Bondholders as the Privileged Class

Christopher Whalen with Institutional Risk Analytics gave a great interview last November on what is now one of the most important topics around: bank restructuring.

Whalen suggested that the best way to restructure a bank like Citigroup (C) is to bring bondholders to the table and make them exchange debt for equity. That would increase the bank's equity cushion to absorb losses and it would force bondholders to share in the stockholders' pain, instead of benefit from the taxpayer bailout.

Below, I've tried to put this theory into "chart-perspective." There's just a sliver of equity at some of these banks that must absorb the inevitable writedowns of various bad loans and investments on the balance sheet. Instead of making the taxpayer buy preferred shares to keep the equity at a sustainable level, we should be requiring bondholders to take a hit and or convert some of their holdings to equity (click to expand).



And here's Citi's explanation of its tangible equity (click to expand).

Disclosure: No position

Comments

[Old Trader:]

Sort of like the bondholders of GM were treated? How about we rewrite contract law FIRST, in anticipation of "next time"? The bondholders (in both cases) are ENTITLED to have the contracts that are represented by the bonds they hold honored.

Oct 09 06:46 PM