Circular Argument Of The Week - Bank Failures

From the Vote UK forum:

Pimpernal: The only way out of this banking mess is to have a bank resolution or law passed which turns the existing creditors of the banks into shareholders, whether they like it or not. At a stroke, the huge debts of banks disappear and are borne by the creditors – which they should be – and we start again. We do what the US did in the savings and loans debacle in the early 1990s: we apply a market solution to a market problem. Is there a hole in this strategy?

Richard Allen: Essentially you want widespread debt for equity swaps which is what UKIP Treasurer Mark Wadsworth has been advocating for a couple of years. The only difference is that he wouldn't mandate it by law.

Pimpernal: Does he? and how would that work if it wasn't done by legal compulsion? I guess that wouldn't be very libertarian though.

Richard Allen: You can read his many blog posts on the subject here.

Pimpernal: Hmmm it's all a bit earnest, and erm, technical to put it nicely...

Richard Allen: Well yes, but then it is a rather complex subject.
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The nitty gritty is incredibly complex, but the bigger picture is dead simple - real life example showing how it would have worked with Bradford & Bingley here - what Pimpernal refers to as "a bank resolution or law passed which turns the existing creditors of the banks into shareholders" is nothing more or less than a 'debt-for-equity-swap'.

Whether this is settled by shareholder/bondholder resolutions; battled out in the insolvency courts or even done by statute (which is what Pimpernal suggested in his very first comment!) is a secondary issue; as a general rule, private resolutions are preferable to statutes, but hey.