by John Bougearel - author of Riding the Storm out
The days are drawing near for a “restructuring” or “reorganization” of Citigroup. No, unfortunately the restruction does not entail evicting the lousy management. They apparently will probably get to keep their day jobs, but Citigroup’s bondholders may have to take a 40 cent haircut.
The issue at stake is how does the government guarantee all bank deposits. The FDIC has only roughly $40 billion with which to guarantee Citi’s depositors if it were to go into recievership. But there is more than $500 billion in foreign deposits alone at Citi. A bank run on Citi deposits would be a major blow to the FDIC’s ability to fund redemptions at the bank. How does the govt guarantee the deposits from here without putting another $500 billion dollars or so of taxpayer-funded dough at risk.The capital ratios at Citi must improve dramatically to a level that is sustainable. A fantastic way to boost capital ratios is to reduce the debt.
U.S. Representative Brad Sherman, a California Democrat, say it’s time for bondholders to share the pain. The Friends of Eddie Coyle movie full
“These banks can go into receivership, shed their shareholders, shed or reduce the amount they owe to their bondholders and come back out much stronger institutions,”
Investors who choose to lend money to poorly run banks like Citigroup “should share the pain of a business that’s having to write things off,” First Pacific Advisors Thomas Atteberry.
Econ blogs (as no one can figure how the gubmint would be able to guarantee both the depositors and the bondholders of failed and insolvent banks like Citigroup) have ben bantering about a bondholder haircut for months, but this is the first time I have seen it in print on the Bloomberg newswires. And it is the first time I see any lawmakers such as CA rep. Brad Sherman supporting the idea.
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This haircut will be the next stage of the crisis, but since this step will help boost capital ratios of bad banks to a sustainable level, this will actually be major league helpful towards unclogging the financial system. With bondholders sharing the pain, a sense of fairness also comes into play that it is not all taxpayer borne pain. Along with the sense of fairness, the boost in sustainable capital levels will boost confidence in the financial system something that has been sorely lacking since August 2007.
For hard-working Americans who do not want this country to go any further down the crapper than it has to, this bit of “good news” is almost Gospel. It begins to answer prayers!
http://www.bloomberg.com/apps/news?pid=20601087&sid=aKqHkkFlnvfM&refer=worldwideYou Kill Me move
