Professor William Black:

"Subordinated" means that you come later in bankruptcy priority, and as a practical matter, it means you will essentially never recover if a bank fails. That is what it is supposed to mean. Because of that, the banking regulators actually encouraged the issuance of subordinated debt - because this was supposed to create ideal private market discipline.

It is bought, typically, from a minimum size of $10,000 up to multi-multi-million-dollar slugs, so it pays to exert private market discipline. It is bought by elites - allegedly financially sophisticated people - and because of the subordinated feature, if the bank fails, the argument goes, they will lose their money. You are supposed to get ideal private market discipline and because of that, it is treated as part of your capital to meet your capital requirement. It is expressly defined, therefore, as risk capital. That means it is supposed to be lost if the institution fails - otherwise, all that theory stuff goes out the window. So the one thing you would never, ever bail out or guarantee is subordinated debt.