Subordinated Debt Holders: Missed By the Bus?

Why has there not been more discussion about the treatment of the subordinated debt holders? Those investors knowingly and with premeditation (I assume) purchased paper which was “riskier” than other agency debt. They received a chunky yield pick up for their faith in that lower rated paper.

Now the GSEs are in conservatorship or whichever euphemism you choose to apply, and the subordinated holders are faring as well as the senior holders. Preferred shareholders and common holders were thrown under the bus. In the interest of equity, the subordinated shareholders should have at least been grazed by the bus. I think that fairness requires that there should be  a symbolic haircut of some sort which would take maybe just a penny on the dollar from these folks. Otherwise the sermonizing about moral hazard is  pompous cant.

The Treasury market is staging a significant recovery. I am told that the giant rally in mortgages has generated a huge need for mortgage servicers to strap on some duration. One dealer posited that the duration need from that source was around $70 billion.

Why did the Treasury leave the “wrap” function of the agencies untouched? They will run off their portfolios beginning in 2010 but can “wrap” as if there is no tomorrow? Am I wrong on that? If so, please tell me. If the goal is to significantly involve private sector companies at some point in this business, that will not happen with FNMA (FNM) and Freddie Mac (FRE) unshackled in this regard.

Comments

[SilverLeaf:]

"Otherwise the sermonizing about moral hazard is pompous cant." Exactly. I'm glad some (such as yourself) are pointing this out. It's like the Bush administration justifying the Iraq War via "weapons of mass destruction." Whatever your position on the war in Iraq, that was simply not true.

2008 Sep 08 10:35 AM

[The Realist:]

Why shouldn't the senior notes take a haircut?

These investors got extra yield on the assumption that the government would guarantee their risk. If that is the case then the yield on this paper needs to be adjusted to treasury rate as they are not mortgage backed securities but really treasuries.

Why should dirt bags like Bill Gross make a mint on a horrible investment which I am now paying his excessive return.

2008 Sep 08 12:22 PM