Re: [Pen-l] Permanent nationalization of banks with debt-equity swaps

[fmoseley@xxxxxxxxxxxxx]

Hi Julio,

Thank you very much for your ?devil?s advocate? role.  This is a
helpful and productive discussion.  A few responses below.

1.  I would certainly expect that debtholders are much more wealthy
than depositors.  Deposits are for spending.  Debt is for saving.
Saving is done mostly by the wealthy.  The saving rate is much higher
for the wealthy and high incomes than it is for the low-incomes.

Anybody know of some related data (e.g. saving rate by income)?

2.  In addition, depositors deposited their money with known
guarantees.  The debtholders lent their money with no guarantees.  Why
should the debtholders be guaranteed ex-post?

3.  Also, the debtholders received a higher rate of interest than
depositors (often = 0).  This higher rate of interest was justified
precisely by the greater risk due to the lack of guarantees.  So now
the risk has turned bad, and the debtholders, not the taxpayers, should
absorb the losses. That?s the way capitalism is supposed to work,
right?  If the debtholders do not have to suffer the losses, then the
higher interest that they previously received was not justified.

4.  You are right that much of the bank debt is held by foreign
investors, including foreign governments.  So requiring that these
foreign investors to accept a debt-to-equity swap, along with all the
other bank debtholders, may involve further considerations.  But the
foreign investors are not being singled out; they are being treated the
same as all other debtholders.  The reasons given above for why
debtholders should absorb some of the losses apply as well to foreign
debtholders.

5.  Which FoF table is your source on bank liabilities?


Thanks again.  I look forward to further discussion.

Fred



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