tag:blogger.com,1999:blog-5776375569387669394.post6177606465479982129..comments2023-10-19T10:43:38.825-04:00Comments on Free Advice: A Quick Note on RecapitalizationBob Murphyhttp://www.blogger.com/profile/04001108408649311528noreply@blogger.comBlogger8125tag:blogger.com,1999:blog-5776375569387669394.post-88664015903345020162010-01-01T12:52:37.839-05:002010-01-01T12:52:37.839-05:00Yes, it does.
Yes, it is to you. Educators, thou...Yes, it does.<br /><br />Yes, it is to you. Educators, though, do not stop at one explanation. They shed light on the topic from several angles to give students a more stable understanding.<br /><br />Nope. Now you're really getting squirrelly.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5776375569387669394.post-29824459773767499842010-01-01T04:58:19.910-05:002010-01-01T04:58:19.910-05:00Hmmm.
2+3=5. Does it really help the discussion t...Hmmm.<br /><br />2+3=5. Does it really help the discussion to say 3+2=5, as well? <br /><br />It's obvious, isn't it?<br /><br />Could it be that you're anti-Fed, anti-Krugman because you don't understand these basics in the "Recapitalization" post?<br /><br />Just asking.Unknownhttps://www.blogger.com/profile/16971180325992717161noreply@blogger.comtag:blogger.com,1999:blog-5776375569387669394.post-22778211336877370712009-12-31T15:11:04.516-05:002009-12-31T15:11:04.516-05:00timk, It may be 'obvious' to you the same ...timk, It may be 'obvious' to you the same way it is 'obvious' to me you have no manners.<br /><br />Even for those who understand the topic, repetition and a slightly new way to go about discussing it with other people is enlightening. This type of broad reeducation is going to be essential to the reordering of our financial and economic systems therefore we should always welcome such discussions. <br /><br />BTW, whom have you taught this to lately?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5776375569387669394.post-33907234630497781112009-12-31T03:13:37.590-05:002009-12-31T03:13:37.590-05:00Am I really the only one to find this post to be a...Am I really the only one to find this post to be a repetition of the obvious?<br /><br />Did you all sleep through Finance and Accounting 101?Unknownhttps://www.blogger.com/profile/16971180325992717161noreply@blogger.comtag:blogger.com,1999:blog-5776375569387669394.post-84170079147467240612009-12-30T12:46:03.536-05:002009-12-30T12:46:03.536-05:00Current creditors care in ordinary circumstances. ...Current creditors care in ordinary circumstances. They don't care if they are lending in the form of a FDIC-guaranteed deposit or bond or if they are lending to any of the too-big-to-fail entities with a "no more lehmans" implicit guarantee.MRhttp://www.macroresilience.com/noreply@blogger.comtag:blogger.com,1999:blog-5776375569387669394.post-20395550785859415672009-12-30T12:34:53.984-05:002009-12-30T12:34:53.984-05:00Very nicely done! I think you should still do the...Very nicely done! I think you should still do the original series--to hear this explained from your angle is educational. They don't have to be too detailed--the length of this one was great.<br /><br />Nice additional point, fundamentalist.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5776375569387669394.post-14727566798273258542009-12-30T10:54:21.313-05:002009-12-30T10:54:21.313-05:00Current creditors have a stake in this as well. If...Current creditors have a stake in this as well. If the banks issued bonds, then the current creditors would have less of a chance getting repaid if things went badly. If the banks issue sell equity, then the current creditors stand a better chance of getting their money back.fundamentalistnoreply@blogger.comtag:blogger.com,1999:blog-5776375569387669394.post-25400222479601147422009-12-30T10:08:26.182-05:002009-12-30T10:08:26.182-05:00On the first question, a bond issuance would solve...On the first question, a bond issuance would solve a liquidity problem but not a solvency problem which would need an injection of equity. <br /><br />On the second question, it's not so much of a problem convincing new investors to invest in an equity issuance. There is almost always a price at which new equity investment will be forthcoming, a recent example being the Citi issuance at a 15-20% discount. <br /><br />The real problem is that the current owners of any financial institution would almost always prefer to operate on a thin sliver of equity if the regulator would allow them to. When debt issuance is explicitly or implicitly guaranteed by the govt, new debt issuance is "cheap" and increases firm value and the optimal leverage is infinite ( See Merton http://www.people.hbs.edu/rmerton/analytic%20derivation%20of%20cost%20of%20loan%20guarantees.pdf ). <br /><br />The reason why we have capital adequacy standards is that creditors/depositors no longer have the incentive to monitor risk and shareholders are incentivised to operate at as high a leverage as possible. <br /><br />Although given the arbitrary nature of bank bailouts and FDIC policy, bondholders still have an incentive to not invest if the bank is too thinly capitalised. Except of course if the new bond issue is FDIC-guaranteed as most bond issuances were this year.MRhttp://www.macroresilience.com/noreply@blogger.com