Editing Debt restructuring (section)

=== Bondholder haircuts ===
A debt-for-equity swap may also be called a "bondholder [[Haircut (finance)|haircut]]". Bondholder haircuts at large banks were advocated as a potential solution for the [[subprime mortgage crisis]] by prominent economists:

Economist [[Joseph Stiglitz]] testified that bank [[bailout]]s "are really bailouts not of the enterprises but of the [[shareholder]]s and especially bondholders. There is no reason that American taxpayers should be doing this". He wrote that reducing bank debt levels by converting debt into equity will increase confidence in the financial system. He believes that addressing bank solvency in this way would help address credit market liquidity issues.<ref>{{cite web|url=https://www.nytimes.com/2009/04/01/opinion/01stiglitz.html|title=Obama's Ersatz Capitalism|date=1 April 2009|work=The New York Times}}</ref>

Economist [[Jeffrey Sachs]] has also argued in favor of such haircuts: "The cheaper and more equitable way would be to make shareholders and bank bondholders take the hit rather than the taxpayer. The Fed and other bank regulators would insist that bad loans be written down on the books. Bondholders would take haircuts, but these losses are already priced into deeply discounted bond prices."<ref>[http://www.realclearpolitics.com/articles/2009/03/making_rich_guys_richer.html "Jeffrey Sachs: Our Wall Street Besotted Public Policy"], Real Clear Politics, March 2009</ref>

If the key issue is bank solvency, converting debt to equity via bondholder [[Haircut (finance)|haircuts]] presents an elegant solution to the problem. Not only is debt reduced along with interest payments, but equity is simultaneously increased. Investors can then have more confidence that the bank (and financial system more broadly) is solvent, helping unfreeze credit markets. Taxpayers do not have to contribute dollars and the government may be able to just provide guarantees in the short term to buttress confidence in the recapitalized institution. For example, [[Wells Fargo]] owed its bondholders $267 billion, according to its 2008 annual report.<ref>{{cite web |url=https://www.wellsfargo.com/downloads/pdf/invest_relations/wf2008annualreport.pdf |title=Wells Fargo-2008 Annual Report |archive-url=https://web.archive.org/web/20120518085043/https://www.wellsfargo.com/downloads/pdf/invest_relations/wf2008annualreport.pdf |archive-date=2012-05-18 |url-status=dead }}</ref> A 20% haircut would reduce this debt by about $54 billion, creating an equal amount of equity in the process, thereby recapitalizing the bank significantly.

====Exit consent====
'''Exit consent''' is a formal agreement that allows a majority group of [[creditor]]s holding [[sovereign bond]]s to change the non-financial terms of the bonds in a way that makes the bonds effectively worthless for the minority holdouts, motivating them to accept a [[restructuring]] offer.<ref>{{cite journal |last1=Buchheit |first1=Lee C. |last2=Gulati |first2=G. Mitu |title=Exit consents in sovereign bond exchanges |journal=UCLA Law Review |date=October 2000 |volume=48 |issue=1 |page=59-84 |url=https://heinonline.org/HOL/Page?collection=journals&handle=hein.journals/uclalr48&id=73&men_tab=srchresults}}</ref> Thus creditors willing to restructure can outmaneuver holdouts by using the [[supermajority]] voting features of existing bonds to secure changes, which reduce their value as they are tendered in exchange for restructured debt. [[Government bond]] issued by [[sovereign nation]]s are often perceived as safe investments.  But over time, countries in difficult economic situations have needed to restructure their debt structure, or see their national economy collapse.  During that process, the country must restructure the outstanding debt by offering its old bonds holders new instruments that reflect new financial terms.  It is a process that sees the emergence of holdout creditors who refuse the proposed restructuring, posing a problem to the reorganization process the [[holdout problem]]. Therefore, the threat of an exit consent is used to encourage (or coerce) minority creditors to accept the exchange offer so they are not left with diminished bonds.