Tuesday, August 24, 2010

Banks' bond holders a different class of creditor - make that a guaranteed creditor - unless a Basel Comm "Bail In" proposal passes

A recent Bloomberg News story http://www.bloomberg.com/news/2010-08-19/basel-committee-says-bank-bond-investors-should-help-bear-cost-of-bailouts.html reports that GOING FORWARD any capital instruments sold by banks to meet regulatory requirements should be loss absorbent - before any taxpayer funds bail out the institution; the proposal has been called a "Bail IN".

Contrast to banks own commercial lending practices:
Hmmmm let's take a look - when banks lend money to a small business and that business falls on hard times whether voluntary or involuntary - the bank stands in line with all other general and secured creditors attempting to recoup as many pennies on the dollar as possible.

Losses become REALITY in step fashion:
upon the bank marking down it's loan portfolio
then booking loss reserves
then reversing the reserve when the actual loss is determined
and taking (recognizing) a REALIZED loss.

Yet somehow - when - banks' bond holders a/k/a parties which have LOANED money to the Bank are involved the Banking industry lobby cries and moans - boo hoo - our capital costs are going up - BECAUSE OUR BONDHOLDERS ARE - IN THE FUTURE - GOING TO BE ON THE HOOK IF WE SCREW UP - WOW - WELCOME TO YOUR OWN REALITY.

The BFD continues to occur - trying to end the siesta on the US taxpayers dime one easy to read blog at a time.

No comments: