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| User Info | There Is Only One Solution To The Banking Crisis in forum [Ticker] | |||
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Genesis Posts: 71403 Incept: 2007-06-26 
KD^2 
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http://market-ticker.org/archives/733-Th....
---------- "The monetary base in ALL modern monetary systems is the sum of unencumbered assets against which one is both WILLING AND ABLE to borrow." - Me
2009-01-20 12:43:06
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Architect Posts: 780 Incept: 2007-07-11 
london UK
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KD Can you spell this out simply in principle in a form that I can take to my MP? Would it work in situations where the common stock is near worthless? I think that we need your solution on a world wide basis.
2009-01-20 13:00:45
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Gmak Posts: 10176 Incept: 2007-07-27 
Re-inventing the future at the speed of time.
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The way I understand it is that all holders of bank debt become share holders. Existing shareholders are diluted - but still own something (unlike bankruptcy). Is this correct?
2009-01-20 13:02:52
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Pika-steph Posts: 39197 Incept: 2007-09-11
^Why I keep^ fighting; so he is not fighting for nothing. Online
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 Not enough worm to go around. Metaphorically speaking, We The People ARE the worm. ---------- Stop the Looting; Start Prosecuting - http://www.FedUpUSA.org  "America is at that awkward stage. It's too late to work within the system, but too early to shoot the bastards."
2009-01-20 13:08:29
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Genesis Posts: 71403 Incept: 2007-06-26
KD^2
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Architect and GMAK: Yep. The common IS worthless. It has no bearing on a cramdown as it is extinguished and replaced with new common (can trade under the same symbol) that is comprised of the debtholders. Once the cramdown is done the stock continues to trade and may go up or down in value in the future. This also gives the debtholders effective control of the failed company as they become the voting stockholders. The debt (bonds) are crammed down in levels until the equity required is restored. For example, take the following capital structure: $100b <Senior Unsubordinated Debt> (senior tranche - may be larger, may be smaller) $1 trillion <Ordinary Debt> (issued bond face value) $50 billion <Preferred Stock> (trading at a hell of a discount) $5 billion <Common Stock> (common price has effectively collapsed) Let's assume that on the other side of the sheet are an alleged $1 trillion of "assets" that are in fact dodgy HELOCs and ALT-A loans that if liquidated today would be lucky to fetch 30 cents, and are defaulting like crazy. On any fair value accounting the bank is insolvent - it has three times the liabilities as the fair value of its assets. It's ****ed and you would need $600 billion to fix it - for one bank. But the structure post-cramdown might look like this: <Senior Unsubordinated Debt> ---> <Ordinary Debt> <Ordinary Debt> --> <Common Stock> <Preferred Stock> --> Extinguished <Common Stock> --> Extinguished Now we have $100 billion of debt, $200 billion of equity (the balance of the true value of those assets), and the old preferred and common are gone. The bondholders have gotten 20 cents on the dollar but instead of being paid in cash as they would be in a liquidation they instead hold equity in a solid institution with the potential for capital appreciation. They can of course sell the next morning if they'd like and convert that equity to cash, putting them in exactly the same place they would have been in a Chapter 7. In doing this you are effectively retiring the debt obligations in that they are turned into common equity. Since that's the "liability" side of the sheet, what you have done is dramatically shifted the balance sheet, in that what was a hard liability (the previous bond obligations) is now equity. This is sort of what happens in a bankruptcy. In an ordinary bankruptcy the bondholders are often retired at some haircut and common is essentially always wiped out. But a BK reorg can fail throwing the company into liquidation, and requires DIP financing during the interim. The argument that such a "Cramdown" is illegal (which some raise) is horse****. The government already has the right to take over a failed financial institution; it needs no new authority to do so, and the debtholders are no worse off than they would be in a FAILED reorg where they get pennies (if that.) Witness Lehman where they got ten cents - literally - with zero future appreciation potential. If the bondholders wish to argue that the bank is not REALLY insolvent they're welcome to go find a lawyer who will argue the case in court and try to block it. If they can find one who can stop laughing long enough to file. ---------- "The monetary base in ALL modern monetary systems is the sum of unencumbered assets against which one is both WILLING AND ABLE to borrow." - Me
2009-01-20 13:16:31
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Gmak Posts: 10176 Incept: 2007-07-27
Re-inventing the future at the speed of time.
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Then the operative "question" becomes whether or not the remaining write-offs would wipe out the debtors' equity. If so, that is where the taxpayer comes in, assuming that a bailout is still the road we're walking. I assume that this operation ignores the regulatory capital requirements issue, since whether it is in the form of sub debt or pref stock or equity, it is still capital. Therefore, that ratio (risk weighted capital) wouldn't change. Or am I off-base on this?
2009-01-20 13:25:03
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Genesis Posts: 71403 Incept: 2007-06-26
KD^2
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If the bank is insolvent even with ALL of its debt crammed down then you cram it down and bring in the FDIC to do its job. ---------- "The monetary base in ALL modern monetary systems is the sum of unencumbered assets against which one is both WILLING AND ABLE to borrow." - Me
2009-01-20 13:28:56
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Gmak Posts: 10176 Incept: 2007-07-27
Re-inventing the future at the speed of time.
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Insolvent in the "Equity < 0" sense, post debt-conversion. What happens if the institution still has equity, but doesn't meet the regulatory capital ratios, then? Does anyone believe that the new owners will throw more money in to recapitalize, or should the gov't provide the preferred shares /sub debt loan to re-cap, or should it be allowed to die as well? The dead you bury, the living you celebrate, but what about all those zombies?
2009-01-20 13:31:37
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Genesis Posts: 71403 Incept: 2007-06-26
KD^2
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Gmak given how regulatory capital ratios work (6% Tier Cap) the number of institutions that will fall into that very narrow bucket will be extremely small. In fact, its rather unlikely there will be any. Most will cramdown successfully. Those that do not are truly dead (they're not zombies, they're just flat broke - have bene, are, will be) and they need to be closed, with the deposits stripped off as the tranche over Super-Senior that they are, transferred, and everyone else gets nothing. ---------- "The monetary base in ALL modern monetary systems is the sum of unencumbered assets against which one is both WILLING AND ABLE to borrow." - Me
2009-01-20 13:42:12
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Architect Posts: 780 Incept: 2007-07-11
london UK
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Translated into English English this might read as follows..(KD, Have I got this right? Any UK experts, would this work under UK law?) "The principle behind this proposal is to recognize that a bank is insolvent and to construct a new form of controlled bankruptcy that allows the bank to continue trading in an uninterrupted manner. The idea is to mark the banks assets to market and then construct a matching equity pool from the debtholders in ascending order of priority. In the USA this is called a cramdown. Once the cramdown is done the stock continues to trade and may go up or down in value in the future. This also gives the debtholders effective control of the failed company as they become the voting stockholders. Retail bank current and deposit accounts are taken to be exempt from the cramdown to a figure to be decided The debt (bonds) are crammed down in levels until the equity required is restored. A US example might have the following capital structure: $100b <Senior Unsubordinated Debt> (senior tranche - may be larger, may be smaller) $1 trillion <Ordinary Debt> (issued bond face value) $50 billion <Preferred Stock> (trading at a hell of a discount) $5 billion <Common Stock> (common price has effectively collapsed) Let's assume that on the other side of the sheet are an alleged $1 trillion of "assets" that are in fact dodgy loans of all kinds that if liquidated today would be lucky to fetch 30 cents, and are defaulting like crazy. On any fair value accounting the bank is insolvent - it has three times the liabilities as the fair value of its assets. It's broken and you would need $600 billion to fix it - for one bank. But the structure post-cramdown might look like this: <Senior Unsubordinated Debt> ---> <Ordinary Debt> <Ordinary Debt> --> <Common Stock> <Preferred Stock> --> Extinguished <Common Stock> --> Extinguished Now we have $100 billion of debt, $200 billion of equity (the balance of the true value of those assets), and the old preferred and common are gone. The bondholders have received 20 cents on the dollar but instead of being paid in cash as they would be in a liquidation they instead hold equity in a solid institution with the potential for capital appreciation. They can of course sell the next morning if they'd like and convert that equity to cash. In doing this you are effectively retiring the debt obligations in that they are turned into common equity. Since that's the "liability" side of the sheet, what you have done is dramatically shifted the balance sheet, in that what was a hard liability (the previous bond obligations) is now equity. The argument that such a "Cramdown" is illegal (which some raise) is rubbish. The government already has the right to take over a failed financial institution; it needs no new authority to do so, and the debt holders are no worse off than they would be in a full bankruptcy."
2009-01-20 13:49:26
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Jparks Posts: 490 Incept: 2008-04-07
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Karl, at the risk of appearing naive, why aren't the banks being forced recognize their bad debt? Is it a lack of political will, complicity, what?
---------- "We used to be a country that made ****. Now, we just have our hand in everybody else's pocket." Sobatka, The Wire.
2009-01-20 13:51:18
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Gmak Posts: 10176 Incept: 2007-07-27
Re-inventing the future at the speed of time.
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Thanks Gen.
2009-01-20 13:53:15
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Genesis Posts: 71403 Incept: 2007-06-26
KD^2
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Its hard to get a bonus from a failed company isn't it?
---------- "The monetary base in ALL modern monetary systems is the sum of unencumbered assets against which one is both WILLING AND ABLE to borrow." - Me
2009-01-20 13:54:59
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Mtgspy Posts: 6121 Incept: 2007-10-27
Online
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Karl, Citi has a company wide bonus increase for 2008 the same day they were guaranteed 300B by the government. Next year target is up. If this is not plunder I don't know what is.
---------- It sounds antiquated, merchantilistic - until you figured out that I was hoarding for war.
2009-01-20 13:56:29
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Genesis Posts: 71403 Incept: 2007-06-26
KD^2
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OF course it is.
---------- "The monetary base in ALL modern monetary systems is the sum of unencumbered assets against which one is both WILLING AND ABLE to borrow." - Me
2009-01-20 13:57:04
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Sboady Posts: 50 Incept: 2008-03-02
Cape Horn
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Spy, I would guess they are estimating a rather small discount factor for future earnings in this game  
---------- ‘We Have to Go Spend Money to Keep From Going Bankrupt’ Vice President Joe Biden.
2009-01-20 14:21:08
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Mtgspy Posts: 6121 Incept: 2007-10-27
Online
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Just a friendly question here, how many of you will renounce your US citizenship if Obama decides to give $1T to recapitalize UK banks? no I don't think they would but just in case.
---------- It sounds antiquated, merchantilistic - until you figured out that I was hoarding for war.
2009-01-20 15:53:04
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Jnojr Posts: 552 Incept: 2008-09-18
San Diego, CA.
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Quote:President Obama needs direct Treasury and The Fed to immediately go institution-by-institution, write down the assets to "death's door" levels, determine how far down the capital structure needs to be crammed to restore that institution to a strong capital position with double the Tier Capital ratio required by law, and then forcibly reorganize the debt into equity. I don't get this. The end result sounds like a bankruptcy of sorts... debt is discharged. But how does this happen "overnight"? What happens to the very real assets that most banks hold? Sure, they aren't near enough to counterbalance the debt, but the way I'm reading this, the idea is to tell all existing investors, "Sorry, you crapped out", erasing their debt (and their claim on the assets) so that the institution suddenly becomes "solvent" and attractive to new investors... who would be extremely wary of being caught in the same position as the old investors. I could use a much better explanation of this concept. I'm sure my poor understanding is fundamentally flawed.
2009-01-20 15:53:58
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Swarf_maker Posts: 19 Incept: 2008-10-18 Ottawa, Ontario, Canada
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Karl; Hopefully, the cramdown would preclude any of the former officers and board members from continuing. Would this create a shortage of qualified execs? Do you know what the status of the Canadian banks is with regard to holding toxic assets? ---------- "Eternal vigilance by the people is the price of liberty." Andrew Jackson
2009-01-20 16:35:37
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Berkleyreindeer Posts: 560 Incept: 2008-07-22 Minneapolis , MN
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if your idea takes hold, I hope none of us are holding money markets
---------- It'll get worse. Just wait.
2009-01-20 17:16:47
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Dan721 Posts: 2185 Incept: 2007-08-23
Phoenix, AZ
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What happens to depositors? Still insured by FDIC limits? My deposit is a debt to the bank, right?....does it get crammed down or exchanged for equity? Glad I'm at a credit union....
2009-01-20 17:31:31
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Mtpaul Posts: 61 Incept: 2008-12-06 alaska
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bank holiday tomorrow ..?? ---------- woof.. bad doggie no biscuit Last modified:
2009-01-21 06:52:02 by mtpaul
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Tienkou Posts: 3158 Incept: 2007-09-09
Connecticut Online
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Quote:
It's also hard to get a campaign contribution from an out of work Bank CEO. ---------- Barack Hussein Obama - The last President of the First American Revolution. The US Congress has abdicated its role as a governing body. The most dangerous man is the one with nothing left to lose. Our government is making more of them everyday.
2009-01-20 18:08:57
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Samadams Posts: 357 Incept: 2008-12-03
San Antonio, TX
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Architect: It was educational reading the "English English" translation. I've known for quite some time that an "elevator" is a "lift," a "police officer" is a "bobby," and that the TV or "boob tube" is the "telly." Now I find out, thanks to you, that "horse****" is "rubbish." :>) I suspect that there are others. For example, you might say "politician," whereas we say "thieving *******s." You might say "The American Secretary of the Treasury," whereas we say "biggest lying mother****er on Earth." Things like that. Since this is an educational site, I invite others (with KD's permission, of course) to teach the rest of us about differences in language.
2009-01-20 18:10:17
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Mtgspy Posts: 6121 Incept: 2007-10-27
Online
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Equestrian Penetration?
---------- It sounds antiquated, merchantilistic - until you figured out that I was hoarding for war.
2009-01-20 18:11:31
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