TARP: A Gift for the Bondholders
By Garett Jones
When the federal government bought shares in the biggest banks, who benefited most: Shareholders or bondholders?
According to co-blogger Luigi Zingales and U Chicago professor Pietro Veronesi, the answer is clear: bondholders. They estimate the total benefit to banks at $131 billion, and
the total increase in debt value due to the plan at $119bn.
So by their estimate over 90% of the benefit to banks’ balance sheets went to bondholders. [As a special bonus, the authors also estimate the bailout’s cost to taxpayers.]
If most political battles need a villain to succeed, it’s easy to see why bondholders have largely escaped the wrath of voters: Bondholders make poor villains. The bank promised to repay, and now the bank can’t. The bondholder wasn’t out there making the loans; the bondholder didn’t vote for the directors who led the company to the brink of destruction; the bondholder just handed some cash to the bank and hoped for the best.
Bondholders have had good luck getting government guarantees, and I suspect their luck will continue. That means rational investors will dump more cash into the megabanks with minimal scrutiny: The megabanks are the new Fannie and Freddie.
Here’s hoping I’m wrong.