BLOGNAME: LOUDER THAN WORDSAn informal, stream-of-consciousness reflection on business ideas, events and issues in modern business, modern life and with some specifics to the web-software industry by Paul Tomori, Internet Entrepreneur
|How Liquidity is Supposed to be Achieved|
By Paul Tomori
Wednesday, April 22, 2009 at 06:52:55 (EDT)
A quick follow-up to my last blog post... In the Financial Post, I just read that Royal Bank of Canada (RBC for those who might be unpleasantly affected by the word "Royal"... kind of like KFC for those who didn't like the word "Fried" in Kentucky Fried Chicken!) has issued $600,000,000 in preferred shares in the last two months in order to "shore up their balance sheet" (i.e. provide liquidity).
Traditionally, this is how capital markets are supposed to work, right? The (ahem) principle is that the PUBLIC gets to "vote" with their dollars as to who gets their investment. At $25 per share, just about anyone can buy in. The hope is that there will be a return on one's investment over time... AND that RBC will get some much-needed immediate cash in order to keep selling money to borrowers. When business can borrow, business can expand. When business expands, more goods and services are created. When more goods and services are created, there is an inherent stimulus for commerce and job creation.
Wonderful concept, isn't? When the above is allowed to happen, then the only people who go into debt are those actually desiring the debt to fund their enterprises. And the only ones having to lend money are the ones who are actually in the business of lending money... for profit. Under this scenario, only those who wish to contribute liquidity actually put their cash on the line by purchasing shares, while everyone else gets to dispense with their cash as THEY want to. We don't have massive new government debt under this scenario... and our future generations will not be burdened either. Three cheers for RBC.
"TORONTO -- Royal Bank of Canada announced another preferred share offering on Tuesday to bolster its capital ratio.
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RBC's $200-million offer is for 8 million noncumulative five-year rate reset preferred shares, at a price of $25 each.
The offering comes a month after RBC announced a $400-million preferred share offering and is the latest in a string of issuances by Canada's big banks to shore up their balance sheets as the economy slides."