Greg Weston

The Benefits of Forced Debt for Equity Recapitalizations

Thanks everyone for the positive comments. I have had less time for writing because of work obligations. I have another GM column in the works, and more to come as my biggest case goes through the settlement process.

Even better, the settlement was big enough that I'll have plenty of money to invest!

The Benefits of Forced Debt for Equity Recapitalizations

Lisa, thank you for your informed comments.

We will have to agree to disagree about the solvency of JPM right now, and whether market prices of disfavored (some might say "toxic") assets is irrationally low.

But if you will assume that JPM is under legal capital ratios if it had to report assets at market prices and would under my plan be forced to raise capital by forced debt for equity swaps, and it later turned out the market prices were indeed excessively low, then the new equity holder would not be harmed, because they would have shares of a now extremely well capitalized bank.

Nor would current shareholders be harmed because they could use their warrants to buy new common JPM shares. JPM could also simply return all its new excess capital to its new shareholders (and old debt-holders) via dividends, so they too would get their cash back. And given the huge amount of debt these large banks have, the stronger of them would not have to swap that much debt for new shares, maybe 5%. And the market value of that debt would be higher than before given the bank's greater ability to pay it.

Another Big Bank Failure: More Likely Than Not to Occur

Credit Suisse and UBS may be the next big financial institutions to fail. In CS's case it might have been a little more conservative than other major banks, but it the case still remains that either one of these banks is far too big to bail out by the Swiss government as they hold assets many times the GDP of Switzerland.

Even the GDP to assets ratio does not tell the whole story, because Swiss central government is very weak compared to other national governments. Small infusions are likely, but the money simply doesn't exist for a large scale bailout as we saw with all the major U.S. and UK banks.

Felix Salmon has some good articles on this topic if you are interested.

Don’t Buy What Wall Street Is Selling

Excellent article, persuasive and well-written.

There will be some vultures who end up making a bundle buying financials when they are near the bottom, as happened to those who picked up the survivors of the 1990-92 recession. Problem is right now, the bottom for many financials is bankruptcy, and the rest have a long ways to fall.