US on the abyss
September 26th, 2008A whole week drifts by and as yet no signed bailout deal is on the table.
Let’s be clear about this: it isn’t going to work. Nothing less than a full recapitalisation of affected banks and financial insitutions will suffice. Repackaging bad debts has been tried already.
What should happen is a debt for equity approach. As it stands now equity holders have (and should be) absolutely wiped out. They have done their dough.
But the real sticking point is all those bondholders. Bonds rank ahead of equity in a liquidation but to avoid that bond holders would swap debt for equity: yes its a disaster scenario but it allows balance sheets to be reformatted (esssentially this is a reformatting of numbers on a spreadsheet).
Given the leverage in debt markets the value of the equity will be piddly but there is not a lot of choice.
There is no one taxpayers should be bailing out failed institutions.
The only solution for taxpayer involvement is complete nationalisation of failing institutions without any fancy deals.
The half way both up approach will not make anyone happy and merely patch up a badly flawed system.
Tags: banking, central banks, financial crisis, intervention, markets