tag:blogger.com,1999:blog-5613349802102193582.post6524711828726598426..comments2023-12-22T23:56:04.826+11:00Comments on Houses and Holes: Pascoe's bank failureDavid Llewellyn-Smithhttp://www.blogger.com/profile/01762856583909059662noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-5613349802102193582.post-45755333714253204892010-12-16T07:25:47.287+11:002010-12-16T07:25:47.287+11:00"In fact, it's used pretty much everywher..."In fact, it's used pretty much everywhere. In such a failure process, equity holders are usually next-to wiped out and management as well as the board is fired."<br /><br />Except if you are Bank of America, JPMorganChaseChemicalManufacturer'sHanoverBancOne, Wells Fargo or Citibank. Then your executive team remains intact and is paid bonuses, bondholders made whole, FASB 157 suspended ('mark to market' of balance sheet) and various funding mechanisms, discount windows, TARP funds etc are provided for your convenience. And trillions of dollars of mortgage fraud ignored by the SEC, FedReserve and FBI.Crocodile Chucknoreply@blogger.comtag:blogger.com,1999:blog-5613349802102193582.post-30257536307603636822010-12-15T17:03:00.053+11:002010-12-15T17:03:00.053+11:00A lower ROE for banks would be justifiable, but on...A lower ROE for banks would be justifiable, but only if at the same time the shareholder's funds to total capital ratio was increased. This is what banks used to be like in the days when they were the "widows and orphans" shares recommended by stockbrokers to those with no knowledge of the market who just needed something safe they could put in the bottom drawer and keep raking in the dividend. This was because of the much more conservative and restrictive lending practices of the era.<br /><br />Now, even though banks may be unlikely to fail, there is still a good chance of significant losses of shareholder capital, due to the much higher level of loans and the risk profile of those loans. A friend was recently bemoaning the foolishness of his daughter and her hubby, who have not only borrowed 110% of the value of their house, but also taken out additional loans for new cars.<br /><br />Risk levels is the real sleeper. What happens to the banks if the housing bubble collapses and wipes 40% off the valuations of the properties they have lent for? FWIW, friend's son-in-law is an electrician, so his employment prospects mightn't look too hot if the bubble is pricked.<br /><br />AlexAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-5613349802102193582.post-91918486816993265372010-12-15T13:27:12.074+11:002010-12-15T13:27:12.074+11:00Fair point.
I guess I would counter that althoug...Fair point. <br /><br />I guess I would counter that although banks can fail, they have a whole range of supports to make it less likely than other sectors - such as lender of last resort etc.<br /><br />Therefore a lower ROE is justifiable...David Llewellyn-Smithhttps://www.blogger.com/profile/01762856583909059662noreply@blogger.comtag:blogger.com,1999:blog-5613349802102193582.post-88884238365673886852010-12-15T13:20:52.931+11:002010-12-15T13:20:52.931+11:00Really enjoying this blog - thanks for your work.
...Really enjoying this blog - thanks for your work.<br /><br />Just not sure about your last point on return on equity. If shareholders can be wiped out in a typical restructuring, why should that affect the ROE they demand? They aren't being protected in a restructuring (unlike bondholders for example). cheerscdo squarednoreply@blogger.com