“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


Category: Bailouts, Credit, Fixed Income/Interest Rates

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

27 Responses to “Haircuts for Bond Holders”

  1. Kyle says:

    I wonder how many $ worth of CDSs were written backing the bonds.

  2. Rep. Brad Sherman (D-CA) has long been one of the few to see through, and say something about, this charade..



  3. danm says:

    I wonder how many $ worth of CDSs were written backing the bonds.

    Imagine if you took a CDS to protect yourself from a default. You find out the underlying loan should have defaulted and you should have been made whole because that’s what you paid for but the government decided to prop it up. So instead of getting your 100% you now have an 80% loss (because the loan is now valued at 20 cents on the dollar).

    I don’t even care to estimate how many players are losers when they should be winners and vice versa just because of government intervention.

    Government propping up everything is creating huge dislocations everywhere, including the CDS/derivatices market. And we all know this derivatives market is much larger than the economy itself.

    So the solution is much bigger than asking for government to force the net out of positions. Before doing this, they’d have to let the underlying loans default and be written off… when pigs fly.

  4. super_trooper says:

    If congress is starting to get it , it’s time for an army of lobbyists to fix that. They already have most of the treasury in their pockets.

  5. Chad says:

    Finally. Maybe our congressmen are getting a little more of a clue. Maybe, just once, we can get something right.

  6. rww says:

    That the problem is credit and that the solution is the banks will be remembered as the great financial scam of our times.

  7. VennData says:

    Wait a sec, you’re telling me Bush/Paulson structured their solution to save the rich guys? That’s not what I thought when I voted.

    — Single-issue flag-burning voter.

  8. in related news:

    The man at the center of a fraud scandal at the Treasury Department has been allowed to quietly quit and retire from his job as a government regulator, despite allegations that he allowed a bank to falsify financial records and amidst outcries from investigators who say the case shows how cozy government regulators have become with the banks and savings and loans they are supposed to be checking on.
    Darrel Dochow, the West Coast regional director at the Office of Thrift Supervision who investigators say allowed IndyMac to backdate its deposits to hide its ill health, quit last Friday. Prior to his leaving, Dochow was removed from his position but remained on the government payroll while the Inspector General’s Office investigates the allegations against him.
    March 5, 2009

  9. jritzema says:

    So you are saying the government should wipe out its prior investment? Their investments thus far are lower in the capital structure than debt holders. As with other bankruptcy situations the bondholder should be the owners of the firms with the government making money by providing the DIP. If you wipe out bond holders no one will want any bond in any bank, there will be further shrinking of banks and lending. As far as I know Lehman bondholders and WaMu bondholders did not make out fine and financials/banks have not been able to issue non-guaranteed bond since.

  10. leftback says:

    This is a problem, Barry, as the bondholders are pension funds and university endowments and they are going to have to liquidate other assets if this happens. Namely, equities. So they will be walking a tightrope if they go down this road.

  11. lb, you know Everthing is overpriced..

    the choice is an Inflation that’ll add zeroes to your currency..

    I don’t know about you, but I’m looking fwd: to U$D 5 ‘golden’ Zinc coin..

  12. I’m ‘not’ looking fwd:

    that should have been

  13. leftback says:

    @MEH: I have begun thinking of items as priced in oil, not $. I think the extra zeroes are baked in now. I wonder how many loaves of bread people will be able to buy with a share of GOOG/RIMM in 5 years? Less than today I imagine. So I’ll take the oil, and a few mushrooms, and leave the NAZ alone.

  14. Andy Tabbo says:


    Indeed. That is the issue…we are truly between a rock and hard place here.


    a) Issue trillions of dollars to bailout bondholders and create huge future debts and most likely severe inflation in the future; or

    b) Force the equity and debt holders to take losses that they should be taking as they made very poor investment decisions by investing in these institutions during a credit bubble.

    I would also suggest there might be some big bondholders who took on this debt back in Oct/Nov to be “under the government umbrella” essentially front-running the Government, believing they would be bailed out. (Pimco, et. al.) Should all those guys be bailed out as well?

    It’s a difficult road we must travel….

  15. lb,

    I’m w/ ya on Things v. Paper, part of it.

    But, if we don’t take ‘Markdowns’, our ‘Markers’ won’t be anything, at all..

    I’ll ask again, who’s got bets that the U$D sees 2010?

  16. or, maybe an easier Q, how does ~1 Quadrillion of ‘Derivates’ get paid off?

    note: from the art, above: 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.

    and, remember 10% of a Quadrillion is 100 Trillion, and we’re, already NPV U$D ~66 Trillion in the hole..

    at this rate, we’ll be lucky to afford the Paper for a U$D 10-spot, the Golden Eagle of yore–that FDR killed off.

  17. batmando says:

    RE Andy Tabbo Says:
    a) Issue trillions of dollars to bailout bondholders and create huge future debts and most likely severe inflation in the future; or
    b) Force the equity and debt holders to take losses that they should be taking as they made very poor investment decisions by investing in these institutions during a credit bubble.”

    Doesn’t it all come down to this, taxpayers will pay for it one way or the other?
    For me the question is which generation(s) of taxpayers, the current lot of us (soon-to-be) poor slobs or future generations?
    I’d rather current equity and debt holders who “made very poor investment decisions,” be they hedge funds, charities, or IRAs/401(k)s, all take their proportional hits now, rather than foist future inflation of untold magnitude on my daughter and her children and their contemporaries.

  18. leftback says:

    While we are writing, the printing presses are running, day and night….
    This can will be kicked down the road, whatever we think is the right thing to do.

  19. I guess it is ironic that this debt was the moral hazard that Greenspan created when he gave past debt crises a pass.

    The chickens came home to roost with a vengeance even though those that got bailed out in the last round (via low interest rates) learned nothing but to pile more debt on

    I’m glad I lived to see it even though I paid for it. Twice. First through the inflation of the last ten years and now through this mess we are in now

  20. DL says:

    Andy Tabbo @ 10:20

    “It’s a difficult road we must travel….”

    I see it as very simple.

    Stop giving them money.

    End of analysis.

  21. DL says:

    batmando @ 11:13

    Almost everyone says that it’s about the next generation.

    I think that the future will be here sooner than most people think.

    How about social security and medicare, for example.

  22. Mike in Nola says:

    Bill Gross seems to wield enormous power. My theory is he has pictures of BB, Geithner and Paulson doing something disgusting together. And I don’t mean bailing out banks.

  23. danm says:

    Almost everyone says that it’s about the next generation
    - Either you get the write-offs and people over 55 suffer (wealth – or supposed wealth- mostly owned by this group), or

    - You create huge inflation to deflate the debt…. the older population suffers.

    Boomers as there retire will be going through the wringer no matter what.

  24. sorry, this : Golden Eagle, technically, is a Bird, which I don’t believe FDR killed off. the coin, to which I was referring, was/is the Gold Eagle, which FDR most certainly did kill off in ’33..


    the new tinfoil ‘dollar’ coins from the US Mint, are termed “Golden” ‘Dollars’..

  25. Jim C says:

    Weird, I swear I made a comment about how if you take each line back to election day the results would be pretty interesting.

  26. VangelV says:

    This shows why we must oppose interventionism and insist that the markets force corrections to take place. There is no point in burdening productive individuals in the real economy by bailing out the reckless speculators with taxpayer dollars.