FDIC Chairman Versus Secured Creditors
5th October 2009
A more far reaching proposal to consider is limiting the claims of secured creditors to encourage them to monitor the riskiness of the financial firm.
This could involve limiting their claims to no more than say 80 percent of their secured credits. This would ensure that market participants always have ‘skin in the game’.
Unfortunately for Chairman Bair, the whole point of being a secured creditor is so that you don’t have to spend a lot of time monitoring the riskiness of a financial firm. Secured creditors charge a lower interest rate because they have a lower risk. As the government found out during the recent bailouts, secured creditors are the fly in the oinment of expropriation and restructuring to favor those whom the government chooses to favor, and so they want to eliminate it in the future.