Macroeconomics in the Galaxy Far Far Away

The Implosion of the Hutt Cartel

Note: I ... wish the reasonings of the various financial institutions and concepts written below were purely fictitious ... If anyone reading this works for a Ratings Agency and wants to talk to me, please!

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It started innocuously enough. Slave rebellions were a rather common sight within Hutt Space, so nobody was surprised when another charismatic upstart launched a campaign against the dominance of the Hutts. The expectation within the Republic, the IBC that had its own interests in Hutt space, and even among the population itself were that mercenaries brought in by the overlords would soon put down the uprising and life would go back to its stagnant normalcy.

However, that is not what happened. Not only did the upstart warlord defeat the various mercenary faction sent to destroy her, over twenty years, the rot of the periphery had spread into the core of Hutt space. Every rumour of defeat fuelling local underground societies until every planet in Hutt space was filled with rebels organizing quietly, even while the upper layers of society remained almost oblivious. After all, the Hutts had weathered rebellions before, had done so for millennia, and there was certainty that they would do so again.

During this time the warlord herself seemed to have disappeared, traces of her presence pointing towards Wild Space. By now, her presence was no longer necessary; indeed, many of the newer outfits had not even heard of her exploits. Instead, these new rebels simply drew on the roiling discontent spread by the persistency of rumours of Hutt vulnerability.

The seeds of discontent soon reached Nal Hutta itself. Like much of Hutt politics, Nar Shaddaa was simultaneously thin end of the wedge and the jumping off point for further discontent. While the major players in the Cartel had a firm grip on the surface of Hutta, the hive-like cities on Nar Shaddaa were almost impossible to control. With the mounting unrest, layers upon layers of the city-moon were lost to various groups of revolutionaries, rebels, and reactionaries, giving the factions a safe space to thrive. But more importantly, it meant that there was a constant source of discontent beamed directly onto Nal Hutta.

To counter this increased unrest, Hutta itself was flooded with Mercenaries, every player spending massive amounts to firm their own control. Yet, even with massive repression, within a decade the planet was in open rebellion, with the major powerblocks splintering as the prosperity promised by the Hutt Pyramid Schemes fell apart in the face of persistent labour shortage, and rising insurance cost. Combined with the cost of bringing in ever larger amounts of mercenaries, the situation quickly became untenable. That is when the Ratings Agencies stepped in.

Originally, Hutt Shell Corporations had applied for and integrated themselves into the Ratings systems used by the Republic to classify risk to bring in cheap credit in the form of quadrillion of credits in investment from the various component Hedge Funds and Investment Banks of the InterGalactic Banking Clan (IBC). The upside of this loss of sovereignty was the massive investment inflows from within Republic space that could now "safely" invest in Hutt space. While it was not needed for the venture arms of the IBC holdings, the Ratings Agencies imparted a certain amount of legitimacy to the Hutt corporations, which added to the prestige that already came with doing business with the IBC.

In the good times, this meant that the expertly cooked books of the Hutts convinced the Ratings Agencies to give universally high ratings to Cartel bonds. Hutt Shell Corporations received on average AA+ (the second highest in existence) across the entire space. This allowed institutional investors, such as retirement funds, insurance companies, and big mutual funds, who were desperately in search of yield within the Republic, to pile in. As a result, over the five-hundred years preceding the latest rebellion, quintillion credits flowed into Hutt space via the legitimacy granted by the existence of the ratings, dramatically enriching the Hutts sitting at the top of their domain, by buying countless junk bonds which were repackaged as safe (AA+) assets.

However, this was now all thrown into disarray. With the prolonged unrest in Hutt space reaching an intensity not seen in millennia, the Ratings Agencies were forced to start downgrading Hutt Corporations. This was recognized as a threat to the Cartel early on in the rebellions on the fringe of Hutt space. In fact, the Cartel came together in a lobby to make sure that the Ratings Agencies were provided with the "real" facts, which reflected, in the view of the Hutts, the proper situation on the ground.

For the first two decades, this was accepted without complaint by the Ratings Agencies, which themselves were under pressure from the buy-side (i.e. the big institutional investors) to maintain ratings so that the latter could continue to buy the high-growth positions offered by the Hutt Corporations. However, with the open rebellion on Nal Hutta, fiduciary duty within the Ratings Agencies finally won out over lobbying. Therefore, the three major agencies (Alderaan Financial, Corellia Galactic, and IBC Ratings) simultaneously downgraded Hutt Corporations across the board.

Even though this initial downgrade of Hutt bonds was only one single notch, from an average of AA+ to A, the consequence was severe. Since their underlying assets were essentially junk, Hutts sold their bonds with the intention of rolling them over in perpetuity, that is to say, using new issuance to pay off expiring bonds. Together with clever financial contracts, this meant that for the Hutts only minimal interest rates needed to be repaid. However with the downgrade, there was a sudden demand for extra collateral when rolling over corporate bonds.

This the Hutts did not have. Consequently, one Hutt corporation after another failed to meet their payment deadlines as negotiations with bond holders started to drag on. The first Hutt corporation to fully default on a bond payment was a small mining conglomerate owned by the "great" Jabba (the Hutt). On paper, the conglomerate had interests in everything from basic iron to the rare metals used in the most advanced hyperdrives. However, when private investigators hired by the institutional bondholders visited the purported mining stations and warehouses pledged as collateral, they found either nothing, or worse, signs of a hurried evacuation. In one of the biggest Galactic Scandals, further investigation revealed that across all of Hutt space, companies linked to Jabba had gone silent. The accumulated wealth of one of the smaller powers in the Hutt Cartel simply vanished from all Republic records.

This led to panic among the great institutional investors. Even as more investigators were sent out to ascertain the validity of other Hutt corporations, the Ratings Agencies were coming under pressure to downgrade further Hutt assets. In an effort to prove their own ratings systems sound, the agencies sent their own agents. Working together with the great powers running the Cartel, the agencies were able to temporarily halt a cycle of downgrades, leaving the major Hutt corporations intact, with downgrades only hitting the bonds of the corporations associated with the lesser Hutts.