I fired off a comment in response to a post at UK House Bubble titled "We need a market based solution to the credit crisis" earlier today, which Alice Cook kindly turned into a post in its own right. For posterity, I'll repeat it here:
The solution (to the banking crisis) is far simpler than that, and the State should keep out as far as possible, except to start supervising banks properly - not regulating, mind you, I mean supervising, having quiet words in ears etc.
Nobody wants to lend to banks because they are 'undercapitalised'. What does this mean in practice? It means that total liabilities are perilously close [to] total assets - especially as we know banks are overstating the value of some of their dodgier investments.
The 'capital' is just a balancing figure, really.
On the liabilities side we have customers' deposits, shorter term 'money market' stuff and longer term bonds.
To recapitalise banks, all they have to do - at gunpoint if necessary - is to cancel some of their longer term debts and replace it with share capital, a so-called 'debt-for-equity-swap'.
Hey presto, problem solved. The bondholders who get given shares can always sell their shares if they need cash - the total value of the bonds and shares, taken together, will probably be slightly enhanced by the move.
Worked example applied to Bradford & Bingley here.
As to bonuses, these are A Good Thing as far as HM Treasury is concerned - the corporation tax on negligible profits is negligible - but we know that bank managers overstated profits and then paid themselves huge bonuses taxed at effective rate 47% (including Employer's NI).
The real losers from the bonus culture are the shareholders. The problem here is that most shares are owned by 'institutions' who are in cahoots with boards of plc's and vice versa. Again, this is easily fixed - see here.
Land values can be kept low and stable by introducing land value tax (and scrapping all other property or wealth related taxes - I am a small government, low tax kind of chap).
There. All sorted.
Thursday 9 October 2008
This has really cheered me up (1)
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4 comments:
The debt-for-equity-swap does, indeed, have an attraction, but is this not a breach of contract? Those who made loans made loans. If they had wanted to buy shares they would have bought shares.
Who would sanction this and what recourse would a bond holder have in the courts? If implemented, even at the point of a gun, it could get very messy, not to mention being a bit like Suez.
Arthur, the bondholders may of course prefer to put the bank into liquidation, do a fire sale of assets, pay the liquidators tens of millions of pounds and wait years for their money.
Or, they can swap part of their nominal liablities (the market value of which is much lower than the balance sheet value/amount originally invested) for new shares, and keep the bank as a going concern. It's their call.
Mark, your logic is faultless. Faced with a choice between losing all your money and saving some of it in the form of shares makes perfect sense.
However, the reality is that bondholders - unlike shareholders - have no real influence over the company they invest in, they are not proposing such a swap, and the banks do not seem to have put this forward as an option.
It seems they just want a mixture of cash and government guarantees, which is what they have got. Do you really believe that this might happen, and if so, who is leading on the proposal?
A, thanks for dropping back in.
Bondholders do not - even in a worst case scenario - face losing everything, maybe 25% or something. As you say, banks want a mixture of [taxpayers'] cash and [taxpayer funded] government guarantees.
And bondholders in turn, would prefer a [taxpayer funded] government guarantee to facing up to some of their losses and being compensated in shares.
The question of who is hoodwinking whom is uppermost in my mind.
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