Anger over the trillions of dollars of government money that have been used to bail out the U.S. financial system is understandable since at some point U.S. taxpayers are going to have to pay that money back through higher taxes. Well, either that or the U.S. itself will declare bankruptcy -- but that's a different discussion altogether.

The particularly frustrating part about the bailouts is that if we're to believe much of the media coverage, the money is going toward keeping financial executives high on the hog and cushioning the fall of those who brought about calamity in the first place. There's certainly some truth to these claims, but most coverage has failed to call out one of the primary beneficiaries of the bailouts. Any guesses?

If you said "bondholders," then you are smarter than a fifth-grader.

The guy behind the guy
So who are these shadowy figures known only as "the bondholders?" To put it broadly, these are the companies and investment funds that own the debt of companies like Citigroup (NYSE:C), Bank of America (NYSE:BAC), JPMorgan (NYSE:JPM), and General Motors (NYSE:GM) and are hoping that these same companies can -- maybe with a little help -- stave off bankruptcy.

As for their exact identities, they're a bit harder to track down than equity holders, but I dug up the major bondholders for Citigroup and Bank of America. There's a good deal of overlap between the two, particularly at the top with PIMCO -- the bond fund behemoth -- and mutual fund giant Vanguard leading both lists. Other major holders include MetLife (NYSE:MET), AIG's (NYSE:AIG) life insurance arm, Fidelity, Prudential, Dodge & Cox, and TIAA-CREF.

Do the names sound familiar? They should, because these are the same companies selling us funds for our 401(k)s and holding our life insurance policies.  

In many cases the bonds that these heavyweights are holding are trading at discounts -- for instance, a $1,000 long-dated Bank of America bond might be trading at $0.60 on the dollar. However, the government's commitment to propping up financial institutions thus far means that debt holders are still receiving their interest payments and are theoretically on schedule to eventually recoup their principal at full value. In other words, right now while brimstone scorches the rest of the economy, they're sitting pretty.

The bonds that bind us
So if the "who" is bondholders, and the "what" is getting bailed out, then how about the "why," as in "why should we care?"

The fact that bondholders are the ones getting bailed out doesn't really tell us anything new about the bailouts. That is, all along, the government has been saying that the bailouts are designed to get credit flowing through the system again. Bondholders are the linchpins for this strategy as they provide the trillions of dollars of debt funding that many major companies rely on. If we spook the debt market, we'll end up with exactly the situation that the bailouts are designed to prevent.

This isn't to mention the fact that an earthquake in the bond market may very well flow back directly to Jane and Joe American. The funds that investors like PIMCO and TIAA-CREF are managing are for pensions, retirement accounts, and other savings plans, so bondholder losses become fund-holder losses. A big hit to the investment portfolios of insurance companies may not be as direct, but it could also create uncomfortable situations.

Containing moral hazard
But even if the reasoning behind bailing out bondholders isn't anything new, the player is one that hasn't gotten much attention -- and that seems like a big oversight. After all, if there was a video "Banks Gone Wild," bondholders would be the cheering crowd feeding the banks drinks and encouraging them to go further.

When we talk about moral hazard and the creation of firms that are "too big to fail" I think we have to look hard at the fact that the debt buyers left the funding spigot on far too long for Lehman, Citi, and everyone in between. Give the bondholders a government-funded free ride and they'll fearlessly lend to massive, risk-taking institutions all over again, expecting Uncle Sam's printing press to spring to life if anything goes wrong.

Prodding at this group won't be easy though. Goldman Sachs (NYSE:GS) may be politically connected, and Citigroup might have a healthy lobbying effort, but the folks buying debt pack some punch of their own. PIMCO, for instance, not only has former Fed Chairman Alan Greenspan as a consultant, it also is running the government's $251 billion commercial paper program and its $500 billion mortgage-backed security program.

Of course, the first step is bringing the bondholder issue into the light. AIG financial services employees getting million dollar bonuses may seem outrageous, but the week-plus spent pulling our hair out over that served as more of a distraction than a step toward a solution. At a time like this, you have to pick your battles, and the fate of trillions of dollars worth of corporate debt seems like a front that we should be all over.