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Thread: The Uber-rich Bondholder Myth

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    Default The Uber-rich Bondholder Myth

    Apparently there is a lie going around saying that 'Bondholders' are saved in Bail-outs and other acquisitions.

    Simple answer: No

    During any liquidation process, assets get distributed in the following order (generally)

    1) Senior Debt (Bond)
    2) Junior Debt/Sub-ordinate Debt (Bond)
    3) Preferred Stocks/Warrants (Half-Bond, Half-Stock)
    4) Common Stock (Stock)

    Lets say, each group is owed the following for a total of $400
    1) Senior Debt: $200
    2) Junior: $100
    3) Preferred: $50
    4) Common Stock: $50

    Lets say, during liquidation, only $200 is recovered

    Typically, it will be distributed as follows
    1) Senior Debt: $180 (loss of 10%)
    2) Junior Debt: $15 (loss of 85%)
    3) Preferred/Warrants: $5 (loss of 95%)
    4) Common Stock: $0 (loss of 100%)

    If UberRich(TM) has Junior Bonds or Warrants, he will still suffer excess of 85%

    Also, UberRich(TM) would be well spread among all the 4 groups. There would be some UberRich holding stocks and completely wiped out.
    In fact, the senior debt (usually AA rated) are held by many pensioners and funds(aka Average Joe)

    Bottomline, don't get fed by lies reading shady web-sites and do your own thinking

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    Default Re: The Uber-rich Bondholder Myth

    ^^^ now recalculate your $400 example for a $300 recovery which is more typical for a bailout scenario ...

    1) Senior Debt $190 (loss of 5%)
    2) Junior Debt $90 (loss of 10%)
    3) Preferred / Warrants $30 (loss of 40%)
    4) common stock $0 (loss of 100%)

    If you now consider that the 10% loss suffered by the uber-rich can be applied dollar for dollar against other capital gains, their aggregate 'loss' is probably on the order of 7-8%. On the other hand, the losses for Joe Sixpack common stock holder are worse than 100%, since Joe not only took a total loss on his common stock shares but will also be paying higher taxes to finance the bailout ... which effectively reduced Mr. Uber-Rich's pre-tax loss from 85% to 10% but did nothing to mitigate Joe's own losses.

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    Default Re: The Uber-rich Bondholder Myth

    Quote Originally Posted by Melonie View Post
    ^^^ now recalculate your $400 example for a $300 recovery which is more typical for a bailout scenario ...

    1) Senior Debt $190 (loss of 5%)
    2) Junior Debt $90 (loss of 10%)
    3) Preferred / Warrants $30 (loss of 40%)
    4) common stock $0 (loss of 100%)

    If you now consider that the 10% loss suffered by the uber-rich can be applied dollar for dollar against other capital gains, their aggregate 'loss' is probably on the order of 7-8%. On the other hand, the losses for Joe Sixpack common stock holder are worse than 100%, since Joe not only took a total loss on his common stock shares but will also be paying higher taxes to finance the bailout ... which effectively reduced Mr. Uber-Rich's pre-tax loss from 85% to 10% but did nothing to mitigate Joe's own losses.
    Again totally wrong.

    * you can find UberRich investors distributed equally among all four groups
    * you can find Average Joe distributed equally among all four groups (through pension funds or regular mutual funds)

    Bottomline, there is no single group in the above four, that focuses on Average Joe or UberRich. Consequentlly neither fed nor george bush can only save UberRich or only save Average Joe

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