Debt for car companies, bad. Debt for banks, good!

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One of the big constituencies involved in negotiating GM’s fate is, of course, GM bondholders. Last I read, GM was looking for its bondholders to turn in at least two-thirds of their debt in exchange for equity and new debt. Ford, that anomalously self-sufficient American car company, is reducing its debtload, too—buying back or retiring billions of dollars in bonds, with the goal of reducing its dependence on borrowed money by some 40%.

This attitude, you might have noticed, is very different than the one taken with respect to the financial industry. Just two weeks ago, the FDIC extended its debt-guarantee program, designed to make it easier for banks to issue debt to each other.

Now, this, I told myself at first, makes sense. Banks have a different business model than auto outfits. They need to be able to borrow money. As a leading business columnist recently wrote, if you start wiping out bondholders at financial firms, everyone will panic and there will be (even more of) a global credit collapse. At least that’s the fear.

I started to wonder exactly how dependent finance outfits are on borrowed money. It’s a rough gauge, to be sure, but at the end of last year, some 20% of the total liabilities and capital at FDIC-insured institutions came from non-deposit borrowing and subordinated debt. Seems like a lot. Then I went back and calculated what that percentage was at the end of 1993, the earliest year the FDIC has on its web site. The figure in 1993 was 14%. That’s just six percentage points of difference—but six percentage points spread over billions of dollars. So it is possible to survive with a lot less dependence on debt financing. Hm.

I’m now beginning to wonder if the car industry has a lesson to teach the finance industry. Debt financing is fun, but maybe now is the time to think long and hard about how much we want to actually do that and take the opportunity of an anything-goes economic environment to rejigger our balance sheets? Yes, the alternative for banks is deposit-taking—borrowed money of a different sort. But at least depositors tend to stick around in good times and bad. They rarely get together and start lobbying the Treasury Secretary for a seat at the table.