bondholders and derivative counterparties.  As if derivative counterparties are degenerate gamblers playing fast and loose with other people’s money while bond investors are upstanding patriots. Derivative counterparties are insurance companies, Universities, other banks, hedge funds, corporations, state and local governments, etc… Bondholders are insurance companies, pension funds, other banks, corporations, money market funds, mutual funds, etc… One group does not look that different from the other. Both were just playing by the rules as they were and pursuing their own financial interests. Demonizing derivative counterparties is just silly.

Also, what is missing from these recent discussions about the repercussions of Lehman’s bankruptcy was the effect it had on money-market funds, particularly the Reserve Fund which “broke the buck” shortly after Lehman’s bankruptcy because the fund was holding commercial paper issued by Lehman brothers. Once this happened, there was essentially a bank run on money-market funds and the debt capital markets froze for about six weeks. Citi is much larger than Lehman was so I think people are afraid of this happening again but on a much grander scale.

So unfortunately I think taxpayers would for the greater good want to guarantee the liabilities of Citi if they were put into receivership or nationalized or “pre-privatized” or whatever. Hopefully, the current administration is figuring out what this would cost and if there were a way to guarantee a portion of the liabilities and prevent a credit market collapse. There could be a way of giving bondholders a “haircut” so they see some loss of principal but not so much so that it would cause panic selling.

What they need to do is at close of business Friday, announce a detailed plan about what they are guaranteeing or not so that by Monday morning when the markets open back up folks would have had time to figure it out. It would be messy but if they do it right, hopefully the dire scenarios could be avoided. Unfortunately, the financial markets are so big and complicated nobody really has any idea what will happen.

These have got to be the two whiniest grown men on television. Jim Cramer and Joe Scarborough wimpering over Jon Stewart beating them up and taking their lunch money:

Obama finally got it right!

From TPM Reader JG …

NBC is working full time to build up the John Stewart – Jim Cramer thing. While Cramer is loud and obnoxious (a totally easy target), the tone of NBC has become increasingly negative towards Obama. Call me paranoid, but Jack Welch establishes the talking points at NBC, and Welch can be regularly seen on “Morning Joe” laying down the law as to what should be done.

The real point is that GE stock has tanked, and Welch acknowledged the other day that his personal holdings (mainly GE) has tanked. The man is looking for a bailout. They would like to focus on the shiny object (Cramer) and ignore the constant barrage of Scarborough, Mika, Barnicle, the sweater girls from CNBC, and the rest of the cast bombarding Obama.

MSNBC at least has been pretty friendly territory for Democrats of late, at least at night. So I don’t know if this isn’t a bit of a partial view. But GE, which is NBC, is deeply implicated not just in the broader financial crisis but in various bailouts as well. So the whole issue is worth considering.