Haircuts for Bond Holders

“The bond market is getting more scared every day. At some time, the government is going to say enough is enough, the only way we will give you more cash is if the bondholders have to be hit.”
-Gary Austin, PDR Advisors


We have been lambasting the AIG bailout as a backdoor rescue for Goldman and others. It is unconscionable that the taxpayer must make good the speculative, off-exchange bets made by hedge funds.

There is another group that has also been (unfairly) made whole: The Bond Holders.They lent momey to poorly run, insolvent institutions, and somehow expect to see a return of a 100% of their capital.That makes no sense whatsoever.

In bailout deals such as Bear Stearns, Citgroup and Bank of America, they garnered a 100% return of invested capital (i.e., lonas). I suspect that is fast coming to an end. In the event of any pre-packaged receivership workout (aka Nationalization), the bond holders are going to have to take a big hit.


“Citigroup Inc. and Bank of America Corp.’s bond prices are sliding on concern that owners of debt issued by U.S. financial firms will be forced to swallow losses if the industry needs another bailout.

U.S. bank debt has lost 7.8 percent and yields have jumped to record levels compared with benchmark rates in the past month, even after taxpayers committed more than $11.6 trillion to prop up financial firms. With shareholders almost wiped out at banks like Citigroup and lawmakers resisting more rescues, holders may be asked to swap bonds for new debt that offers reduced interest rates or lower face values, analysts said.

Debt investors are an attractive target because of the size of their holdings — more than $1 trillion just at the four largest U.S. banks — and because they’ve emerged almost unscathed so far.”

I thought this quote was interesting also:

Since any reduction in debt at a bank helps boost capital ratios, members of Congress including U.S. Representative Brad Sherman, a California Democrat, say it’s time for bondholders to share the pain.

“These banks can go into receivership, shed their shareholders, shed or reduce the amount they owe to their bondholders and come back out much stronger institutions,” said Sherman, who sits on the House Financial Services Committee, in a statement to Bloomberg News. More U.S. capital might be offered as part of the package, he said.

I appears that Congress is starting to get it . . .


iBanks Grabbed $50 Billion in AIG Bailout Cash (March 7th, 2009)

Backdoor Bailouts for Goldman Sachs? (March 5, 2009)

Solvent Insurer / Insolvent Insurer (March 4, 2009)

Banks’ Bondholders May Be Next in Line to Share Bailout Pain
David Mildenberg and Bryan Keogh
Bloomberg, March 11 2009

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