Steve Schwarzman on why bank creditors have to be bailed out

It seems to me that we are talking about two different kinds of debt here.
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The first is debt incurred through actual banking operations -- banks borrow money in order to be able to do what banks do -- make loans. There is good reason to "protect" that debt, and that is what the FDIC does.
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But a whole lot of the debt that banks owe has nothing to do with the loan business -- its debt held by bond holders who loaned the banks money to buy up other banks/businesses. That kind of debt should not be protected by the government -- and that is precisely what is being protected by the Geithner/Bernacke bailouts -- the bondholders for these megabanks, and the stockholders who own the banks themselves.

Justin,
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In all this talk of the bondholders and stockholders, are you and everyone else going to continue ignoring exactly who those people are?
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I mean, it's bad enough we're bailing out Goldman Sachs and their buddies, but do we also have to subsidize Saudi oil princes and Chinese businessmen?
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I'd really feel a lot better about all of this if there wasn't so much deception - or just plain non-mentioning of how much of these financial institutions are held by rich foreigners/foreign governments. There's a case to be made for not wiping them out, but we're not hearing that. We're hearing something else entirely, and I wish someone in the financial media would call them on that.

Thanks, Justin Fox, for pointing this out.

Investing in corporate bonds has always been, like investing in equities, all about risk and reward.

There are many tiers of debt that one can invest in at various layers of bank holding companies, including holding company senior or subordinated and subsidiary bank senior, subordinated, or deposits and subsidiary non-bank debt instruments.

Investors in these securities generally know what they're taking on.

And, as in other investments, they sometimes make bad decisions.

As usual, Schwarzman's just talking his book. He needs massively capitalized and leveraged banks run by "legacy" bank managements to keep rolling over the debt crippling Blackstone's private equity positions - there is a reason, after all why Blackstone's stock price dropped 75% since it's IPO less than 2 years ago (he cashed out more than $1 billion and left the "new money" with the embedded losses)

Schwarzman is a much more deserving target of populist rage than AIG's Liddy. Thank goodness for Schwarzman nobody in Iowa or Michigan has much of an idea of what "private equity" is or his role in all of it.

He should simply be gracefully quiet until all this passes.

But that's not the kind of person he is.