One of the more interesting hallmark features of the wholesale transformation to the biota of capital markets these past (roughly) 50 years as been the line of flight from any meaningful distinction between between debt and equity. Like Euclidean geometry, its not so much that the principle of its equivalence classes is so much always “wrong” as it is only sometimes right -of course, how the figure/asset behaves when moving from one to another place in space all depends on the structure to its space of motion.
This trend -i.e of the regressive differentiation between debt and equity- was perhaps first best formally observed by Modigliani and Miller, but since then has been reformulated, both epistemologically (by BSM, etc.) and ontologically (convertible bonds, etc.) time and time again. Issues surrounding the resulting material obfuscation has most recently been reinvoked as a subset debate of the big debate over Dodd-Frank’s ostensible ban on banks’ ability to continue to trade their own capital. Burne and Tracy’s “Debt Bundles Unloaded Before Bank-Rule Shift” (WSJ, January 9th 2014) report that the $300 bn CLO market has been rumbling as of late in light of the issue of whether banks have to ‘divest themselves of their CLO notes’, precisely because its unclear whether such notes, whose values are tied to the value of of the portfolio of loans, are debt or equity? If the notes are equity, no, they cannot keep them on their balance sheet; but if they’re debt, then perhaps they may be held. The problem is, no one seems to know for sure: is it debt or is it equity? -the answer is likely “yes, it is”!
The piece can be found here, but is probably less interesting than the aforementioned issue it raises.