US: Bair wants skin of senior bondholders in game...

[yoganmahew]

ftalphaville.ft.com/blog/2009/10 … creditors/

Sheila Bair has strong words for secured creditors
Posted by Stacy-Marie Ishmael on Oct 08 14:27.

On Monday, FDIC chair Sheila Bair proposed forcing the secured creditors of any failed US banks to take a 20 per cent haircut on their exposure to said institution. According to a Reuters report, Bair believes having secured creditors take a hit when a financial institution fails “could help rein in excessive risk-taking and strengthen the financial system”.

From Reuters:

Bair told a group of international bankers on Sunday that officials might want to consider “the very strong medicine” of limiting secured claims to 80 percent, although she said such a proposal would need to be carefully weighed.

I believe this is a warning shot to bondholders to smarten their act up on doing debt for equity or face being mandated to do it.

[Negative_Covenant]

“She said curbing claims would encourage secured creditors, who are protected from losses when a bank fails, to more closely monitor the risks a bank is taking and could speed up the process when an institution needs to be wound down.”

Oooh… more secured senior subordinated debt bonds confusion. It appears that secured bondholders are different to senior unsecured debt. Secured bondholders are senior even to depositors. Does this mean that the US equivalent of our senior debt has been protected in all the US banks going bust? That is a surprise if it is the case. They must form a large part of US bank issued debt if FDIC feels they need to get at them.

“Skin in the game” is definitely the catch phrase du jour. I am going to start using it willy nilly at work and on the phone to show that I am one sharp shootin’ son of a gun.