Stress? Not for big banks’ bondholders -- unlike Chrysler’s
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There will be one sure group of winners in the aftermath of the government’s ‘stress testing’ of 19 major U.S. banks: The investors who own the banks’ bonds.
That fact won’t be lost on Chrysler’s dissident debtholders -- the ones who balked at the Obama administration’s restructuring offer for the company last week, only to be labeled as villains.
Debtholders of the 19 banks already have been reassured that the administration won’t allow the institutions to fail. If the banks need more capital, and private investors won’t provide it, the government will.
That may mean pain for the banks’ common shareholders. But there’s no indication that bank bondholders will face any risk of a burden-sharing “haircut” -- quite unlike the sacrifices that were demanded of Chrysler’s debtholders, even though their $6.9 billion in loans are secured by the automaker’s assets.
The law says Chrysler’s debtholders rank above other creditors. But the administration doesn’t see it that way. In the case of the banks, however, the administration seems to be offering full protection of principal and interest to holders of hundreds of billions of dollars of bank debt.
The taxpayer-supported umbrella over the pension funds, mutual funds, foreign governments and myriad other owners of big banks’ bonds has been there, de facto, since the collapse of Lehman Bros. -- even though some critics, including Rep. Brad Sherman (D-Calif.), have called for the bondholders to sacrifice some return to help bolster the banks’ finances.
Chrysler’s hedge-fund debtholders might have figured they wouldn’t be invited under that umbrella. But they obviously weren’t expecting a White House rebuke just for trying to enforce their legal rank in the creditor pecking order.
Obama’s attack spurred Clifford Asness, head of well-known hedge fund manager AQR Capital Management in Greenwich, Conn., to write a bitter letter that has been making its way around Wall Street and the Web.
The entire letter is available here. One paragraph relevant to the treatment of Chrysler’s debtholders vs. bank debtholders:
“... The President screaming that the hedge funds are looking for unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying. . . . The hedge funds were singled out only because they are unpopular, not because they behaved any differently from any other ethical manager of other people’s money.”
-- Tom Petruno