Why is the idea of "risk" being ignored with it comes to bondholders?

hatrickpatrick

Do we really want to be sending out a message that making dangerous investments is perfectly safe in Ireland because average joe will pay you back if your investment fails?

Why are we sending out this message of "You take no risk whatsoever by investing in an Irish bank"?

Isn't risk an integral part of the principle of investment? Why are we removing it?

Weird and dangerous road to go down if you ask me. Try as I might, I simply cannot understand why those who chose to gamble (and I'm talking about unguaranteed, unsecured senior bondholders here) are regarded as suitable for public subsidy.

Where's the free market in all this?

EDIT: I understand about the Guarantee, what I'm asking is why the ECB and others are so opposed to allowing bondholders to fail without intervening.
Surely the ECB understands risk as well as anyone else?

Cork boy 55

Credit default swap contigant
A known unKnown

Sand

Well, back in 416 B.C. the Melians were a people living on small, neutral island caught in the midst of a war between Athens and Sparta. The Athenians desired to capture the Melians to serve their greater war aims. The Melians protested to the Athenians that they were neutral in their war with Sparta. The Athenians responded:

‘For ourselves, we shall not trouble you with specious pretences—either of how we have a right to our empire because we overthrew the Mede, or are now attacking you because of wrong that you have done us—and make a long speech which would not be believed; and in return we hope that you, instead of thinking to influence us by saying that you did not join the Lacedaemonians, although their colonists, or that you have done us no wrong, will aim at what is feasible, holding in view the real sentiments of us both; since you know as well as we do that right, as the world goes, is only in question between equals in power, while the strong do what they can and the weak suffer what they must.’

Essentially the bondholders and the ECB are on the same team. And whatever team the Irish government and various assorted insiders are on, its not on the side of the Irish taxpayer. The Irish taxpayer is weak, the ECB and the bondholders are strong. They do what they can, we suffer what we must.

The mule might as well ask the farmer why it has to pull the plough...

The same basic principle of realpolitick has been expressed in other ways:

Do as much damage as you can. Get your message across. That way you stand a far better chance of being taken seriously next time. Of being considered dangerous. And make no mistake about this: being taken seriously, being considered dangerous, marks the difference – the only difference in their eyes – between players and little people. Players they will make deals with. Little people they liquidate

Ireland has the potential to do damage. But as I said, the Irish government/insiders are not playing for the same team as the Irish taxpayer.

Scofflaw

More expansively, the ECB undoubtedly understands the principle of risk, and the corresponding one of moral hazard, but has to balance the moral hazard of exempting bondholders from risk against the risks attendant on letting them face the full consequences of the crisis, and of activating the various hedging mechanisms.

Part of the problem for the ECB (and every government in this crisis) is that those who originally invested in the bonds - largely pre-crisis - did so in what seemed to be a very benign risk environment. They weren't high-risk gamblers - banks like Anglo had very solid investment grade ratings. That doesn't excuse them from risk - what seems a safe investment may not be - but it does mean that the effects of haircutting their bonds would have been different from how it would be if they were high-risk funds.

Of course, most of the senior bondholders in Anglo and Nationwide are now believed to be exactly those high-risk hedge funds - but at this stage the issue has become one of not sending any signals that could upset anyone in any market anywhere, and there's not, in any case, all that much to be gained from imposing discounts on those bonds.

cordially,
Scofflaw

thebman

I think to analyse why it is the case you'd need to know how much of the bondholders were pension investment firms and regular peoples pensions for their retirements.

A lot of the time they are portrayed as millionaires/billionaires but it isn't really clear that this is the case. In fact, it is probably provable that a large portion of the bonds aren't and I don't really want to kill my fathers retirement fund or my own or the rest of my families if it is cheaper to save it.

Also when Icelandic banks failed, many of the burned investors were local councils in the UK so there is that element of governments saving themselves from poor investment choices.

I'm open to correction on all of the above :P

Sand

I think it would be a mistake to assume the Irish govt decision was made based on the government having knowledge of who the bondholders were. They quite simply didnt have a clue who or what was going on in the Irish banks.

The decision to guarantee the banks was simply a kneejerk reaction to save their deposits and investments bourne from fear and a desire to put off difficult decisions. Basically the game plan and strategy that has been counselled by the responsible and wise sages ever since, leading us to our present malaise.

The ECB/bondholder policy is seperate to that motivation.

thebman

Sand wrote: »

I think it would be a mistake to assume the Irish govt decision was made based on the government having knowledge of who the bondholders were. They quite simply didnt have a clue who or what was going on in the Irish banks.

The decision to guarantee the banks was simply a kneejerk reaction to save their deposits and investments bourne from fear and a desire to put off difficult decisions. Basically the game plan and strategy that has been counselled by the responsible and wise sages ever since, leading us to our present malaise.

The ECB/bondholder policy is seperate to that motivation.

Probably could add that if they didn't know then fear of the unknown played a significant part especially given they tried to listen to what people had to say so if they didn't know genuinely they could have been fed any line and bought it.

Scofflaw

Sand wrote: »

I think it would be a mistake to assume the Irish govt decision was made based on the government having knowledge of who the bondholders were. They quite simply didnt have a clue who or what was going on in the Irish banks.

The decision to guarantee the banks was simply a kneejerk reaction to save their deposits and investments bourne from fear and a desire to put off difficult decisions. Basically the game plan and strategy that has been counselled by the responsible and wise sages ever since, leading us to our present malaise.

The ECB/bondholder policy is seperate to that motivation.

Sure - recall that Lenihan originally came out with the line that they might be pension funds and credit unions, but backed away from it until it was demonstrated to be the case for some junior bonds. I don't think the government here had a notion who held the bonds, how deep the hole was, or anything very much about the state of the banks at all.

cordially,
Scofflaw