You don’t have to, but it gives you peace of mind.
Why should you care? It’s the right thing to do—even if it doesn’t seem that way right now, because there are some risks to consider. And if you don’t see a path to full health coverage that’s right for you, the insurance industry is the way to go.
The right decision could cost you more than health coverage.
The next time a big American bank announces that it will raise a huge new offering, take a minute to keep tabs on its competitors, for instance Bank of America (BAC) or Wells Fargo (WFC). After all, they stand to benefit from the new financing. They just might raise their own offerings first. Just like the big banks, their executives are likely to give the newly offered money to investors in the form of preferred shares or convertible notes—but in exchange for some of the new money.
These new financing vehicles may seem as harmless as a bank’s normal stock sale, but they carry far greater potential risks. As we have written, bank executives use these new financing vehicles to “game the system” so that they can reap a windfall, and then transfer that windfall to the top of the executives’ compensation bundle—or, depending on the terms of their preferred shares, back onto those executives to repay the government.
One of the big risk factors for banks, says Eric Trombley, has always been the fact that banks have limited ability to access capital markets. But this is particularly important, Trombley notes, “given the global financial crisis.” “Our banks have the same problem as the big banks, which is that the market for capital is very inefficient. It’s so inefficient that it hasn’t been able to provide banks an adequate return in terms of the equity. So basically, banks have to keep capital invested in excess of 90% of GDP in order to meet their risk-adjusted cost of capital.”
But in an ideal world, banks would be able to invest in alternative sources of capital, Trombley says, like mutual funds. While these are available in a limited number of countries, they are risky. He adds: “It only adds marginal benefit if the fund provider has the capital to absorb losses when banks make bad investments.”
The most important thing for banks, Trombley says, is having the courage to do something about that problem, such as creating a new type of capital market that is less reliant on government