"Experts at Bank of England say 'no' to common sense"

From City AM:

CONTINGENT capital bonds risk increasing volatility in financial markets and undermining banks’ safety, rather than enhancing it as planned, a Bank of England report warned yesterday.

“Cocos” as they are commonly known, act as debt but convert into equity when a bank looks like it is getting in trouble – usually when the share price falls below a set trigger level...

As we well know, debt-for-equity swaps are the quickest, cheapest and most 'free market' way of sorting out banks which are in trouble. All this means is that some of their repayable debts get converted into non-repayable debts i.e. shares i.e. ownership. This doesn't increase their assets, but it reduces their liabilities which is as good as the same thing.

To save bickering, the idea behind cocos is to make it clear exactly whose debt will be converted into equity and under what circumstances. Common sense says that a conversion would be triggered when the bank's capital ratio fall beneath a certain figure (and there's nothing to say that the resulting shares wouldn't be converted back into bonds again if the situation improved, a kind of pre-programmed share buy back).

Clearly, The Powers That Be are against this sort of thing (presumably they think it is better for the taxpayer to bail out banks), so they worked backwards from the answer, then launched a Big Fat Lie and made the wholly unsubstantiated claim decided that the conversion would be triggered by something completely irrelevant (the bit in bold) and then applied their contorted logic (see remainder of article) to show that because this would be the trigger, then all sorts of terrible things would happen. As it happens, the rest of their logic doesn't really stack up either, but once they've got their main point across that cocos are bad, that doesn't really matter.

This is exactly the same sort of propaganda that they used when arguing against the Alternative Vote - they started off their argument by making wild claims such as AV would mean that the candidate who came third in the first round would automatically win, or that everybody would have to vote BNP, and then extrapolated forwards again to conclude that AV must therefore be a bad thing.