3 ms·

I think a big problem is calling the thing a bond. Everybody is going to think it is senior to equity when in fact it's junior, because that's what every class

I think a big problem is calling the thing a bond. Everybody is going to think it is senior to equity when in fact it's junior, because that's what every class in capital structure says: the most junior tranche is called equity. In general complicating things is not a great idea. Why didn't the regulators just say "hey you guys just need to issue more regular equity" instead of inventing this weird Frankenstein? Especially in a crisis, people need to be able to think quickly and clearly about what they have, and making things more complex does not help that.

blitzar 4y ago
> Why didn't the regulators just say "hey you guys just need to issue more regular equity" Issuing equity in a crisis is very expensive, your share price is at a low point, your diluting the existing shareholders who have already lost a bunch of cash. Easier to issue paper that is pretending to be equity, claiming to be senior while actually being junior to not just actual losses of capital, but to regulatory whims.
- lordnacho 4y ago
  Yes but they could have forced an equity raise before the crisis? As in "a bank with our national reputation riding on it needs x amount of equity"
  - blitzar 4y ago
    Ahh but that would trigger a downgrade by analysts as the return on equity for the bank would reduce - at the top price companies do buybacks of the shares they issued at low prices ... I dont want to come over as a socialist, but if your country has a bank with your national reputation riding on it, it should probably be part nationalised anyway - maybe someone could design a hybrid bond/equity/warrant/option for the state to hold with their half. If a corporation is borrowing your name and reputation you deserve to get paid for it (in non trickle down hiring and taxes $$'s).

3 ms·

I think a big problem is calling the thing a bond. Everybody is going to think it is senior to equity when in fact it's junior, because that's what every class

by lordnacho 4y ago

blitzar 4y ago
> Why didn't the regulators just say "hey you guys just need to issue more regular equity" Issuing equity in a crisis is very expensive, your share price is at a low point, your diluting the existing shareholders who have already lost a bunch of cash. Easier to issue paper that is pretending to be equity, claiming to be senior while actually being junior to not just actual losses of capital, but to regulatory whims.
- lordnacho 4y ago
  Yes but they could have forced an equity raise before the crisis? As in "a bank with our national reputation riding on it needs x amount of equity"
  - blitzar 4y ago
    Ahh but that would trigger a downgrade by analysts as the return on equity for the bank would reduce - at the top price companies do buybacks of the shares they issued at low prices ... I dont want to come over as a socialist, but if your country has a bank with your national reputation riding on it, it should probably be part nationalised anyway - maybe someone could design a hybrid bond/equity/warrant/option for the state to hold with their half. If a corporation is borrowing your name and reputation you deserve to get paid for it (in non trickle down hiring and taxes $$'s).