Wednesday, February 10, 2010

Looking For Answers ???

I just finished reading an article about how Standard & Poor's (S&P) is letting too big to fail (TBTF) institutions (banks) that the Federal Government is no longer going to guarantee their debt, assume a new level of risk. Mention was made of the 18 largest banks receiving Federal backing, backstopping their debt during the recent financial crisis. The article goes on to say in so many words that the holders of their debt instruments, notes and bonds, will have to take a haircut if the banks find themselves in the position they found themselves in during the last financial crisis. My question is: do not all equity holders go to zero before any debt holders take less than 100 cents on the dollar? How can the law be rewritten to preserve shareholder equity at the cost of debt holders first claim? I realize that Congress can do anything, even stupid things, but someone is going to have to explain to me how this new system is going to work. Naturally if the Federal guarantee is taken away for the debt of TBTF institutions, their cost of capital must increase. This will cause all consumer interest rates to shift upward.

As usual, the Congress of the United States, in their effort to do something, and not being able to do the right thing - which is proper regulations and bringing back Glass-Steagal, they come up with something I don't understand. Perhaps, I will eventually read the answer to my questions.

Stay tuned.

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