Trichet Bonds To Resolve the European Sovereign Debt Problem

We propose the creation of “Trichet Bonds” as a comprehensive solution to the current sovereign debt crisis in the EU area. “Trichet Bonds,” to be named after the ECB president Jean-Claude Trichet, will be similar to “Brady Bonds” that resolved the Latin American debt crisis in the late 1980s and were named after the then Treasury Secretary Nicholas Brady. Like the Brady Bonds, Trichet Bonds will be new long-duration bonds issued by countries in the EU area that will be collateralized by zero-coupon bonds of the same duration issued by the ECB. The zero-coupon bonds will be sold by the ECB to the countries issuing Trichet Bonds, which will be offered in exchange for outstanding sovereign debt of the countries. The exchange is offered at market value, so current debt holders will experience a “haircut” from par value, and thus the exchange does not involve a “bailout.” However, present holders of sovereign debt will be exchanging low quality bonds with limited liquidity, for higher quality bonds with greater liquidity. Debt holders not accepting the exchange will be at risk of a forced restructuring at a later date at terms less favorable. The effect of the exchange offer, if a threshold of approximately 70% approve it, is to replace old debt with a lesser amount of new debt with longer maturities. The creation of Trichet bonds will result in various advantages both in comparison to the present unstable situation and other proposed solutions. First, the long duration of Trichet bonds will eliminate the immediate crisis caused by short term expiration of significant amounts of debt which is looming over Greece, Ireland, Portugal, Spain and possibly other EU countries. Second, the guarantee of the principal with the zero-coupon ECD bond collateral increases the quality of the Trichet Bonds compared to existing sovereign debt. Third, the market for the new Trichet Bonds will be liquid and likely to trade at appreciating prices as refinancing (roll-over) risk is reduced and time is allowed for economic reforms by the issuing countries (a condition of the ECB) to take effect. In addition, the exchange of existing sovereign debt for Trichet bonds will force many European banks holding the sovereign debt to take the write-offs required, thus making their own balance sheets more transparent. Many European banks are thought to have large holdings of sovereign debt from the “peripheral” countries that have not been marked-to-market, and thus represent sizeable potential losses for the banks when the sovereign debt is ultimately restructured, as we believe it must be over the next few years. Most of the sovereign bank debt likely to be exchanged, however, is held by larger German, French and Swiss banks with the capability (if not necessarily the desire) to take the write-offs required. The overhang of such future losses affects the entire European banking system at a time when it too is being restructured. The ECB, and the European central banks need to identify those banks that are impaired by excessive sovereign holdings and assist them in recapitalization – the sooner the better – but they should also push the larger, stronger banks to accept the exchange offers in the interest of bank transparency and restructuring as well as in resolving the sovereign debt problem. Clearly the two problems – sovereign debt and bank restructuring – are connected. The issuance of Trichet Bonds, will help to resolve both problems by recognizing market realities and offering an easier way out than through a forced, cram-down restructuring once the ailing sovereigns exhaust their ability to repay the existing debt. There are significant advantages to Trichet bonds over other discussed solutions to the sovereign debt problem. One such proposed solution is the issuance of “Euro Bonds” guaranteed by the Eurozone countries or the EU itself for the purpose of redeeming sovereign bonds by market purchases, or by lending the proceeds to the countries involved for them to acquire their debt. Apart from the considerable political obstacles to such a program, the undertaking actually makes it less likely that existing self-interested debt-holders will sell in the market. The implication of the program is that either through market interventions that push prices up, or by the assumption that the program will continue to enable the debt to be retired at par on maturity, debt-holders won’t sell unless the price is pushed high enough to constitute a bailout. The ECB’s current efforts to support the prices of distressed sovereign bonds is currently having this effect, which transfers some, if not all of the cost of resolving the problem to European taxpayers, where increasingly it is resented. The alternative approach, that has only been discussed by market participants, is for a Russian or Argentine solution in which the debt-holders are made a take-it-or-leave-it offer to exchange outstanding debt for new, generally illiquid bonds at an arbitrary price that discourages future investment by the market. Such an approach is understood by the sovereign debt market to constitute a de facto default. Such a default would likely have serious adverse consequences for the Euro and the EU, and may be less likely that a bailout of some kind. The great advantage of Trichet Bonds is that they avoid both bailouts and defaults.Trichet bonds, sovereign debt, euro, debt restructuring, Greece, Ireland, Portugal, Spain, Italy, Brady bonds

Managing Venture Capital Investments

The original venture capitalists were wealthy “angels,” often entrepreneurs themselves, who funded promising business ventures that came to their attention in the late 19th and early 20th Centuries. A number of these families continued to make such investments after their own capitalist progenitor died, including the Vanderbilts, Rockefellers, Phippes, and Whitneys and continue to be such today. In time some of these families opened their investment funds up to non-family members. In 1946, MIT president Karl Compton, Harvard Business School professor Georges Doriot and some Boston business leaders founded American Research and Development Co., the first independent firm to enter the VC business. Subsequently a number of other independent firms were formed, especially in the Boston and San Francisco areas, to manage equity investments in promising new sectors of the economy, especially technology. Most of the money given to them to manage came from wealthy families, university and other endowments, and a limited number of inancial institutions. The firms stayed in touch with each other, invested together, and shared information. The amount of new investment flowing into these venture capital firms grew, but never exceed a few hundred million dollars through the 1970s

Rating Agencies: Is There an Agency Issue?

This paper examines the potential for conflicts of interest in the debt ratings business. Inherent in the current business model is the fact that firms whose obligations are rated by the agencies pay fees for those ratings, which in turn comprises virtually all of the revenues of the rating agencies. Given the public nature of the ratings, no other business model seems feasible for rating agencies as commercial ventures, so that conflicts of interest are inherent in this important part of the financial markets infrastructure. This paper examines the nature of this conflict, how it is managed, and the significance of market structure and reputation in preventing conflict exploitation. These issues are linked to the use of ratings for regulatory certification purposes, as well as the international dimensions of debt ratings activity through investments and joint ventures of the major rating groups

Four Years after Enron Assessing the Financial Market Regulatory Clean Up

This paper assesses the efforts to “clean up” financial markets and corporate governance practices in the wake of the bankruptcies and scandals of the early 2000s. It begins by reviewing what actually happened during that period, what damages ensued and the responses of government enforcement agencies and policy makers, then assesses the impact of the various actions that followed and their effectiveness. The paper then looks at these actions in an historical context, examining the possibilities of imbalances of power between market insiders and ordinary investors that provide an uneven market environment. Finally, it discusses actions that might be taken to have a greater impact on leveling the uneven market, and what might be expected in the way of altered governance practices for the future

Rating Agencies: Is There an Agency Issue? Roy C. Smith and Ingo Walter

This paper examines the potential for conflicts of interest in the debt ratings business. Inherent in the current business model is the fact that firms whose obligations are rated by the agencies pay fees for those ratings, which in turn comprises virtually all of the revenues of the rating agencies. Given the public nature of the ratings, no other business model seems feasible for rating agencies as commercial ventures, so that conflicts of interest are inherent in this important part of the financial markets infrastructure. This paper examines the nature of this conflict, how it is managed, and the significance of market structure and reputation in preventing conflict exploitation. These issues are linked to the use of ratings for regulatory certification purposes, as well as the international dimensions of debt ratings activity through investments and joint ventures of the major rating groups

Model Invalidation: A Connection between Robust Control and Identification

This paper begins to address the gap between the models used in robust control theory and those obtained from identification experiments by considering the connection between uncertain models and data. The model invalidation problem considered here is: given experimental data and a model with both additive noise and norm-bounded perturbations, is it possible that the model could produce the input/output data

Model validation: a connection between robust control and identification

The gap between the models used in control synthesis and those obtained from identification experiments is considered by investigating the connection between uncertain models and data. The model validation problem addressed is: given experimental data and a model with both additive noise and norm-bounded perturbations, is it possible that the model could produce the observed input-output data? This problem is studied for the standard H∞/μ framework models. A necessary condition for such a model to describe an experimental datum is obtained. For a large class of models in the robust control framework, this condition is computable as the solution of a quadratic optimization problem

Towards a Methodology for Robust Parameter Identification

The paper considers the problem of estimating, from experimental data, real parameters for a model with uncertainty in the form of both additive noise and norm bounded perturbations. Such models frequently arise in robust control theory, and a framework is introduced for the consideration of experimental data in robust control analysis problems. If the analysis tools applied include robust stability tests for real parameter variations (real μ), then the framework can be used to address the problem of "robust" parameter identification. While the techniques discussed here can quickly become computationally overwhelming when applied to physical systems and real data, the approach introduces a new way of looking at the identification problem and may be helpful in arriving at a more tractable methodology

The 1998 floods in Bangladesh: disaster impacts, household coping strategies, and responses

This report combines a careful analysis of government policy and private foodgrain markets with a detailed survey of 757 households in rural Bangladesh in November and December 1998, about two months after the floodwaters receded. The report describes short- and medium-term government policy measures taken to encourage private trade, including an earlier trade liberalization that permitted private-sector imports of rice from India that stabilized private markets and largely offset the decline in production. The impact of the floods on household assets, employment, consumption, and nutritional outcomes is analyzed using the micro-level survey data. The study finds that flood-exposed households were, in general, able to avoid severe declines in food consumption and nutritional status through a combination of private-sector borrowing... and targeted government and NGO transfers.Food relief Bangladesh., Food supply Bangladesh., Disasters Asia., Households Bangladesh.,

Juridical Subordination

The purpose of this Article is to play out the various conceptualizations of the black equality interest in post-civil rights America. How is the claim of juridical subordination manifested in current Supreme Court cases, and what might civil rights law look like if the Court were to avoid juridical subordination? Our ambition is not to analyze every landmark Supreme Court civil rights case—page limitations prevent us from doing that—but to provide a framework for analysis, setting the table for the juridical subordination inquiry. Furthermore, we do not here attempt to reconcile the disparate ways in which the black equality norm is defined, because that might preempt important discussion that needs to take place before any such attempt is made. We begin with a discussion of the Supreme Court’s inglorious racial history, which forms the backdrop for the Brown opinion, and then proceed to a discussion of the Brown opinion itself (Part I). The former discussion not only lays the foundation for our assessment of the motivation behind the Court’s desegregation ruling in Brown, but also educates those who live with the misconception that the Supreme Court has been an unwavering champion of racial advancement. It has not; hence the strict scrutiny it receives to this day from civil rights scholars. Finally, we discuss the elements of juridical subordination—the black equality interest and implementing law—looking at both the civil rights and post-civil rights periods (Part II)