If subprime issues and tainted paper sold around the world didn’t start a global economic war a recent move might do so. Investors in bank debt are threatening to boycott lenders that follow Deutsche Bank in breaking an unwritten rule and failing to exercise a call option on subordinated debt.
In a coordinated action, angry bond investors are writing to bank treasurers and investor relations heads telling them that any failure to exercise a call option will be considered a breach of trust that could cause all the issuer’s debt to be shunned.
Read the part that says breach of trust. Now consider the breach of trust relative to selling homes to those who could not possible pay for them. Consider for a moment the vulnerability of credit card holders as interest rates are arbitrarily raised prior to adoption of new rules, often referred to a the “credit card bill of rights.”
While banks around the world claim to have a special trust and confidence in unwritten rules, that trust is seriously in doubt. The fact that subprime problems started in the United States is not overlooked. Trace the problem back to Phil Gramm and his proposed lack of regulation, if you will. But even as warning signs were obvious, there was little impetus to raise alarms about the proliferation of easy credit that was helping Mr. Bush meet housing goals.
Where was the first shot fired in the overall global economic war? Deutsche stunned the debt market last week by choosing not to redeem about $1.8 billion (USD) of subordinated lower tier 2 bonds because to do so was cheaper than refinancing. The Bank of China fired back, writing to many banks, including every bank in England, saying if trust is violated the violating bank would be put on a permanent list of those never to do business with again.
Here are the complete details of what happened.