Comments on: When insolvent banks are worth billions A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: Joe in Morgantown Fri, 14 Aug 2009 16:55:06 +0000 Don,

the idea isn’t to discourage business fund raising. Fund raising can come in one of two forms: debt or equity. Debt has an externality it that (in large doses) creates systemic risk. That is, highly leveraged systems are brittle: a system with the same investments in the form of equity, rather than debt, is much more resilient to shocks.

I don’t like Taleb’s idea. But there is a halfway point. Currently the rules favor debt financing via 1) not taxing outgoing interest but taxing outgoing dividends, 2) manipulation of interest rates to make debt financing cheaper, 3) guarantees of liquidity for financial institutions so they can more easily make long term loans. These are things we have been doing for a while; the crisis management stuff has been in the same direction.

This is very strange. Why are the rules biased to favor debt? We need to work to make the rules neutral or even to give a nudge to equity instead of debt.

By: Aiden Thu, 13 Aug 2009 20:34:02 +0000 “we’re certainly nowhere near the point at which you can judge the health of a bank by looking at its share price.”

I don’t think that we should ever be at this point. Public equity markets are driven by any number of things, which in many cases does not represent the future fundamental cash flows of a company. Large shareholdings give management the incentive to make money no matter how healthy the bank is. Share prices are not directly based on equity capital, which is why regulators do not use public market prices to determine solvency.

Your use of CDS spreads which are informative if you want to guarantee debt or speculate on a future default, are of little value for a depositor of a bank (unless they are above the FDIC limit), much less a regulator. A much better measure of market perception of solvency would be the most trades for bond issues, which are all tracked. For regions financial their bonds look to be fairly liquid. These are trades for which real money changed hands, rather than just broker quotations.

Regulators should continue to supervise banks based upon their judment rather than that of the market. They have non-public information and are able to exert a certain amount of pressure on management based on the health of the bank and the perceived risk of the bank.

By: Don the libertarian Democrat Thu, 13 Aug 2009 20:05:40 +0000 ” And the slightly safer market, in corporate bonds, is exactly the market we want to discourage from coming back: systemically speaking, equity markets are much less dangerous than debt markets.”

I can understand wanting to turn existing debt into equity, but isn’t the point of Corporate Bonds to loan money to businesses so that they can expand, etc? How does cutting that back help economic growth?

In fact, that’s my worry about Taleb’s idea. It’s going to make lending more expensive in the future, if bonds can be turned into stocks. Are you saying that, going forward, we want a lot less lending? Period. I can see the point of thinking that about mortgages and bank debt, but all Corporate Debt?