tag:blogger.com,1999:blog-1141932539860553199.post7935673789246577455..comments2024-03-05T10:52:24.691+00:00Comments on Mark Wadsworth: Fixin' the banks - made simpleMark Wadsworthhttp://www.blogger.com/profile/07733511175178098449noreply@blogger.comBlogger19125tag:blogger.com,1999:blog-1141932539860553199.post-45689859000195288232013-06-17T07:46:01.549+01:002013-06-17T07:46:01.549+01:00Thanks Mark.Thanks Mark.Barnacle Billhttps://www.blogger.com/profile/17257546424880537005noreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-12915149740567564492009-02-03T11:37:00.000+00:002009-02-03T11:37:00.000+00:00It is true that NRK did, at first, retain the "fir...It is true that NRK did, at first, retain the "first loss" piece of the loans sold to Granite, like other banks. Later it even sold the first loss piece too. So it is up to Granite to bear the losses. However, Granite has the "best" stuff, or at least what was thought of as the best stuff, the worst is left with the shareholders, debt capital holders and then any other unsecured creditors (you and me now that the government has guaranteed all other unsecured retail and wholesale deposits). Granite debt holders are not out of the woods yet as the depth of the house price crash and recession in the UK even begin to hurt their securities.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-47539526371120085812009-02-02T15:49:00.000+00:002009-02-02T15:49:00.000+00:00JA, maybe. But isn't part of what triggered the NR...JA, maybe. But isn't part of what triggered the NR collapse the fact that it is guaranteeing the losses on the loans it had sort-of sold on to Granite? Is it up to Granite to bear those losses or not?Mark Wadsworthhttps://www.blogger.com/profile/07733511175178098449noreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-4607202037536234322009-02-02T15:37:00.000+00:002009-02-02T15:37:00.000+00:00You might say "fine print" but investors...You might say "fine print" but investors in RMBS and covered bonds would say "legal contracts". Government-backed administration that breaks voluntary contracts is expropriation of someone. In the case of Northern Rock, RMBS (via the Granite securitisation vehicle) and Covered Bondholders are being paid according to schedule. Unsecured depositors have been guaranteed as losses on the mortgages, commecial loans and other Treasury "securities" are paid for by the taxpayer. More or less the same is true for B&B. The unsecured depositors were able to leave behind all the assets, good or bad. The secured funders also seem to be OK inside the UKFI government holding company. Again, the taxpayers are taking the hit on any B&B losses. If we want to avoid banking crises in the future then we have to let banks fail, wiht hits to creditors in order of their security. Only if this happens will future generations of deposit-holders understand to avoid grossly-overleveraged banks. It is tough love, governments may fall due to it, but if we don't learn our lessons then we will be doomed to repeat these situations.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-81610156653647377102009-02-02T09:31:00.000+00:002009-02-02T09:31:00.000+00:00JA, "Funding from RMBS issues and from "covered bo...JA, <I>"Funding from RMBS issues and from "covered bonds" rank ahead of (unsecured) retail and wholesale depositors in modern banks' liability structures."</I><BR/><BR/>Maybe the fine print says that, but once a company is put into administration, the clock is reset. The administrator would just transfer all deposit accounts to a new bank (like transferring B&B branches and deposit accounts to Santander - there are real life examples for all of this). <BR/><BR/>This triggers a liability on the transferee bank - as debts incurred in administration rank in priority to everything else (as a general rule), this would have to be repaid first - which would happen automatically if the old bank simply hiked its mortgage interest rates - the 'good' borrowers would simply remortgage with the new bank and it would all net off (basic bookkeeping). <BR/><BR/>This was the model that the Northern Rock was pursuing, rather successfully it must be said, until the government decided a few months ago that it was more important to slow down the house price crash than to get taxpayers' money back.Mark Wadsworthhttps://www.blogger.com/profile/07733511175178098449noreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-45329257093444241042009-02-02T09:20:00.000+00:002009-02-02T09:20:00.000+00:00Good stuff but I think you'll find that the banks ...Good stuff but I think you'll find that the banks have been more imprudent that you have realised. Funding from RMBS issues and from "covered bonds" rank ahead of (unsecured) retail and wholesale depositors in modern banks' liability structures. Sadly, the contractual reality is that depositors have probably been left with some of the worst assets that the banks own. It's a scandal, but there you have it. The banks, under cover of the government-guaranteed "too big to fail'ness", have stuffed their depositors and consequently stuffed the taxpayers too. The government unintentionally, and the mainstream banks less unintentionally, did away with the level playing field, by giving privileged guarantees against failure to existing banks eliminating any possible prudent competition, and creating the conditions for the bubble and current bust.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-30623965685786600402009-01-23T22:38:00.000+00:002009-01-23T22:38:00.000+00:00MA, yes of course.Shares = value of business minus...MA, yes of course.<BR/><BR/>Shares = value of business minus amount owed on bonds, so the current situation is thus:<BR/><BR/>£nil = £100 minus £100.<BR/><BR/>If you convert £10 of bonds to shares (which, by definition reduces the amount owed on bonds by £10), the situation would be thus:<BR/><BR/>£10 = £100 minus £90.Mark Wadsworthhttps://www.blogger.com/profile/07733511175178098449noreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-15574990190987562252009-01-23T21:11:00.000+00:002009-01-23T21:11:00.000+00:00If the bank shares are worth zero (and I agree, th...If the bank shares are worth zero (and I agree, they may as well be) can you still do a debt for equity swap?marksanyhttps://www.blogger.com/profile/01520830611440112455noreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-63559008781059525692009-01-23T20:02:00.000+00:002009-01-23T20:02:00.000+00:00JP, don't forget that in the absence of government...JP, don't forget that in the absence of government guarantees, £1 nominal of bank debt might be worth 50p or something. Deposits balances were always guaranteed £35k or £50 per person, fair enough, but not all the RMBS and CDO crapola.<BR/><BR/>MA, bank shares are effectively worthless. RBS for example have fallen 98% over the last two years. Who cares if they fall 100%?Mark Wadsworthhttps://www.blogger.com/profile/07733511175178098449noreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-41824016053548325352009-01-23T17:46:00.000+00:002009-01-23T17:46:00.000+00:00AH - I agree. I'd add - at the moment, no one know...AH - I agree. I'd add - at the moment, no one knows what a bank share is worth. They don't have a functional business model anymore.marksanyhttps://www.blogger.com/profile/01520830611440112455noreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-66448128892689753332009-01-23T17:13:00.000+00:002009-01-23T17:13:00.000+00:00Marksany:Yeah, you still need to find someone. Oft...Marksany:<BR/><BR/>Yeah, you still need to find someone. Often however they end up exchanging debt for shares worth more than the debt. e.g. £1 debt for £1.01 of shares.<BR/>From what I've seen, this is what happens when businesses do it. I'm not sure banks can at the moment under current legislation. If they can't, then that definitely needs to change!<BR/><BR/>JP: I'd say it comes down to self-interest and behavioural economics in the end. Debt-for-Equity is currently used as a model for some businesses when they go bankrupt. Once you've started guaranteeing stuff, there's no more incentive to do it. As for the government, it's probably incompetence and misunderstanding of the problem despite extensive media coverage (particularly in the FT - just look at that possible demi-genius Willem Buiter!)Anton Howeshttps://www.blogger.com/profile/13713949105943906016noreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-6842234586231440472009-01-23T12:07:00.000+00:002009-01-23T12:07:00.000+00:00"why aren't we doing this?"According to the financ..."why aren't we doing this?"<BR/><BR/>According to the financial genius running the country and saving the world - and interviewed on Today this morning - because printing money, doing a Weimar on sterling and ruining the economy is "the right thing to do" and, oh yes, in case we'd forgotten "it's all the fault of the US".Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-70070419522461586612009-01-23T07:32:00.000+00:002009-01-23T07:32:00.000+00:00JP, it's either cock up or conspiracy, you decide....JP, it's either cock up or conspiracy, you decide. On balance I suspect the latter - the government loves nationalising stuff with our money, and the corporatists at the banks love a bit of free money.<BR/><BR/>L, I agree on cash ISAs, that's a different topic.Mark Wadsworthhttps://www.blogger.com/profile/07733511175178098449noreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-22071616023883414122009-01-23T06:46:00.000+00:002009-01-23T06:46:00.000+00:00John P @ 05:01 - Exactly. Every day that goes by ...John P @ 05:01 - Exactly. Every day that goes by is another shed of our wealth down the tubes. Guido says £1m per hour on government unfunded spending alone. Plus all the commercial negative cashflow from the banks.<BR/><BR/>BTW - ISA's = horrible deceit. Cash ISA's in particular. Nearly everyone I look at ends up with the offering institution pocketing the tax relief.Lolahttps://www.blogger.com/profile/04586735342675041312noreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-85742284172094886782009-01-23T05:01:00.000+00:002009-01-23T05:01:00.000+00:00Then the question becomes... why aren't we doing t...Then the question becomes... why aren't we doing this?John Pickworthhttps://www.blogger.com/profile/02166443099429490782noreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-18656825313203463872009-01-23T00:12:00.000+00:002009-01-23T00:12:00.000+00:00AH, good explanation.MA, the distinction is not be...AH, good explanation.<BR/><BR/>MA, the distinction is not between 'good' and 'bad' liabilities so much as between 'blameless in this whole debacle' (i.e. ordinary deposits, ISAs, savings accounts) and 'asking for trouble' (investing in AAA rated mortgage backed securities via a Netherlands Antilles based hedge fund which has leveraged up via further bank borrowings).<BR/><BR/>Remember always that the blameless people can turn up at the bank and demand instant repayment, and that the 'good' borrowers can remortgage elsewhere at the drop of a hat. One way or another, they'll end up with the Good Bank.Mark Wadsworthhttps://www.blogger.com/profile/07733511175178098449noreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-32996985949435848742009-01-22T23:54:00.000+00:002009-01-22T23:54:00.000+00:00AH - thanks for the explanation. So you still need...AH - thanks for the explanation. So you still need to find someone willing to accept equity in lieu of payment, but then the alternative is default.<BR/><BR/>I meant "good" liabilities in the eye of the investor- I consider my cash ISA to be good and my RBS shares (sniff) to be "bad." From the bank's point of view, cash ISA's are a bad liability, because they have to pay out. <BR/><BR/>Cheers,marksanyhttps://www.blogger.com/profile/01520830611440112455noreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-50967860765211240182009-01-22T23:37:00.000+00:002009-01-22T23:37:00.000+00:00marksany: You swap as much debt-for-equity as need...marksany: <BR/><BR/>You swap as much debt-for-equity as needed once assets have been revalued (lower).<BR/>There aren't really any "good liabilities" - you pay off as much debt as possible (preferably without getting savers with deposits to take part in the swap - but there are enough larger creditors for this not to happen in most cases I think).Anton Howeshttps://www.blogger.com/profile/13713949105943906016noreply@blogger.comtag:blogger.com,1999:blog-1141932539860553199.post-66187439275538316752009-01-22T23:29:00.000+00:002009-01-22T23:29:00.000+00:00Sounds good, but doesn't this depend on a balance ...Sounds good, but doesn't this depend on a balance between good assets and good liabilities? Do we have a situation where there are many more good liabilities than there are good assets.marksanyhttps://www.blogger.com/profile/01520830611440112455noreply@blogger.com