We are pleased to discover that we’re no longer shouting down a rain barrel.
The idea that the government should draw on a massive pot of money available to fix the banks that is NOT coming from the U.S. taxpayer is finally going mainstream!
Today, the NYT’s David Leonhardt has devoted an entire column to the idea of making bondholders–the people who lent the banks the money that they incinerated–pay for some of the cost of fixing them.
What’s more, Leonhardt says that Larry Summers actually mentioned this as a possibility in a TV interview:
On “Meet the Press” on April 19, Mr. Summers said one option for increasing the banks’ capital was “asset liability swaps,” by which he meant a voluntary exchange of loan forgiveness for equity.
(We assume this was a disastrously off-message slip-up, akin to his falling asleep in the credit card meeting.)
In any event, this is great news. The sooner we force the administration to explain why it is NOT pursuing debt-for-equity swaps or debtholder haircuts, the sooner everyone will realise that they’re an excellent idea.
The problem, you may recall, is that the banks will have to write off another $1 trillion of crap assets before this thing is over (per the IMF), and the TARP only has $100 billion left. So that’s a $900 billion hole we have to fill.
We can fill it one of three ways:
- Taxpayers cough up another $900 billion and then end up owning many banks outright.
- Denial (a.k.a., zombie banks)
- Debt-for-equity or debtholder haircuts
The government is currently pursuing solutions 1 and 2, which many Nobel laureates and others think is a disaster.
The reason that the Administration has refused to discuss solution 3 until now–as David Leonhardt intelligently notes–is that, shhhhh, it would be bad for Wall Street.
Wall Street wants you to believe that it would also be bad for you–civilisation would end!–but there are plenty of smart economists who think this is a bunch of baloney. Handled right, a big debt-for-equity swap would not trigger another Lehman Brothers, and it could quickly restore the banking system to health. And the taxpayer wouldn’t have to spend another dime.
(Note that bank bondholders don’t really believe that they’ll never be forced to pay for some of the banks’ stupidity. How do we know that? Because most bank bonds are trading well below par, suggesting that the market has already factored in a haircut. And the world hasn’t ended!)
So read David Leonhardt’s column, in which he explains in more detail how debt-for-equity swaps might work and why the government is pretending that this option doesn’t exist (short story: Because Tim Geithner was brainwashed by Wall Street).
Then call your Congress-person up and start screaming “DEBT FOR EQUITY, DEBT FOR EQUITY”!
* Well, OK, “considering” may be jumping the gun (depends on the context of Summers’ remark). But it’s a start.
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