Ever since the 2008 global financial crisis, banks and central banks have implemented several new and some would say insane monetary instruments to try to both keep the system afloat, and also to allow banks from having to stop the financial schemes which helped create the crisis in the first place. From negative interest rates, direct monetization of debt, and even talk of banning cash, the processes instituted over the past eight years show everyone just how broken the global banking and financial systems really are.
Even commercial and investment banks in general have gotten into the game of creating financial instruments unheard of in modern finance. And one in particular is the CoCo bond which in case of default, allows the bondholder to swap the debt for equity in the institution they hold the bonds for.
CoCo stands for contingent convertibles, and are debt instruments created to draw in suckers, err I mean investors who were unwilling to buy regular corporate debt out of fear of receiving nothing during an insolvency event. And the ironic part of this is that if a CoCo bond would actually trigger, and exchange the value of the bond for direct equity (stock) in the bank or company, then it would be nearly worthless anyway since that companies stock would most likely be near zero at the time of the exchange.
At the moment there are a number of Italian banks, as well as a few German ones, who have sold a large number of these CoCo bonds. And on Dec. 16 an interesting bit of news came out which suddenly begs the question… is Italy’s Monte Die Paschi requesting a voluntary swap of debt to equity for outstanding CoCo bonds, or are they seeking to do this with other outstanding debt not tied to a convertible contract?
Banca Monte dei Paschi di Siena has opened its offer for a debt to equity conversion, a major part of a privately-funded rescue of the troubled bank, to retail investors. Italy’s third biggest bank has until the end of the year to raise €5 billion (in equity or face being wound down by the European Central Bank, potentially triggering a wider banking and political crisis in Italy. Sources said, if needed, the government is ready to step in with state money to keep the Siena-based bank afloat. Monte dei Paschi said on Friday its latest debt-to-equity offer would run from December 16 to December 21. The bank, which wants retail investors to convert their junior bond holdings into shares, said market watchdog Consob had approved the reworked offer on Thursday. – Reuters via Russia Today
Italian banks are desperate for any type of liquidity as insolvency fears have heightened since the Italian Referendum vote two weeks ago. And because EU rules regarding sovereign bailouts of banks will not allow the Italian government to backstop Monte Dei Paschi along with her sister institutions, private means of dealing with bondholders is the only avenue they have right now in an attempt to stave off collapse.
One has to ask the intelligence of investors either providing debt, or investing in corporate bonds of these insolvent banks, especially when you look at the outcome for those who invested in Greek debt just a few years ago. But perhaps we can ask Jon Corzine or the husband of Chelsea Clinton on how well that worked out for their investors.
Kenneth Schortgen Jr is a writer for The Daily Economist, Secretsofthefed.com, Roguemoney.net, and Viral Liberty, and hosts the popular youtube podcast on Mondays, Wednesdays and Fridays. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.