Imagine this: you've maxed out three or four credit cards, you've got a mortgage for a house which you purchased waaaay above your means, an outstanding loan on a £100,000 auto and suddenly, you lose your job. You've got no way to pay any of the debt back.
You're fucked, right? Not if you're a bank, of course. If you're a bank you just ask your fellow taxpayers pay for you. Give me a BIGGER loan to cover all the bad loans I can no longer afford and THAT will solve the problem.
Right, good luck with that one.
Now comes a sensible approach from historian Niall Ferguson:
"The aim must be not to increase debt but to reduce it. Two things must happen. First, banks that are de facto insolvent need to be restructured – a word that is preferable to the old-fashioned “nationalisation”. Existing shareholders will have to face that they have lost their money. Too bad; they should have kept a more vigilant eye on the people running their banks. Government will take control in return for a substantial recapitalisation after losses have meaningfully been written down. Bond holders may have to accept either a debt-for-equity swap or a 20 per cent “haircut” (a reduction in the value of their bonds) – a disappointment, no doubt, but nothing compared with the losses when Lehman went under."
From last night's debacle...the morning after: