For Faster Recovery, Let Deutschebank Go Bankrupt
When a bank needs more capital, and investors are reluctant to incur more risk to save it, that defines the conditions under which bankruptcy and restructuring are in order. So long as the failed bank procedures adequately protect both depositors and avoidable fire-sale distortions in asset value, that process is healthy and to be vigorously defended. (Some argue that depositors must bear some risk, but I believe that has led to widespread and popular support for forms of intervention that are even more destructive of the advantages of a market economy).
New capital then flows directly into new lending/investment opportunities, and its return does not have to be diluted by sharing it with incumbent investors. That is important for fast economic recovery from previous unsustainable excesses. When this restructuring process is managed by government agencies it opens up common incentives for regulators and incumbent investors to resist these corrective requirements. Regulators have incentive to avoid and hide that “it happened on my watch.” And investors are always happy to be rescued from their own soured investments.
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