TARP is your mother……
by Tom on April 20, 2009
in Market Musings, banks
You’ll probably be hearing a lot about preferred shares in banks being transferred to common equity relatively soon. Paul Krugman has a great analogy that explains it well.
You know, I’m not a liberal, but I really like what he has to say……
Tom Vanderwell
Preferred shares to common equity: an analogy – Paul Krugman Blog – NYTimes.com
Preferred shares to common equity: an analogyA followup to my previous post. Here’s how I think about it: you started a business with a bunch of borrowed money, but of course had to put some of your own money in. Now, actually some of the money you put in was borrowed from your mother, but the original lenders don’t care about that, since they have prior claim.
Eventually you run into some business difficulties, and your creditworthiness is in doubt — which in turn is making it hard for you to do business. What you need is evidence of ability to repay the money you already owe.
So does it help if your mother converts her loan into a share of the business? Not really, because she won’t get repaid anyway unless all your other creditors get paid first. So the terms of her agreement with you don’t affect their prospects of payment.
And in this case, the TARP is your mother.
Hey Paul Krugman (A song, A plea)
