Comments on: Banks Say Plan to Guarantee Their Debt is Flawed, Ask For a Better Deal

By: bondinvestor

bondinvestor — Sat, 15 Nov 2008 21:41:00 +0000

what is going on here is pretty straightforward. the politicians are desperate to jump start the economy, the banks can sense this, and therefore are taking full advantage of the situation to get the best deal they can.

issuing US guaranteed debt, even with the fee, is a no brainer. you can issue the debt and use the proceeds to buy back your own senior and subordinate bonds at anywhere from 50-80 cents on the dollar, depending on the institution.

every institutional bond investor in the world is begging the banks to make this trade. and the banks are smart. to the extent they can pull of the swap without impacting their liquidity position, they will do it.

but why not wait, allow the economy to deteriorate, see your bonds to drop further, and try to goad the government into reducing the guarantee fee.

the folks in washington are some of the least commercially savvy people in the entire US economy. it's sad to watch them get taken to school by the sharks who run the big money center banks.

By: Anonymous

Anonymous — Fri, 14 Nov 2008 10:27:00 +0000

There are a number of arguments here. The first is that the guarantee is too expensive compared to other countries. I doubt that argument really holds water if you consider the repayment terms for bailout money that European banks pay.
The second argument is that the guarantee is not water tight and is next to useless. The difference between European and US guarantees being that timeliness in the event of bankruptcy with bankruptcy judges being able to modify payments.
The result is that US banks are not trading normally with no major debt being issued since early september. The credit markets remain closed in the US as elsewhere the first blooms of recovery show.
Its probably just a matter of perspect with European banks knowing full well that if they don’t try to jump start the economy even if they fail then they will be staring into the abyss, whereas US banks are still thinking that individually they can use the situation to their advantage.

By: simpson

simpson — Fri, 14 Nov 2008 05:38:00 +0000

I guess I am not agreeing with you Yves or any of the other commenters today.

Why isn't better for the USG to have a contingent liability by guarantee bond issuances than to have direct full liability for the borrowings at the discount window?

Yes, you mention that the banks don't want to lend. That's right because they need to raise capital to de-leverage. Bond issuances in the market would allow them to raise cash from someone other than the USG for a change, but this only works if there is an effective guarantee.

An ineffective guarantee is simply useless for both the USG and the banks. The banks don't benefit at all from an ineffective guarantee. I don't get it. Why support an ineffective policy?

By: Stuart

Stuart — Fri, 14 Nov 2008 02:44:00 +0000

RE: China and gold reserves. Brother, if I had 1 gold oz for every time I’ve heard this “boy who cried wolf” story over the past 3 years…. I’d have a tonne by now. I’ll believe this when I see it.

By: Stuart

Stuart — Fri, 14 Nov 2008 02:42:00 +0000

The banks want a better deal do they…. How about this. Sit down, shut up and be humble and all the Sr. Executives might stay out of jail.

By: doc holiday

doc holiday — Fri, 14 Nov 2008 02:33:00 +0000

TARP never was a contract or had terms or conditions — it was an attempt to patch together a bailout that would depend on non-accountability. It is thus no shock that a conceptual framework would morph and twist into various illusions (for various people).

By: Matt Dubuque

Matt Dubuque — Fri, 14 Nov 2008 01:44:00 +0000

Yves-

Competent analysis. Thanks.

As part of ITS dealings with banks, the British government is ALSO getting Board of Director seats on the banks that take the money. I'm not sure whether they vote.

We should insist on this stateside as well. That will help to compel the banks to prudently lend.

Matt Dubuque

By: dryfly

dryfly — Fri, 14 Nov 2008 01:18:00 +0000

China considers building gold reserve:
http://www.thestandard.com.hk/news_detail.asp?pp_cat=30&art_id=74335&sid=21457716&con_type=1

November 13, 2008 7:21 PM

The ultimate deflation killer – create money & dump on the market while pulling down the supply of a 'useless commodity'. The higher the price of gold goes the more efficient a money creator they have.

I've been waiting for that one for a while – surprised BB & Hank haven't gone that route (or threatened to).

FD – I don't own gold.

By: RBG

RBG — Fri, 14 Nov 2008 00:21:00 +0000

Off topic, but thought you would be interested.

China considers building gold reserve:
http://www.thestandard.com.hk/news_detail.asp?pp_cat=30&art_id=74335&sid=21457716&con_type=1

By: Don

Don — Thu, 13 Nov 2008 23:50:00 +0000

"The letter cited the U.K. program as a model because it offers ``an unconditional guarantee'' of principal and interest when due. Without a similar guarantee, U.S. banks will be ``at a significant disadvantage'' to their U.K. and European counterparts because their government-backed debt will be more expensive for borrowers and less attractive to investors, the letter said."

Hello. We've seen this argument go back and forth over the water. European banks and investors claimed the same thing when our FDIC insurance went up.

What about Ireland? I thought that they were getting hurt by unconditional guarantees? What am I missing?

By the way, what happened to all that talk about beggaring your neighbor.

Oh, by the way, that reminds me of the problem people in the EU were complaining about, which is that they didn't have a bank like the Fed, and so all the member banks needed to guarantee everything together to match the Fed's guarantees.

Hey, what happens in all this if we have to save UBS?

Don the libertarian Democrat