As regular readers of this blog know, the FDR Framework specifies how a government should and should not interact with the financial markets.
- It should insure that all useful, relevant information is made available in an appropriate, timely manner to market participants; and
- It should not endorse a specific investment.
Investors are not required to do their own homework.
This is very important. Because they are able to know what they own, investors are willing to accept losses.
This is the important corollary to be willing to accept losses without complaint when there is an ability to know what they own. There is no reason to believe that investors would not want to be protected from losses if they cannot know what they are being asked to invest in and are being asked to blindly bet on.
This is why investors in senior bank debt are unwilling to accept losses. Investors do not have access to all the useful, relevant current asset-level information in an appropriate, timely manner. Without this data, how can they do their homework, evaluate the riskiness of the bank and properly price this risk?