Private equity fun

These so-called 'private equity' investors have spent the last decade gleefully borrowing ever more money from the banks at ever lower interest rates to constantly buy and sell the same underlying businesses for ever higher prices.

Sooner or later these private equity firms become hopelessly overleveraged, the music stops, and the banks have to start unpicking it all again, via what are basically debt-for-equity-swaps, for example:
a) Terra Firma (owners of EMI) asked Citibank to convert £1 billion of bank loans to equity.
b) HIT Entertainment (owners of Thomas The Tank Engine etc) have asked their lenders to buy a large chunk of their assets.

What HIT Entertainment are asking their lenders to do is pretty much the same as the bank foreclosing on a mortgage and repossessing a house, which is yet another kind of debt-for-equity-swap.

What riles me is the fact that politicians are too dumb to realise that what's sauce for the goose is sauce for the gander. The banks are hopelessly overleveraged (i.e. far too little share capital and reserves; far too much bond finance) and they too can be fixed by debt-for-equity swaps (i.e. bondholders convert part of their loans to shares). There is little need for taxpayer-funded bailouts (above and beyond the £50,000 deposit guarantee).

This is not some pie-in-the-sky idea, as it worked perfectly well for a medium tier US bank called CIT-Group, and, after a fashion, much the same was achieved in the UK by splitting Northern Rock into a 'good bank' and a 'bad bank' (which is effectively owned by the bondholders in the original Northern Rock).

Ah well.