We learned in Finance 101 that US Treasury bonds were not risk free, but were the lowest risk available and thus the standard of comparison.
To put the Euro mess in perspective, the original deal offered bond holders who were expecting to receive 100 euros at maturity were offered 79 or a "21% haircut". The when that deal flopped, 50. The latest offer is 22. It is not surprising that the bond holders that sold their bonds early for 50 are pleased. It is also not surprising that many who did not sell are refusing to accept the latest deal just on the principle (pun eschewed) that it is not a haircut, but a fatal scalping.
When Obama forced the GM rescue deal, the bondholders took a big haircut, and lost their usual position in front of unsecured creditors. In effect, the money the bondholders lost went to union pension funds. So the original deal that the bond owners thought they had was 'strong armed' by government to be something else. This has permanently increased the 'perceived risk' of buying bonds, raising the cost of corporate finance money in a capital intensive global economy.
The "Greek Effect" will do the same thing for government borrowing.
The not yet widely reported proposal by the Obama administration to refinance a large number of mortgages at the expense of the lenders to win votes before the November elections would permanently increase the cost of mortgages down the road and will create a whole new 'layer' of people who will never again qualify for a mortgage.
Unexpected consequences are one thing, but the Obama administration was warned of all these things (mostly by people who resigned when their warnings were ignored) and went ahead anyway, since the payoff was at the next election and the negative long term consequences were at least another election away.
The PT Barnum theory of American politics is thus reinforced.
No comments:
Post a Comment