Banks often oppose higher equity asset ratios, because equity capital is more expensive than debt capital.

Common Sense on Capital Controls

First, capital requirements should be set as a straightforward ratio of common equity to total assets, thereby abandoning all reference to banks own risk management models.

But the Fed cannot endow the banks with new equity capital and prevent a credit crunch.

Rather, the banking system is at the brink of insolvency, with a permanent loss in equity capital.

Under Chapter 11, companies with a solid underlying business generally swap debt for equity. Old equity holders are wiped out and old debt claims are transformed into equity claims in the new entity which continues operating with a new capital structure.

Lack of equity capital, in turn, made risk averse shareholders hire gamblers to manage their limited liability investment companies.

Another hoped for benefit was that capital gains could be converted into home equity loans, boosting homeowners living standards.

This is why equity capital held by financial institutions typically is more than twice as expensive as debt capital and why these institutions try to minimize its use.

In the past, bank executives bonuses were often based on accounting measures that are of interest primarily to common shareholders, such as return on equity or earnings per common share.

Instead, they should become partners of private shareholders, endowing the banks temporarily with new equity capital until the crisis is over.

Given that the combined equity capital stock of all US financial institutions is roughly 1.2 trillion dollars, this is a breathtaking sum.

Investment banks like Bear Stearns and Lehman Brothers got into trouble because they had too little equity capital far less than 10 .

He also has invested in non traditional asset classes, including real estate, oil, timber, private equity, and venture capital and buyout firms.

Taming the Private Equity Locusts

The typical bank is capitalized with equity, long term debt, short term debt, and deposits. Investment banks like Bear Stearns and Lehman Brothers got into trouble because they had too little equity capital far less than 10 .

They will continue to deprive the banking system of its equity capital, with little chance of it being recouped in the near future.

These risks are already exacerbating the economic slowdown equity markets are falling everywhere, leading to negative wealth effects on consumption and capital spending.

According to the European Commission, creating a single European capital market would reduce the cost of equity capital for EU businesses by 0.5 and lower the cost of corporate debt financing by 0.4 .

Rather, bonds should be at least partly converted into equity capital, and any infusion of new capital by the government should be in exchange for securities that are senior to those of existing bondholders.

Moreover, you should care about equity.

But in bad times, when it is important to keep banks lending, bank capital would automatically be increased by the debt to equity conversion.

In particular, if the firm s equity capital erodes, the government should not provide funds (directly or indirectly) to increase the cushion available to bondholders.

Common security implies common commitment.

The mutual interaction between the incentive to minimize equity capital and the incentive to gamble in order to exploit the upside risks caused America s crisis.

Equity based awards, coupled with the highly leveraged capital structure of banks, tie executives compensation to a leveraged bet on the value of banks assets.

Pay equity? Yes. Absolutely a feminist issue.

common

Banks serve a special function in the economy that does warrant a special role for the government not in setting pay, but in imposing effective capital requirements. Higher and pro cyclical equity capital requirements on banks, combined with a requirement to raise contingent long term debt debt that converts into equity in a crisis is a better way forward.

Vast amounts of short term capital, speculating on interest rate convergence or equity market gains, are flowing into the most advanced candidate countries, driving up their currencies and increasing their vulnerability to a sudden capital flow reversal.

To do so, they develop complicated legal claim structures that hardly anyone can fully understand and operate with too little equity capital to cover the risks.

The US financial institutions that went bankrupt in 2008 or that would have gone bankrupt without government help were in trouble because they lacked equity capital.

The key is to reflect on six kinds of capital goods business capital, infrastructure, human capital, intellectual capital, natural capital, and social capital.

A globalized world, with one country s goods, capital, and pollution flowing into another, will inevitably need common norms and laws.

But it has no formal authority to mandate a common approach to capital (the G 20 should give it one).

The attribution of companies to a common group would need to be based on legal control, that is, ownership of some defined threshold of equity 51 or higher.

Unemployment up. Housing values down. Equity markets down.

Prosperity with equity is important for the region.

While these attempts to revolutionize the equity capital markets have yet to gain widespread traction, their very existence is evidence of the opportunities for disruption in this sector.

Many countries tax systems hugely favor debt over equity.

Equity markets were subjected to disclosure and transparency requirements.

It is a matter of both equity and efficiency.

The equity bull market is now six years old.

Finally, public equity markets will have to be strengthened.

(c) Good governance and equity at the international level