Mark Moran

Citi, Merrill, WaMu: Death Spiral Financing

Not to be picayune, but this is not what was commonly known as "death spiral" financing during the heyday of that instrument. A death spiral was a security whose conversion price was based on a discount to the stock market price; so if a company initially issued a convert at $50, when the stock fell to $40, the convert price fell to $40, and when the stock fell to $10, the convert price fell to $10. NYSE and Nasdaq essentially put an end to these, or at least put a floor under most of them. What these banks face is a "full ratchet" provision in which any subsequent issuances at lower prices triggers more shares issued to the prior purchaser. But at least the issuer remains fully in control over whether another issuance gets done; with the true death spiral, once the instrument was issued, a plunging stock price acquired its own momentum, and there was little the company could do about it.