There’s still precious little appetite to do anything that could hurt Bill Gross, a major holder of bank debt. While shareholders have been effectively wiped out, the government has gone a long way to make sure that the bondholders don’t suffer at all.
And it looks like that will remain official, global policy until something else major happens.
Hugo Dixon at Breakingviews says the protection of bondholders, as policy, was actually one of the quiet choices made by the G20 leaders last week.
The G20 finance ministers last month said shareholders should be made to suffer when banks are bailed out. But they pointedly omitted any reference to bondholders. Theoretically the G20 nations could still impose pain on bondholders. But several officials speaking on condition of anonymity said there is no appetite for this following the damage caused by Lehman and to a lesser extent Washington Mutual and Britain’s Bradford & Bingley where bondholders also suffered. Read the whole thing >
It’s obvious that the weight of the Lehman episode weighs heavily on the minds of lawmakers given the sheer trauma of those few weeks, when it looked like the entire banking sector might literally explode.
It’s one reason why still feel the need to question the official history. While we’ve announced a policy of no more Lehmans, it shouldn’t necessarily follow that bondholders can’t take a hit in a controlled manner. And as we’ve argued, Lehman was a key trigger in that it confirmed to the market just how bad things were — it was revelatory in a way that wasn’t so when Bear Stearns collapsed.
Ultimately, this strategy of making protecting bondholders’ every last penny will only encourage them to do more lending with troubled institutions, essentially making excess profit with implicit government backing. And we know how that turns out.