From today's FT:
Recapitalisation is essential if institutions are to be deemed creditworthy after the guarantees [for savers' deposits] are withdrawn. Governments should insist on a level of capitalisation that allows for further write-offs. They should then either underwrite a rights issue or purchase preference shares. Either way, governments should expect to make a profit on their investments when these institutions return to health, as they should do.
Such recapitalisation is an alternative to forced debt-to-equity swaps. I do find the latter an attractive idea. Yet today it is sure to increase the hysteria, unless it can be made credibly once-and-for-all.
"Amen!" to sensible write downs (the mark-to-market rule should apply in bad times as well as good); "Boo!" to investing taxpayers' money in badly run institutions; and "Hurray!" for debt-for-equity-swaps (the government should of course only use force to the extent that it pushes in the same direction as market forces).
As to "credible once-and-for-all forced debt-for-equity-swaps", here's how it would have worked with the Bradford & Bingley.
The centenarian bug
2 hours ago
5 comments:
Thanks for blogging!
MW
But debt/equity swaps:
1. do not have the political PR advantage for Brown and Darling of being seen to ride dramatically to the rescue (with OPM);
2. (although the intellectual small change of dealing with business failure) are apparently not understood by the financial geniuses at the Treasury or at nos 10 and 11 Downing Street.
Unfortunately, it may be too late for sensible policies. It's more than possible that quoting big figures (50, 100, 700 billion) to throw at the problem might be more effective at reigniting confidence (which is the proximate problem) than the quiet voice of business reason and experience.
It would appear that those big numbers didn't do much for the USA.
The equity markets have crapped out anyway and values are returning to something like reality. In any event the markets will overshoot on the way down (if they haven't done so already) whether or not confidence returns to the banking system soonish. Even so, sensible tactics (your debt/equity swap for instance) will be politically swamped by the big figures for the time being.
Once (if!) the system stabilises maybe more enlightened policies would prevail. However, if the system doesn't stabilise then all bets are off.
BTW right now 6:36 pm, the Dow is up 17 points. Not much but it's something.
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