http://www.macroresilience.com/2010/03/30/modigliani-miller-and-banking/ towards a more resilient macroeconomy Sun, 05 Feb 2012 10:17:44 +0000 hourly 1 http://wordpress.org/?v=3.3.1 http://www.macroresilience.com/2010/03/30/modigliani-miller-and-banking/comment-page-1/#comment-2279 Bank Capital and the Monetary Transmission Channel: The Importance of New Firm Entry at Macroeconomic Resilience Mon, 12 Jul 2010 13:57:38 +0000 http://www.macroresilience.com/?p=283#comment-2279 [...] injection of capital. Again, this is not far from the truth: As I have explained many times on this blog, banks are motivated to minimise capital and given the “liquidity” support extended to [...] [...] injection of capital. Again, this is not far from the truth: As I have explained many times on this blog, banks are motivated to minimise capital and given the “liquidity” support extended to [...]

]]> http://www.macroresilience.com/2010/03/30/modigliani-miller-and-banking/comment-page-1/#comment-573 admin Mon, 05 Apr 2010 17:31:38 +0000 http://www.macroresilience.com/?p=283#comment-573 Bill - I agree. Forcing a writedown of the equity when the debt is guaranteed may look good in the press but is economically meaningless. Bill – I agree. Forcing a writedown of the equity when the debt is guaranteed may look good in the press but is economically meaningless.

]]> http://www.macroresilience.com/2010/03/30/modigliani-miller-and-banking/comment-page-1/#comment-542 Bill Miller Fri, 02 Apr 2010 17:45:50 +0000 http://www.macroresilience.com/?p=283#comment-542 this is why the seizure of fannie mae and freddie mac and the wiping out of shareholder's equity including preferred equity that counted as tier 1 capital in the banking system was economically idiotic, though politically much applauded: those entities operated with a govt guarantee of their debt, so could never become insolvent in the sense of being unable to meet liabilities as they come due. they don't need accounting equity, which makes it silly for the govt to inject "equity" into them as losses eat thru the accounting equity line item. and of course the govt is not putting equity in at all--it is just issuing more debt and calling it equity. but the seizure of the gse's did wipe out real equity of common and preferred shareholders, whom the govt had encouraged to invest in those entities earlier in the year. the completely gratuitous preferred dividend elimination also eliminated capital from the banking system at the same time as treasury was telling banks to raise more capital. no wonder it only took 7 days from that for lehman to fail, merrill to be sold, aig to collapse etc. premptive seizure led to preemptive action to get one's cash out of financial institutions that might be the next to be seized. this is why the seizure of fannie mae and freddie mac and the wiping out of shareholder’s equity including preferred equity that counted as tier 1 capital in the banking system was economically idiotic, though politically much applauded: those entities operated with a govt guarantee of their debt, so could never become insolvent in the sense of being unable to meet liabilities as they come due. they don’t need accounting equity, which makes it silly for the govt to inject “equity” into them as losses eat thru the accounting equity line item. and of course the govt is not putting equity in at all–it is just issuing more debt and calling it equity. but the seizure of the gse’s did wipe out real equity of common and preferred shareholders, whom the govt had encouraged to invest in those entities earlier in the year. the completely gratuitous preferred dividend elimination also eliminated capital from the banking system at the same time as treasury was telling banks to raise more capital. no wonder it only took 7 days from that for lehman to fail, merrill to be sold, aig to collapse etc. premptive seizure led to preemptive action to get one’s cash out of financial institutions that might be the next to be seized.

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