Debt-for-equity- an alternative to the bailout

UK blogger Mark Wadsworth posted a comment in an earlier post of mine, which questioned the merits of the huge flow of central bank credit to commercial bank.

I really liked Mark's ideas. Mark offers the debt-for-equity solution to the current banking crisis:

The solution (to the banking crisis) is far simpler than that, and the State should keep out as far as possible, except to start supervising banks properly - not regulating, mind you, I mean supervising, having quiet words in ears etc.

Nobody wants to lend to banks because they are 'undercapitalised'. What does this mean in practice? It means that total liablities are perilously close total assets - especially as we know banks are overstating the value of some of their dodgier investments.

The 'capital' is just a balancing figure, really.

On the liabilities side we have customers' deposits, shorter term 'money market' stuff and longer term bonds.

To recapitalise banks, all they have to do - at gunpoint if necessary - is to cancel some of their longer term debts and replace it with share capital, a so-called 'debt-for-equity-swap'.

Hey presto, problem solved. The bondholders who get given shares can always sell their shares if they need cash - the total value of the bonds and shares, taken together, will probably be slightly enhanced by the move.

Worked example applied to Bradford & Bingley here.

As to bonuses, these are A Good Thing as far as HM Treasury is concerned - the corporation tax on negligible profits is negligible - but we know that bank managers overstated profits and then paid themselves huge bonuses taxed at effective rate 47% (including Employer's NI).

The real losers from the bonus culture are the shareholders. The problem here is that most shares are owned by 'institutions' who are in cahoots with boards of plc's and vice versa. Again, this is easily fixed - see here.

Land values can be kept low and stable by introducing land value tax (and scrapping all other property or wealth related taxes - I am a small government, low tax kind of chap).

There. All sorted.