Fed Reveals Secret Bank Bond Protection

Before getting into sovereign Treasury Bond behavior, we learned that Minneapolis Fed Vice President Ron Feldman revealed another terrible Fed secret.

Of course, we know that his boss, Fed President Neel Kashkari has said the Fed prunes wages. Now we find out that the Fed refuses to let bank bondholders take losses. In an interview with David Beckworth at the Mercatus Center, Feldman uttered this must-read quote:

The only active creditor in the US where we have a record that we do impose losses on them is equity holders. We do treat equity holders differently from fixed income holders, depositors, or bond holders…The thing that’s not credible is that in a crisis, a government is going to want to impose more losses on debt holders.

It is one thing for the Fed to act this way. But we now hear a Fed VP saying bank bonds are sacrosanct, untouchable! If you are in stocks and you lose your shirts, we at the Fed are prepared to let you die, financially. We bail out banks and bank stock-holders lose everything.

But if you own bonds, TBTF bank bonds and maybe smaller bank bonds, sleep soundly. We the Fed will protect you and will do whatever it takes to make sure your bonds keep their value. And if you don’t think that is the view of the Fed, take a look at a Ben Bernanke quote in  his book The Courage to Act: 

“Another contentious issue concerned how to treat countries that, even after rigorous austerity, were unable to pay their debts. Should they be bailed out by other eurozone members and the International Monetary Fund? Or should private lenders, many of them European banks, bear some of the losses as well? The situation was analogous to the question of whether to impose losses on the senior creditors of Washington Mutual during the crisis. We (Tim, especially) had opposed that, because we feared that it would fan the panic and increase contagion. For similar reasons, we opposed forcing private creditors to bear losses if a eurozone country defaulted. Jean-Claude Trichet strongly agreed with us, though he opposed other U.S. positions. (In particular, he did not see much scope for monetary or fiscal policy to help the eurozone economy, preferring to focus on budget balancing and structural reforms.) On the issue of country default, though, Jean-Claude’s worry, like ours, was that, once the genie was out of the bottle, lenders’ confidence in other vulnerable European borrowers would evaporate.”