the thinking is that the "stressed" assets in the banking system are $200 billion.
one way or another these assets will require in western terms a "workout" and the workout will require a "haircut".
all of this presumes there is a next buyer for the asset.
the underlying fiction is that bank management's (public banks are owned by the government) have exhausted accounting pet tricks to avoid declaring non-performing loans non-performing because once declared accounting income is hit (not received) and reserves have to be provided at some rate (cash flow negative)
assume a bank management reserves against half the value of the loan (50%, the range is 20-67%) and a distressed asset investor bids 15 cents on the dollar for the loan. the reserves will be inadequate and were the bank to agree to the sale it would have to add another 35% to reserves
so, $200 billion at 50% = $100 billion in reserves (though pretty sure it is less) at 15 cents on the dollar another 35% hit or $70 billion as the crow flies and the fiction of bank capital will make the best seller list.
interestingly the $32 billion promised (and it is a promise short on operational details) is roughly 20% of the stressed assets which, in theory, will provide the same bank management's who failed to handicap risk time to achieve better pricing or for non-performers to become performers.
who would be the buyer of these recapitalization bonds ?
well, the very banks that require the recapitalization would buy the bonds out of statutory government duty and the government conveniently would recycle the issuance into the equity of the banks.
a balance sheet two step, if you will.
similar to tax reform in the united states (expected future growth in the tax base promises to pay for tax cuts today) the government would need economic growth for deposits and credit to increase as a way to pay for past sins.
this capital account ledgermain intended to address previous sins (think the kingfisher chairman in london) will have no impact on underlying economic conditions in the country.
by recapitalizing the same bank managements married to the same auditors the annual musical review for the regulator will provide better disguises for the same thinking and the government may well have to plan for qe 2 to infinity.
one way or another these assets will require in western terms a "workout" and the workout will require a "haircut".
all of this presumes there is a next buyer for the asset.
the underlying fiction is that bank management's (public banks are owned by the government) have exhausted accounting pet tricks to avoid declaring non-performing loans non-performing because once declared accounting income is hit (not received) and reserves have to be provided at some rate (cash flow negative)
assume a bank management reserves against half the value of the loan (50%, the range is 20-67%) and a distressed asset investor bids 15 cents on the dollar for the loan. the reserves will be inadequate and were the bank to agree to the sale it would have to add another 35% to reserves
so, $200 billion at 50% = $100 billion in reserves (though pretty sure it is less) at 15 cents on the dollar another 35% hit or $70 billion as the crow flies and the fiction of bank capital will make the best seller list.
interestingly the $32 billion promised (and it is a promise short on operational details) is roughly 20% of the stressed assets which, in theory, will provide the same bank management's who failed to handicap risk time to achieve better pricing or for non-performers to become performers.
who would be the buyer of these recapitalization bonds ?
well, the very banks that require the recapitalization would buy the bonds out of statutory government duty and the government conveniently would recycle the issuance into the equity of the banks.
a balance sheet two step, if you will.
similar to tax reform in the united states (expected future growth in the tax base promises to pay for tax cuts today) the government would need economic growth for deposits and credit to increase as a way to pay for past sins.
this capital account ledgermain intended to address previous sins (think the kingfisher chairman in london) will have no impact on underlying economic conditions in the country.
by recapitalizing the same bank managements married to the same auditors the annual musical review for the regulator will provide better disguises for the same thinking and the government may well have to plan for qe 2 to infinity.
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