Debt Deflation and Capital Injections

Many people think the current financial crisis is a technical situation, or a liquidity situation. Don't believe them. It's a solvency situation, and equity prices can go negative.

But how?

There is a difference between enterprise value and equity value. It is called debt. So while enterprise value can't go negative, equity value can, depending on the debt. That is why debt deflation is so dangerous.

Since we will never see negative prices on screen, doesn't that make my statement wrong?

To which I will say, look at UBS AG (UBS). Its market cap is $37billion.Over the past year, it has raised close to $32billion in equity, and it just moved $60billion of assets to the Swiss government. Last year, before this crises began, UBS's equity value was negative, and the only reason it didn't remain negative was because of repeated capital injections into the bank.

We are going to see repeated capital injections happen in lots of other industries and companies, as we have gone into a huge negative feedback loop.

Comments

[thannagan:]

What? Of course insolvency equals negative net worth or equity value. But you'll have to explain the UBS situation and timing (a lot) better. The numbers above do not necessarily indicate insolvency or when.

2008 Oct 28 12:02 AM