Posts filed under “Think Tank”

Poole’s Market Solution to Fix Banks

Former Fed Governor William Poole

Here is a proposal, not at all original but deserving of serious public discussion. As a condition of enjoying the benefits of a bank charter, every bank must issue 10-year subordinated notes equal to 10 per cent of its total liabilities. The specification can be adjusted, but this one serves to illustrate the proposal. The subordinated debt would be unsecured; holders would stand last in line among all creditors in the event that a bank had to be shut down. The sub debt requirement would be in addition to existing requirements for equity capital.

Genuine reform requires that four minimal requirements be met, and the sub debt proposal qualifies. First, banks need more capital to protect the federal deposit insurance fund. Second, there must be more market discipline: each bank would be forced to roll over maturing sub debt equal to 1 per cent of its liabilities each year. Third, financial stability requires that a bank not be subject to runs. Sub debt cannot run, because of the 10-year maturity.

Fourth, and critically important, some creditors and not just equity owners must be at risk, which is clearly the case with sub debt. Sub debt provides much more market discipline than equity, because a bank in trouble with a weak share price is not forced to do anything. Maturing sub debt, however, does discipline the bank and if the bank cannot roll over the debt, it must shrink by 10 per cent to live within its remaining outstanding sub debt. This system is stable because any bank can contract by 10 per cent within a year by letting loans run off and/or by selling other assets. It is highly desirable that contraction be managed by the bank itself and not by regulators.

Full discussion can be found t the FT


A market solution to secure banks’ future
William Poole
FT, May 20 2009 23:07

Category: Bailouts, Credit, Think Tank


Treasuries reversed to the downside at about 11am after the results of today’s Federal Reserve purchase details of US Treasuries hit the NY Fed’s website. While the absolute amount of treasuries purchased was similar to yesterday at $7.4b, the amount offered to them was $45.7b up from $37.2b yesterday and it was the supply on…Read More

Category: Think Tank

Philly Fed

The May Philly Fed survey came in at -22.6, 4.6 pts weaker than expected but is a slight improvement from April’s reading of -24.4 and is the 3th month in a row of less negative #’s. New Orders weakened a touch to -25.9 from -24.3 but Backlogs rose a touch to the highest since Sept….Read More

Category: Think Tank

Morning Note: Bitch Slapped

It never matters until it does. I’m referring to the ever growing burden of debt. It’s ok for a while as long as lenders continue to go along and then a point is reached where enough is enough and it turns into an ever tightening noose and lenders balk. Her Majesty’s Throne in the UK…Read More

Category: MacroNotes

Smarter Regulation Should Precede TARP Repayments

Good Evening: A rally on Wednesday morning gave way to a sell-off in the afternoon that left the major averages with modest losses. Hewlett-Packard, Bank of America, TARP repayments, and the Fed minutes all vied for investor attention during a session which saw reflation-oriented investments benefit the most. I will cover the topic of TARP…Read More

Category: Markets, Think Tank

How The Bank Stress Tests Were Done

Category: Bailouts, Credit, Think Tank

Ben and the Boys

While the minutes from the April FOMC meeting mentioned that some members raised the possibility of an increase in the total amount of asset purchases, one has to wonder what they may be thinking now with the US$ index lower by almost 6% since the day before the April meeting, the CRB higher by 12%…Read More

Category: MacroNotes

FOMC minutes

The minutes from the last FOMC meeting gave its economic forecast for growth, unemployment and inflation. They modestly raised its 2nd half ’09 GDP estimate but trimmed its ’10 GDP range. They expect the unemployment rate to reach above 9% from below 8% previously. Their inflation forecasts were little changed. The rest of the minutes…Read More

Category: MacroNotes

The stock market is differentiating

This pullback in the market off the morning’s highs is again being led by the three most important groups in my opinion when analyzing the state of the US economy, retail, housing and financials. The weakness last week was also led by these three groups while at the same time the reflation trade outperforms, helped…Read More

Category: MacroNotes

Where are the natural buyers?

While some recent housing data has shown some signs that the housing market is close to a bottom, the purchase component of the weekly MBA data still is evidence that natural buyers are not responding to historically low interest rates. Mortgage applications for purchases fell 4.4% for the week and are only 7.6% above the…Read More

Category: MacroNotes