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Bank Bondholders Still Expect Bailout From Nanny State

Tickers in this article: AIG BAC C FNMA GS

NEW YORK ( TheStreet) -- Bond investors in some of the country's largest banks still expect government agencies to bail them out if those institutions fail, according to an informal survey held at a financial services conference held recently in New York.

Asked by the panelists to raise their hands if they expected banks to be bailed out if they ran into deep trouble, all of the roughly 40 bond investors in attendance on March 14 at the Bank of America Merrill Lynch 2013 Fixed Income Bank and Finance Conference did so, according to two people who were there.

The relatively small but diverse group of financial companies presenting at the conference included student lender SLM Corp. (SLM) , and U.S. banks such as Capital One Financial (COF) and Bank of America (BAC) , as well as an assortment of Canadian and European banks.

In the U.S., the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act was supposed to put an end to bailouts such as those granted to AIG(AIG) , Citigroup(C) , Fannie Mae (FNMA) , Goldman Sachs (GS) and Bank of America, among other companies. However, there will probably always be a great deal of uncertainty about whether it succeeded--at least until the new law is tested.

Michael Krimminger, a partner at Cleary Gottlieb Steen & Hamilton who sat on the panel at the investor gathering , doesn't agree with the bond investors' perception that government should be expected once again to bail out the country's banks.

"I'm not surprised in some ways--a little disappointed--that no one raised their hand and said they think Dodd-Frank ended Too Big To Fail," he said.

Krimminger explained that "unless you've actually spent some time getting into the details of how this would work you just kind of assume it would go with the tried and true, which is a bailout and that's just not an acceptable outcome." Further, he added, "I don't think there's the public appetite for a bailout."

Susanna Gibbons, a fixed income portfolio manager at RBC Global Asset Management who did not attend the conference, says she has the impression the rules for winding down a systemically important institution are "still in flux," despite what she sees as "increasing regulatory certainty."

However, "if there were to be a major crisis, in the short run, the government would have no choice but to step in," Gibbons says.

The premium investors demand for buying bank bonds as opposed to government debt, known as the "spread," is nearly back to where it was before the 2008 crisis, Gibbons says. Still, she does not attribute the lower premium to investor certainty that they will be paid in full in the event of a bank failure. Instead, she sees it as a reflection of investors' belief that banks have strengthened their balance sheets and so are far less likely to fail than they have been in some time.