Wednesday, March 11, 2009

Accrued interest on Voodoo maths

Accrued interest argues that banks should be given time (by government fiat) to work out of their problems - so that their underlying cash flow keeps them solvent.  My voodoo maths point entirely.  And he does it in the context of GE - where I think Voodoo Maths will do its job.

Any more people on this bandwagon and we would have a movement.




John


Note - an assessment is still required.  Nationalisation after due process.

8 comments:

Anonymous said...

John,
I'm sure that's what the Japanese bureacrats thought too. Look where it got them.

You may be right but if you're wrong, we going to get a zombie banking system and another lost decade.

John Hempton said...

WE have a zombie banking system already.

We have to (a) give them a guarantee and (b) assess them for capital adequacy and (c) nationalise the ones that fail.

Anonymous said...

John,
the Obama administration does not have the stomach to nationalise C and BAC (see Paul Krugman's "The Great Dither").

WFC looks wobbly and their management is rapidly losing street cred with the Street (which bank's management isn't? but at least Dimon tells it like it is)

Anonymous said...

When a corporation guarantees the liabilities of another corporation it is entitled to some business benefit from it. What should the government receive in return for its guarantee of bank liabilities?

Advant Guard said...

I'm with you. Now what do we call our movement?

gaius marius said...

john -- have you seen richard koo's presentation? starting around 38 minutes and slide 11, he notes why fat spreads are insufficient: demand for funds is going to be nil for years to come. he thinks global government capital injections of much larger size will be needed and expanded to all banks and other financial system entities.

Anonymous said...

it would seem at least fair give subordinated bondholders a small haircut -- at the very least don't give them the spread between the bank's cost of funding and the govt's cost of funding after the guarantee is announced -- because that is compensation for risk, and the risk is gone.

John Hempton said...

I was fairly careful here. The recourse I suggested (to the "bank" not the "shareholders") was the same as for FDIC guaranteed banks.

The leverage I allowed was a third of FDIC guaranteed branch deposit institutions - but I would prefer a sliding scale depending on the price the asset is purchased at. Personally I think the 6.5 of the long note is slightly generous.

The problems with looting are similar to banks. You need a level of independence, some force to diversifiy - and a few other protections. But banks will be looted more often than these funds because banks have lots of locations and these funds will be few, centralised and contractually watched.

But - this is NOT a perfect solution by any stretch. None exist here.

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