Comments on: Resolving banks by guaranteeing short-term debt A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: A&O Fri, 02 Oct 2009 09:40:06 +0000 U.S. banks don’t file for bankruptcy, Felix. They’re resolved by the FDIC. Do you seriously not know this yet?

And no, the government does not have the authority to force debt-for-equity swaps under its existing resolution authority (bankrupcy code or FDI Act). But that hasn’t stopped supposedly serious people from claiming, without a hint of irony, that this is what the government SHOULD have done.

By: hello Wed, 30 Sep 2009 17:55:19 +0000 You do understand that not all bankruptcies are liquidations? There is the reorganizational Chapter 11 code. I’m just going to assume you included yourself in the collective “One” when cautioning the world on misrepresenting bankruptcy.

“One has to be careful when using the term ‘bankruptcy’ with respect to banks”

Banks have capital structures that can be bought, sold and reorganized just like any other business.

By: winstongator Wed, 30 Sep 2009 17:04:35 +0000 William Poole’s (retired president of StL fed) idea for strengthening the banking system is the opposite. Force banks to hold 10% of liabilities in 10year subordinated notes. id=10241

By: jb Wed, 30 Sep 2009 16:24:15 +0000 @Ginger Yellow: On what grounds would the longer-term creditors (or employees) sue? I’m happy to believe that they might want to, but I don’t see how they could …

@Felix Salmon: With the ex ante commitment problem: Why not have the government say that they’ll guarantee short-term debt to a particular multiple (possibly less than one) of a bank’s capital base?

That would, at the least, give CP lenders an incentive to preferentially provide funding to banks with less leverage so that leverage would be roughly equalised across the industry.

But it might also present an improved framing of lending decisions: By guaranteeing short-term debt up to, say, 2x tier1 capital, the Fed draws attention to the fact that further lending will dilute the coverage.

By: Ginger Yellow Wed, 30 Sep 2009 16:08:19 +0000 “Given the fact that recovery rates for unsecured bank creditors in liquidation are very close to zero, few creditors would be likely to object to such a thing.”
This seems very naive to me. You’d instantly have a flood of lawsuits from longer term creditors (not to mention employees). And I’d be very surprised if it were legal under existing law.