Many commentators have raised the idea of requiring banks and financial institutions to issue contingent convertible debt that can be converted to equity as a sort of pre-set form of re-capitalization in case of trouble. Greg Mankiw has said that it is his favorite idea in financial regulation reform. He has pointed to reports that Swiss authorities are going forward with a version of it for large Swiss institutions. Here is how Mankiw described the idea in a recent NYT column:
MY favorite proposal is to require banks, and perhaps a broad class of financial institutions, to sell contingent debt that can be converted to equity when a regulator deems that these institutions have insufficient capital. This debt would be a form of preplanned recapitalization in the event of a financial crisis, and the infusion of capital would be with private, rather than taxpayer, funds. Think of it as crisis insurance.
Bankers may balk at this proposal, because it would raise the cost of doing business. The buyers of these bonds would need to be compensated for providing this insurance.
But this contingent debt would also give bankers an incentive to limit risk by, say, reducing leverage. The safer these financial institutions are, the less likely the contingency would be triggered and the less they would need to pay for this debt.
I agree it is a good idea. But I’d like to ask what this would look like from the finance lawyer’s drafting point of view. Suppose you proposed to do what Professor Mankiw says above. First off, can anyone point me in the direction of any actual examples of what this is – any examples of convertible bond documents online designed to do this? Any bond documents for this exist in real life?
Second, what would be the basic functional terms of the bond that would make this happen – what would the triggers be? And finally, what would be the covenants and protections for, e.g., the regulator, the financial institution, and the bondholder? What would they want to be protected against, respectively?
For that matter, is there any reason to think that while aligning some interests in controlling leverage, this proposal either creates other unintended perverse incentives, or perhaps creates other kinds of possibly unresolvable conflicts of interest between these three parties (and potentially the existing shareholders as well). Put on your bond lawyer hats!
Jardinero1 says:
How much would such equity be worth on an upside down bank? A rational investor would impute a negative value to such equity. It would be far simpler to let undercapitalized banks fail. The ones that remain would be a bit more cautious and might be inclined to implement some precautionary measures on their own.
What? Oh yes, I forgot, systemic risk, civilization will end… blah, blah, blah.
April 23, 2010, 9:40 pmMark N. says:
One of the more detailed proposals is published as Ch.5 in this 2005 book (it also accurately predicted that, if something like these convertible bonds for recapitalization weren’t adopted, the most likely outcome of a large bank appearing near failure would be taxpayer recapitalization).
There’s also a short summary of various proposals for how to structure such instruments on pp. 11-13 of this working paper.
April 23, 2010, 9:53 pmTomHynes says:
Isn’t this just preferred stock?
Am I missing something?
April 23, 2010, 9:54 pmAnderson says:
Being largely ignorant of high finance myself, I look to informed commentators for guidance.
Prof. Anderson’s ability to find fault with various proposals is impressive.
But I seem to have missed his own recommendations; when I have the time, I will have to google them up. All that I can recall in recent times is various explanations why proposed reforms won’t work.
April 23, 2010, 10:10 pmJardinero1 says:
TomHynes,
It’s actually could be convertible preferred or convertible bond. As a broker, I have never recommended convertible preferreds or bonds to anybody but the most gullible, guileless or stupid. Here’s how I would pitch convertible to a customer: “The company promises to pay you interest until things go south and they can’t pay you anymore. That’s also the point where this company will become worthless. Since they can’t pay interest anymore they will convert your now worthless bond into even more worthless common equity. The reason it is more worthless than the bond is because with it you abandon all hope of making a claim against the company’s assets. Now do you still think you want to invest in this?” If they listened to that and still thought it was a good idea I would sell it to them.
April 23, 2010, 10:19 pmTatil says:
@Jardinero1: You can also sell it like this: I know you work for an institution that is not allowed to invest in any risky assets, but your boss also doesn’t want to be limited to the interest rates from Treasury bonds, either. I have here bonds from Morgan Stanley, AAA rated bank, your balance sheet will look very safe, none of your investors or regulators will question you about it. I mean you cannot do better than AAA, am I right? Here is the best part: it pays a percent more interest than these other bank bonds. What is the catch you say? Well, nothing really, if the whole banking system collapses, and that is pretty much the only way this could take place, Morgan Stanley will convert the bonds into equity. Yeah, I know, that will never happen, so how many of these bonds do you want? Should we start at $50 mil?
It worked in the past. Why not now?
April 23, 2010, 11:32 pmMark Field says:
What happens when these bonds get securitized into CDOs?
April 23, 2010, 11:42 pmll says:
Yeah, what Jardinero and Tatil say.
Also, from the header:
What this sounds like to me is you get a bunch of people to lend a bank/financial institution money. If the bank gets in trouble, the loans, aka bond debt of some sort, is converted into stock, by regulatory power without the benefit of bankruptcy “protection” for the bond/contingent debt holders. In essence, the debt holders are simply wiped out into stock, and should the bank later go bankrupt, they are absolutely wiped out because at that point they have only stock.
I don’t see how this helps anything.
April 23, 2010, 11:48 pmTatil says:
Too many to fail instead of too big to fail. :)
April 24, 2010, 12:45 amJoe says:
I’m not impressed by these proposals. Seems many of the recent financial problems of banks could have been mitigated by simply requiring a higher level of capitalization of lending institutions.
April 24, 2010, 1:05 amLH says:
Contrary to a comment above, this is not a convertible preferred or convertible bond. Or at least not a vanilla instrument of that variety. As a general rule, they do not have contingent features.
There were a significant number of hybrid instruments with these contingent features issued in the mid 2000s after Moody’s changed its rating methodology to allow a higher degree of equity credit (the so called “5 basket” approach or “hybrid tool kit”). S&P has a simplified methodology of 0%/50%/100%. If memory serves, issuance exploded by a factor of 4 after the Moody’s change (Moody’s is currently evaluating changing its methodology in light of recent experience).
As to what the triggers are: those seen in corporate issuance have been cash flow dropping below a % of sales or interest coverage ratios. For financial issuers, there have been a number of triggers tried including ones based on profitability and regulatory capital
In practice, one of the major drawbacks of these hybrids (at least for US issuers) is the tax treatment. The more equity-like the instrument is, the less likely the issuer will be able to claim a tax deduction on interest (there is no clear line but there is a fair amount of case law on this).
I hope this helps.
April 24, 2010, 1:11 amDoc Merlin says:
“First off, can anyone point me in the direction of any actual examples of what this is — any examples of convertible bond documents online designed to do this? Any bond documents for this exist in real life?”
While not de jure legality, this is the business model for large airlines. They occasionally go bankrupt wipe out their stockholders and convert their bondholders to stock holders.
April 24, 2010, 1:19 amSam says:
What provides a “regulator” with enough enlightenment to determine what is “insufficient capital” for a bank/financial institution? The best remedy for minimizing systemic risk in our financial system- stop christening companies too big to fail.
April 24, 2010, 2:19 amLarryA says:
I have no experience in finance whatsoever, but I understand this quite well. Any such proposal including the phrase “when a regulator deems” is for the purpose of expanding government control over the institutions. All else is camouflage.
April 24, 2010, 2:20 amVirginialawstudent says:
Except that there’s a smaller chance that the bank will go bankrupt because it no longer “owes” the original bondholders anything (except the residual value of the company). Stockholders (both preferred and common) don’t cause companies to go bankrupt, but bondholders do.
So, in one sense you’re correct. If things are super bad, then the company will go bankrupt and this arrangement won’t have helped. However, it’s conceivable that there are a lot of situations where banks could use this conversion feature to avoid bankruptcy altogether (and all its unpleasant side effects). If the bank does recover, the bond holders may be very happy. And the original common holders may be angry. I could see a proposal to preserve some value for the common holders in case the bank experiences some quick turnaround (such has happened in the last couple of years). Of course, this would probably further complicate valuation of the convertible bonds.
BTW, someone mentioned earlier that he never recommends convertible preferred or bonds. In my experience, the convertible option usually isn’t controlled by the company. Instead, the bondholder chooses whether or not to exercise the conversion feature. This may be very useful for a venture capital investor who wants to help out a company and capture possible future growth. Most of these investors, though, demand an arrangement even more favorable to them: warrants for common stock. They like this because they don’t lose their debt to get the stock. I’m not saying they doesn’t exist, but I’ve never seen bonds that were convertible to common stock at the option of the company. (I’ve seen callable bonds that were callable at the option of the company.)
I honestly don’t think the drafting would be that hard. I’d use the term “Event of Conversion” and define it to include such things as the FDIC requiring the conversion, running afoul of certain BASEL II standards, etc. I’d probably also require a vote of the board of directors (obviously), which would create possible claims for breach of the fiduciary duty owed to the common stockholders.
It’s a tough rule for common holders of bank stock because BASEL II regs are much stricter than a simple insolvency test. A bank can that is solvent in the traditional sense of the word can absolutely be seized by the FDIC. That’s because banks are required to maintain certain capital sufficiency levels. In a traditional company, if there’s some capital left (meaning its assets are more than its liabilities), the common stock holders will ordinarily worry only if the company is unable to service its debt. But, banks are complicated. We don’t necessarily want to get to that point with them. Instead, the FDIC will frequently seize banks before they get to this point. This creates a lot of questions over whether the seizure was really necessary. This has been a sore point over the years, and this conversion feature will only make it sorer.
This would mostly be a good deal for the bondholders. This arrangement doesn’t really cause them to lose much because converting the bonds does nothing to change the enterprise value of the banks (all we’re doing is changing around the claims to that value). Sure, they lose the right to force the company into bankruptcy, but that right is probably not worth much anyway. If the value of the bank is so low as to have impaired the value of their original investment, it is unlikely (I’d say impossible) that they would recover anymore in liquidation anyway.
Now, the one worry these bondholders might have is the wasting of assets. The right to liquidate right now might very well be worth more than the residual value two years from now. However, this is probably not likely. In fact, I would suspect the opposite to be true. Shocks to the system that ordinarily cause banking crises don’t seem to be the kind of phenomenon that temporarily increase the price of a quick sale of bank assets.
April 24, 2010, 4:13 amStephen Lathrop says:
We’ve got this medical laser system, see. It works great, but regulators complain about unpredictable conditions where it might overheat and fail. We’ve taken care of that. We’ve added a device that uses a complicated algorithm. It detects incipient failure, and then automatically dopes the laser with a tiny amount of chocolate fudge brownie ice cream, for safety. It’s going to usher in a new age of safe, reliable brain surgery.
April 24, 2010, 5:23 amTruePath says:
This seems useless to me. The worry isn’t single large institutions randomly failing due to independent risk. Had any of the big banks failed at a time the other big players were strong and healthy there would have been no need and little pressure for a bail out.
The danger is systematic risk that afflicts all the big players. Thus if another crisis occurs the holders of these instruments likely won’t have the requisite capital to hold up their end of the bargain. On the other hand if you demand that the money that would be used in exchange for the equity be deposited up front or safely collateralized then it’s no different than raising reserve requirements.
Worse the big investment banks will realize that by buying a diversified portfolio of these bonds on their competitors they will be facing almost exclusively systematic risk…and that by holding each others instruments if that risk materializes the government will have no choice but to step in and bail everyone out.
April 24, 2010, 7:01 amTruePath says:
Based on the comments seems I misunderstood the instrument but my question still stands: how is this better than simply raising reserve requirements?
April 24, 2010, 7:10 ammisplaced trust co. says:
There’s already no shortage of quasi-equity debt being issued by banks: preferreds, trust preferreds, hybrids, mandatory converts, upper and lower tier 2 debt, etc.
Seems the motivation for this one is the weakness of all of them around a too big to fail institution. Yes, they’re ranked well down the capital stack from the depositors, but there’s no way to get them to do the job without failing the institution. Ergo they don’t work. Having the regulator able to cram down this paper without failing the institution is the perceived advantage.
One of the problems with all these instruments is that the biggest holders of bank paper are in turn financial entities, mostly insurance companies. Actual sales process well described by Jardinero1 above. So, failing this instrument is going to spread the weakness around the system. As with failing the Fannie and Freddie preferreds, this can lead to a lot of further pain and in that case bank failures.
Maybe a good idea for the Swiss where the banks are too big to save internally and most of the capital (and pain) will come from abroad. By extension, might have helped in Iceland, but the regulatory failure there was pretty total. Arguably a step better than the bestiary of existing capital-like debt at the top of this note.
April 24, 2010, 7:33 amPorkchop says:
I spent almost 18 years at a federal bank regulatory agency. The one thing that always amazed me was the willingness of third parties (sometimes foreign banks) to infuse massive amounts of capital into shaky banks, apparently on the theory that this was a good, cheap way to enter the US financial services sector. The agency would issue a capital directive, and somehow, someone would come up with a billion or two or seven. Then six months or a year later, the bank was capital-deficient again — and we took it down. Naivete is expensive.
After a few such examples, investors started to see that maybe it wasn’t such a good idea to put their money into such banks. It is a better idea to pay some premium to acquire a bank that actually has a chance of making a go of it or wait to acquire institutions or assets through FDIC as receiver.
My take on the proposal is this: Regardless of what kind of bread you use to make it, a shit sandwich is still a shit sandwich.
April 24, 2010, 7:48 amMJG says:
I agree that these bonds seem irritatingly worthless: you get the fixed, capped return of fixed-income with the meager downside protection and low standing in the credit structure of equity. And keep in mind too Mankiw’s proposal involves the regulator making the debt-to-equity conversion call; it’s my understanding that in the few deals that have been done it’s the issuer who gets to make the decision. So no, I completely don’t understand why anyone would want these things.
But I also don’t understand why smart people like Mankiw are touting these. The FT went on a crusade about them a few months back.
Yet maybe they’ll catch on. Like so much else out there, CoCo bonds seem like they’re good for everyone but the investor.
April 24, 2010, 7:54 amex parte animal says:
This proposal is absurd.
The whole idea of a contingent convertible debt instrument (commonly referred to as a “co-co bond”) is to allow the debt-holder the added *benefit* of being able to capture upside by converting into equity; not the other way around. As a result, convertible bonds are issued with lower, not higher, coupon rates.
Though government could always force regulated institutions to issue these, one wonders who would buy them? As others point out above, these things would be impossible to market on traditional co-co terms. Coupon rates would have to be pushed through the roof to attract investors, costing issuers an arm and a leg. Meanwhile, because of changes to the accounting treatment of co-cos referred to by another commenter (basically, co-cos are now accounted for as equity rather than debt on an as-converted basis, thus immediately impacting the issuer’s earnings per share and, I think, eliminating the deductibility of interest payments), issuers would take significant and immediate hits to their balance sheets upon sale.
Why not simply mandate outright higher reserve ratios for regulated institutions? This proposal seems like an awfully inefficient and indirect way of doing that, from the company’s perspective. And from the security purchaser’s perspective, it looks like a high-yield, non-investment grade note minus the protections that come from holding debt. Yuck.
Academics should stick to the broader questions of finance and leave the details to the professionals.
April 24, 2010, 8:14 amBartleby says:
To your basic question if you are looking for the documentation on how these work in practice- Lloyds issued a whole bunch of them under name of Enhanced Capital Notes back in November and were very successful in doing so as part of their general recapitalisation. The trigger was tied to a definition of their core tier 1 capital falling below certain number.
Bluntly these instraments pay better than ordinary debt thus their attractiveness
April 24, 2010, 8:14 amHouston Lawyer says:
In any prepackaged bankruptcy, this is what happens anyway. I don’t see how you have this conversion set as something less than an illiquidity event.
It looked to me that the whole point of the recent bailouts was to protect the bond holders. In short, this doesn’t solve anything.
April 24, 2010, 9:23 amDjDiverDan says:
Well, yes, but remember that a prepackaged bankruptcy is just the best of a bad situation, where the bondholders were already in the deal because they bought what was real debt at a time when bankruptcy, although a risk, was not on the immediate horizon. AND, in a bankruptcy where there is clearly nothing left for equity (a rarer event than you might imagine for big Chapter 11 cases – there is nearly always a lot of room to argue over enterprise valuation, and the costs of the fighting usually makes it worthwhile to give existing equity something – they may be severely diluted, but they won’t be wiped out), the bondholders being converted to equity holders are replacing existing equity, becoming 100% owners of the company, not merely stepping into the equity pool along with existing equity. The real problem with “requiring” financial institutions to issue this type of convertable debt is, as has been pointed out numerous times above, finding buyers for the instruments. It’s one thing if you bought what was marketed as real debt and, because of unseen business reverses you are going to be compelled to accept a conversion to equity in bankruptcy; its quite another to be told up front that your debt can be converted into common stock at the whim of a bank regulator. I cannot imagine there are enough really naive people with large sums of money to invest to make a market for those securities.
April 24, 2010, 10:16 ambyomtov says:
Jardinero1,
Are you talking about ordinary convertibles or these? Because I thought that ordinary convertibles convert at the option of the holder, not the company. Thus they provide some equity upside in exchange for being junior and paying less than other bonds of the same quality. In effect, you are buying a bond plus a call option. I know that convertibles are often callable by the issuer, but this is usually at a premium price.
As for the bonds being proposed, it’s not clear to me who holds the conversion option. It sounds like Mankiw thinks it would be the bank, or maybe the regulator. Regardless, it would only be available if the regulator determined the bank had “insufficient capital.” That seems to make their valuation dependent in part on the trigger mechanism. If the regulator waits until the bank is near failure then there might be a problem, depending on how big the issue is. I could also see them structured so that the regulator, assuming that’s who holds the option, could convert some percentage of the bonds – with the specific ones chosen at random – if the bank started to look weak.
April 24, 2010, 10:22 amfda says:
The CoCos were very common at the beginning of this century but they were convertible only when the stock increased in value; otherwise they were payable in cash. (Until a FASB rule change, CoCos did not dilute earnings until the bond hit the convertible price target. I believe that GM issued these.) You would have to “reverse” the CoCo features to get at what Mankiw is proposing, I believe.
There are other instruments from the early 1980s called ARCNs (adjustable rate convertible notes) that more closely resembled what Mankiw is talking as they were payable in a fixed number of shares of stock regardless of the face amount of the bonds. Thus, a creditor could end up being paid substantially less than was lent if the stock decreased in value. ARCNs received unfavorable tax treatment and stopped being issued as a result. ARCNs can be contrasted to MCNs (Mandatorily Convertible Notes) and variants thereof – in an MCN, the holder received a number of shares equal in value to the face amount; in an ARCN, a fixed number of shares. If I remember correctly, both instruments were issued primarily by banks to deal with their capital requirements. (I seem to remember reading a prospectus where Manny Hanny issued MCNs.)
April 24, 2010, 11:04 ammark creatura says:
Ex Parte Animal captures the issue nicely – who would buy this? OP starts with the premise of “requiring banks … to issue contingent convertible debt.” EPA and others point out that the proposed securities, as seen by investors, combine the worst features of debt and equity: the limited return of debt, and the 100% risk of equity. So, once banks are required to issue such [stuff], is there anyone out there who may be required to buy it?
April 24, 2010, 11:40 amAnonymous says:
REIT preferred securities do this and have been around for a long time. They are preferred stock of a REIT subsidiary of a bank that automatically exchange into preferred stock of the bank if the bank becomes undercapitalized or goes into receivership. These are the standard triggers: (1) the bank becomes undercapitalized under prompt corrective action regulations; (2) the bank is placed into conservatorship or receivership; or (3) the primary federal regulator or state chartering authority, in its sole discretion, anticipates that the Bank may become “undercapitalized” in the near term.
You would want the triggers to be much more sensitive, such as “less than well capitalized” instead of undercapitalized, or a tangible common or asset quality ratio, maybe nonperforming assets/(Tier 1 capital excluding the notes + allowance for loan losses) > 100%.
April 24, 2010, 12:01 pmMits says:
The main benefit of this approach seems to be that the convertible bond market becomes another regulator of the banks. It continuously asks and answers the question, is this bank too big to manage or is this bank in trouble? And, it puts a lid on the growth of a suspect bank. If a bank cannot find buyers (for its convertible bonds) at an interest rate it can pay out, it must adjust.
This market could also tip off government regulators to the presence or severity of bank problems.
I’m no expert and these are just my thoughts. And, I do wonder if this can force banks to a not-too-big-to-fail size relative to the overall economy and public perception.
April 24, 2010, 1:02 pmPaul Allen says:
my thought exactly. I suppose the idea is to give the regulator the right to convert those preferred shares to common stock.
That raises the question why the regulator should not simply have the authority to adjust the capital requirements down during a crisis.
One of the basic issues have been, particularly in Europe, is with capital adequacy rules that ratched up automatically during the crisis because the risk weighting had to be rescored disfavorably once the losses began.
April 24, 2010, 3:37 pmTatil says:
Actually a similar proposal has been made. People took a look at the leverage ratios when the banks got into trouble. Of course if the limit is set at that level during asset bubbles, every bank at that limit will fall below it as soon as any recession hits. Requiring them to hold higher levels of capital than the current rules when the times are good and relaxing the rules to somewhat below today’s rules when the times are bad is the essence of this proposal. (Something like “4% capital ratio causes a bank run, so set the limit at 6% during a recession, but raise it to 12% when life looks rosy, instead of keeping at 8% all of the time.”)
This not only makes the banks safer as they will have more capital set aside for a rainy day and it acts as a brake on asset bubbles, but without asking all banks to start selling them at the same time as soon as the bubble bursts to get their ratios back to legal limits.
April 25, 2010, 1:11 pmRadford Neal says:
I don’t see why a regulator has to be involved in triggering conversion. Just make the bond convertible to stock at any time, at the option of the bank, but at a rate that is very unfavourable (dilutive) to the existing stock holders (or more precisely, would be seen as very unfavourable at the time the bond was issued). Then the bank will do the conversion only if they have to to avoid bankruptcy.
April 25, 2010, 2:59 pmDWAnderson says:
Radford Neal’s comment seesm exactly right. Unlike many of the other comments teh gist of which are: no one would ever buy such an instrument. The unpersuasiveness of those comments have persuaded me this might actually be a good idea.
A few thoughts:
– One reason we may not have seen instruments like these is that they might be deemed to have features that are like ipso facto clauses, which would not be honored in bankruptcy.
– It may be necessary to wipe out existing equity holders for these instruments to work. Absent statutory authority for these instruments it is not clear that could be implemented.
– You would probably wanty the conversion to be triggered by the regulators in the same circumstances that would trigger a federal takeoverin the absence of such convertible instruments. But if there really was value in the equity at the time of the trigger, the holders of these convertible instruments could actually better their position via conversion: the source of potentially perverse incentives.
April 25, 2010, 9:33 pmCarlsson says:
Any ordinary bond holder can sell and buy same company equity, in a functioning market. So the market already offers convertibility, at the pleasure of both stock and bond holders. Clearly, a CoCo bond must therefore offer a premium for anyone to buy it, or else everyone would be happy with ordinary bonds, which means that it will be issued only by a company in the risk-zone for boobs-up, i.e., it’s in a situation where it can’t recapitalize through ordinary equity sales. But it can’t be a company that is so clearly going under that it’s almost in Ch 11 because then the risk premium will be too big. It seems to me that CoCos would emerge in a relatively small market segment of firms that are facing a 50/50 of either becoming stable and growing or going under some time not too soon. The premium interest payments could perhaps attract some buyers and lead to some capital infusion.
The downside is that premium interest payments will add to the drain in the company, and undoubtedly will depress its stock prices. That’s why I think the market for these bonds ought to be pretty thin. The novelty seems to be that conversion can be ordered by a gummint regulator. I don’t know what additional value would be created by that — who regulates the regulator? I’d think that this feature could easily further lower the stock value of the company.
But what do I know, I’m just an armchair economist.
April 26, 2010, 11:47 amRadford Neal says:
I think the proposal is for banks to issue such convertible bonds at a time when they are not in any apparent financial trouble. The fact that they can be converted at the option of the bank (or a regulator) obviously reduces their value, and so they would be sold at a premium. But the premium would not be very large, since the bank is not thought to be likely to get into trouble, and if it does get into trouble, and goes bankrupt, holders of regular bonds might not expect to get much anyway. The effect of conversion would actually be much like a bankruptcy, except that it would happen smoothly with no uncertainty about how courts would rule, etc.
As a detail, if the conversion is at the option of the bank, there would need to be a provision that all bond-holders are treated equally (the bank couldn’t convert some but not others). A provision for partial conversion would seem desirable, so that a bank that couldn’t make all of its interest payments on the bonds could convert only the part needed for them to be able to make the remaining payments, with all bondholders having part of their holdings converted (rather than some being fully converted and others not converted at all).
April 26, 2010, 1:30 pmohwilleke says:
It is called preferred stock and used mostly by utilities. It is unpopular because it has lower priority in bankruptcy (such debt would essentially be modestly subordinated debt relatively to trade credit) and because of its inferior tax treatment.
April 27, 2010, 4:32 pmRadford Neal says:
It’s not very similar to preferred stock. To give one difference, with standard preferred stock, the company can stop paying dividends without the previous common shareholders losing control of the company. To stop paying the holders of convertible bonds, the company would have to convert them, giving a substantial amount of control to the (previous) bondholders.
Why are so many commentators hostile to this idea, to the point where they can’t even think straight? I can see no apparent reason. It seems to me to be a technical fix, without much ideological content that would provoke emotions. Or maybe that’s it? Actually fixing the problem would mean a lost opportunity to impose some ideologically preferred “solution”?
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