I decided to add a couple of comments to go along with this piece, linked nearby in our Daily Read section. It’s very much on track in identifying a new source of risk facing financial investors: the risk that government will change the rules of the game after you’ve made an investment, and totally messing up your anticipated returns and your risk analysis.

I’ve already said a lot about Chrysler this week, but it’s really impossible to overemphasize the meaning of that episode. The President of the United States used his instant access to the broadcast airwaves and the non-filter of a sycophantic press corps, to rewrite the rules under which a group of investors in secured Chrysler debt would proceed in bankruptcy. Obama basically told them to take their senior claims and shove them into their backsides, because he’d decided to subordinate them to the UAW and to Fiat.

You invest money under particular terms and conditions in light of the impact of those terms and conditions on your cost of providing the money. A senior, secured claim generally comes with a relatively lower interest rate because of the secured position. What the President just did was to heavily mark down the value of the secured debt by imputing to it the notionally-higher interest rate of an unsecured loan.

Guess what? That’s a taking without fair market compensation. The President of the United States just violated the Fifth Amendment.

And it’s not the first time he’s tried to do that, either. The FT piece very correctly makes the connection to this year’s attempt to rewrite bankruptcy law in the event of mortgage foreclosures. It sounds like a great idea to allow a bankruptcy judge to rewrite the principal amount of a mortgage down, in favor of the borrower and to the detriment of the lender. But that too is an unconstitutional taking, because the lender chose his interest rate in light of the fact that he could seize the house in the event of default.

The risk that the US President will go and rewrite your contracts whenever he feels like making headlines is utterly impossible to quantify. It’s an uncertainty rather than a risk. Since you can’t model it mathematically, you can’t hedge it. So you have to set very high reserves against it.

Tim Geithner is constantly going on about what it will take to get private credit flowing again at a reasonable cost. His boss just gave everyone a huge reason not to expect that anytime soon. And there’s a fascinating phrase which Geithner has taking to using in interviews: he plans to “go around the banks” if necessary.

What does that mean? My guess (subject to verification) is that it means the Treasury stands ready to directly create consumer and business credit in large amounts in order to substitute for private credit. The government doesn’t need to nationalize the largest banks. It’s just going to become a bank.