Monday, March 30, 2009
"You're ticked off about the bank bailouts. You think somebody--other than you and your fellow taxpayers--needs to pay. Let's try to work out who that somebody ought to be. ... Which leaves ... the folks who loaned the banks money. The banks' creditors have been the clearest beneficiaries of the bailouts--leaving them with the wherewithal to contribute. ... But banks also borrow on wholesale markets, mainly by issuing bonds. About $2.6 trillion of bank funding in the US, 20% of the total, comes from such debt securities, according to the FDIC. ... It may be too much to ask small depositors to monitor the risks at the banks where they out their money and pay for getting it wrong. But these bond buyers are pros. ... If Citi's $486 billion in wholesale debt were converted into common shares--admittedly a pretty extreme situation--the company's balance-sheet woes would evaporate", my emphasis, Justin Fox at Time, 23 March 2009.
Until bondholders have the right to inspect banks' books, there is no meaningful way they can monitor the banks activities. However, I agree bondholders should have taken a haircut on their bonds as opposed to taxpayers bailing out the banks. Why would converting Citigroup's $486 billion in debt into common stock be "a pretty extreme situation"? That's what happens in bankruptcy courts every day.