Submitted by JM
Senior-Sub Question On Risk: Part Two Of Three
If there was ever a setting where you would think risk is properly appreciated it would be in European banks. Look at total return on senior-sub financial European financials since 2004. On a total return basis, European senior bank debt has outperformed subordinate debt. As a matter of fact, you’ve lost money if you own a portfolio that replicates the BarCap sub debt index going back to late 2004.
Question: Why is sub such a persistent loser in times of crisis, precisely when people should be demanding compensating return for the risk?
- In light of the bailouts and liquidity provision, you can reasonably argue that the larger banks in Europe are quasi-sovereign entities. As a result, there is no way to adequately discern the risk differential between senior and sub debt.
- Is this an example of the foolishness of crowds?