Big Government f***s up, yet again

As a general rule, when governments interfere in free markets, they just provide opportunities for speculators and/or produce windfall gains and losses; which usually never arise where the government was hoping.

As I have been saying for a while now, the best way to recapitalise banks, in other words the free market solution, would have been debt-for-equity-swaps, which would actually be the most likely outcome in the absence of government guarantees. Let's say a bank is looking a bit shaky and so its bonds are trading at 80p in the £1; bondholders are already looking at a capital loss of 20% (having taken the risks associated with that bond); so replacing every £1 of nominal bonds with new bonds worth 80p and some new shares (with a face value of 20p, let's say) recapitalises the bank while not affecting the overall value of the bondholders' total investment.

The Q&A on today's taxpayer funded bank bail-out in today's FT addresses the point thusly:

What does it mean for bondholders?

Bondholders should do well unless the terms of the government's investment penalise them, which is unlikely at a time when the aim is to increase lending, not reduce it. The value of the bonds should rise sharply, since the threat of default would be eased and the risk involved in holding them diminished.

So all that taxpayers' money that the government intends to shovel in will primarily generate a windfall gain for those people who invested in medium risk investments and had made modest losses (probably no more than a quarter of the original investment, as against shareholders who have seen their shares fall 90% in value over the past year or two).

And this of course slams the door shut on any future debt-for-equity swap; bondholders will of course cry foul if the government were to withdraw its offer of funding or guarantees, as this would lead to a corresponding fall in the market value of those bonds.

Twats, frankly.