Dan M <[EMAIL PROTECTED]>
> First, it isn't that simple,
Yes, you do tend to oversimplify.
>the S&L mess (which also came
> after a spell of regulators looking the other way because government
> regulation was bad.....another of many coincidences, I suppose).
Actually, a large contributor to the S&L failures was poor government
regulations.
When inflation shot up, the S&L's were prohibited by regulation Q from paying
high enough interest on deposits to attract enough money. Furthermore, S&L's
were required to make mortgage loans mostly to customers within a small radius
of the S&L. With little ability to attract new deposits, and almost no
geographical
diversification, it is no surprise that they made a lot of desperate, bad
investments
that ultimately led to many S&L failures.
> the short term debt overwhelmed any
> ability of short term assets and subordinate bonds (which I think are the
> ones you are referring to....those folks who don't have accounts with the
> bank but own bonds issued by the bank like Ford issues bonds to raise money.
No, I was referring to all debt, subordinate to senior.
> The data shows that if
> there was a run on short term liabilities (savings, checking, short term
> paper) for either of these banks, then the banks didn't have the assets
> (even assuming all of the bondholders assets were included) to cover those
> assets.
If you only include short term assets, I think that is probably true. That is
not what I was referring to. If a bank is insolvent, then it does not have
enough
total assets to pay all of its liabilities. There is a complicated set of rules
that
determines who gets paid and who doesn't, but generally customers (depositors)
get paid first and equity holders last. Usually it goes something like
customers,
creditors, senior debt, subordinated debt, preferred shareholders, common
shareholders.
As you say, it is likely that the short term assets are not enough to cover a
run
on the bank. But in every balance sheet I am familiar with, the senior debt on
down is more than enough to cover the depositors and creditors. It would just
take some time to get them their money (or to arrange a takeover of the viable
portions of the bank).
> Checks from in-state banks which always cleared overnight took
> eight days to clear. When we closed on our house, the buyers had to
> reconfirm that they had the loan the day of the closing....
Oh, the horrors!
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