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Bonds Are a 'Safe' Investment: A Big Lie Gets Even Bigger
The banking crisis is getting more and more bizarre by the minute. The US Treasury has poured billions of dollars down a bottomless pit and is getting nowhere. Congress and the US Treasury are unwilling to face the fact that some of our big banks are insolvent.Wasting more taxpayer money is breach of their responsibility to the American people.People simply do not trust the banks, nor do they believe the stories being concocted by the Congress and the Treasury. From a gauge of the sentiment on the banking side, it is the bondholders who are holding sway over the Treasury. So what has happened is that the Treasury has bowed to cries of bondholders and has poured more and more billions of dollars into these banks. This is being done in the face of mounting evidence that bank bond prices are nearing junk status. Bank of America Corp (NYSE BAC) Trust preferred shares are trading at less than 30 cents of the dollar. Citigroup Inc (NYSE C). outstanding 7.25% subordinated notes due October 2010 are worth 77 cents of the dollar. This puts the spread over Treasuries at 25.5 percentage points. Yes, 25.2 percentage points!
Overall, US bank debt has lost 7.8% in the past month alone and has jumped to record levels.
Democrat, Brad Sherman of California, said: "its time for bondholders to share the pain." "These banks can go into receivership, their stockholders shed, or reduce the amount they owe to bondholders and come back much stronger institutions."
Should the US Treasury pour more taxpayer money into the banks?
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Reader Comments (Page 1 of 1)
3-11-2009 @ 3:15PM
alan said...
Questions: If you go after the bondholders what will happen to all the CDS written on those bonds and the ripple that would start? Second, who are the holders of these bonds? Third, do you think any bank will be able to issue bonds in the future without some government backing? Bonds these days in financials are FDIC insured after Lehman.
People always like to just wildly throw out nationalize this or that, wipe out this guy and that guy as if there's just some clean, neat and tidy solution. Simple wipe them out remove the bad assets and spin out the clean banks. This isn't Sweden and these are global institutions with their tentacles everywhere. Why do I never hear anyone take into account the psychological investor ramifications of that. If you think the market sentiment is low now, just imagine what that will do and forget about the future in the credit markets. Who will ever buy a bond from these guys again? What they'll be rated AA or whatever after the toxic assets are gone. Oh yea the ratings agencies did a great job there the first time around so we'll trust them again. There's not an easy solution, to act like we can fix it in one fell swoop of nationalization/wipeout isn't realistic.
3-11-2009 @ 8:35PM
Bill Plance said...
Alan - Excellent commentary.
Obviously, the author of this absurd article has lost her butt in the stock market, in addition to most of her common sense.
If bondholders were to be held responsible for the failure of large banks what do you think the chances would be of ever selling a bond in any other part of the corporate world ? I am a 70 yr. old retired widower living on a fixed income and decided years ago to invest in bonds from the safety aspect as opposed to the greed and fear driven stock market.
If you choose to be risky then expect to possibly lose. If you choose to be conservative then expect to be rewarded on a lesser scale but to remain safe.