A comment on banks selling bonds for Perch

[wiegie]

Banks can sell bonds.

 

But you were saying that banks needed to sell bonds in order to meet the government stress test requirements.

 

Banks cannot sell bonds to meet these requirements because the tests are about how capitalized the banks are (meaning--what is the value of their assets minus their liabilities?).

 

If banks sells a bond, it does not increase their capital, because they are basically just increasing their assets (the cash they receive) at the same rate they are increasing their liabilities (the bonds they are selling).

 

The way the banks can increase their capital is to sell equity. Selling new equity increases the bank's assets (in the form of cash) but does not increase the bank's liabilities, because equity is not a liability. Hence, the end result is more bank capital.

[Perchoutofwater]

It appears as though they can sell bonds to do just that.

 

Still the main point wasn't even the banks, though that is another good deflection to avoid talking about the real issue by an Obama supporter. The real issue is the Obama Administartion is pissing on the rights of bond holders in order to reward the UAW. This will scare the crap out of people buying bonds, which will make the cost of all bonds to go up to cover the extra risk because you never know when the administration is going to feel like rewarding another political ally instead of honoring the law. There is little doubt that the administration also used the TARP program to coerce some of the larger institutions that held these bonds into relinquishing their rights. So rather than deflect, please answer how you feel about this obviously redistribution of wealth from the bond holders to the favored UAW? Do you think it is right? Do you think there will be long term consequences such as it being harder for entities to obtain capital through the sell of bonds because of people will be afraid of additional government interference?

[muck]

... you were saying that banks needed to sell bonds in order to meet the government stress test requirements.

 

Banks need to sell bonds that do not carry any sort of special backing or guaranty from the USG in order to be allowed to repay TARP.

 

So, it would appear to me that selling bonds is a prerequisite to getting out from under the TARP restrictions, which is the whole impetus for the "stress test"...

[wiegie]

my bad

 

I was thinking about the undercapitalization of the banks under the worst case scenarios of the stress tests.

 

I was mistaken and stand corrected.

 

Edit to add: apologies to Perch

Edited May 11, 2009 by wiegie

[wiegie]

Still the main point wasn't even the banks, though that is another good deflection to avoid talking about the real issue by an Obama supporter. The real issue is the Obama Administartion is pissing on the rights of bond holders in order to reward the UAW.

I posed almost this same question to a finance prof and the economist in my department who knows the most about what is happening with the automotive sector right now. Neither of them were as freaked out about the situation as you are (and one of them is a very strong conservative).

[Perchoutofwater]

I posed almost this same question to a finance prof and the economist in my department who knows the most about what is happening with the automotive sector right now. Neither of them were as freaked out about the situation as you are (and one of them is a very strong conservative).

 

Well, you and many liberals thought I was crazy when I was concerned about the nationalization of the banks too.

[untateve]

Well, you and many liberals thought I was crazy when I was concerned about the nationalization of the banks too.

 

I actually thought you were crazy even before that.

[H8tank]

This is a good read in layman's terms for those who want to understand this: http://network.nationalpost.com/np/blogs/f...hite-house.aspx