These so-called 'private equity' investors have spent the last decade gleefully borrowing ever more money from the banks at ever lower interest rates to constantly buy and sell the same underlying businesses for ever higher prices.
Sooner or later these private equity firms become hopelessly overleveraged, the music stops, and the banks have to start unpicking it all again, via what are basically debt-for-equity-swaps, for example:
a) Terra Firma (owners of EMI) asked Citibank to convert £1 billion of bank loans to equity.
b) HIT Entertainment (owners of Thomas The Tank Engine etc) have asked their lenders to buy a large chunk of their assets.
What HIT Entertainment are asking their lenders to do is pretty much the same as the bank foreclosing on a mortgage and repossessing a house, which is yet another kind of debt-for-equity-swap.
What riles me is the fact that politicians are too dumb to realise that what's sauce for the goose is sauce for the gander. The banks are hopelessly overleveraged (i.e. far too little share capital and reserves; far too much bond finance) and they too can be fixed by debt-for-equity swaps (i.e. bondholders convert part of their loans to shares). There is little need for taxpayer-funded bailouts (above and beyond the £50,000 deposit guarantee).
This is not some pie-in-the-sky idea, as it worked perfectly well for a medium tier US bank called CIT-Group, and, after a fashion, much the same was achieved in the UK by splitting Northern Rock into a 'good bank' and a 'bad bank' (which is effectively owned by the bondholders in the original Northern Rock).
Ah well.
A grim document
16 hours ago
13 comments:
Good point.
One more point to add is that not all the banks are "hopelessly overleveraged". The taxpayer-funded bailouts obscure that fact and lead to a perception that they are all equally weak.
AC, while it is true that HSBC and Barclays did not get overt taxpayer-funded bail outs, they still did massive rights issues (to repay bonds etc), which is yet another kind of debt-for-equity-swap.
Do you think we might see further bailouts next year?
Government still spending like a madman to keep the homeownerism going, and not much sign from the likes of RBS that they're doing very well.
(incidentally, I'm starting to think about how much homeownerism is linked to floating voters, but that's for another time).
OC, the UK govt will keep bailing and bailing, whether directly (via shares), or indirectly (interest rate cuts, taxpayer guarantees) for 'as long as it takes'.
HO-ism isn't linked to floating voters, die hard Labour or Tory voters are mainly HO-ists. Even the BNP (whose voters mainly live on council estates and have most to gain from new development!!) wailed in its manifesto about the greenbelt being concreted over, blah blah blah.
'Sooner or later these private equity firms become hopelessly overleveraged,'.
'The banks are hopelessly overleveraged'.
'splitting Northern Rock into a 'good bank' and a 'bad bank'.
Taking the comments and the context into account what you appear to say is that fiat money supports fiat lending and eventually leads to, let me suggest, fiat pragmatism i.e. there is 10-20%ish good money and the rest is crap.
So, fiat lending produces a 10-20% growth at the expense of the rest which can probably be justified by the growth of the inherent good(10-20%). less the inherent bad(feckin' obvious! :)) and that over the long term the good outweighs the bad.
That is all.
STB.
There is little need for taxpayer-funded bailouts (above and beyond the £50,000 deposit guarantee).
As I've just said at Vox Day's and posted today, it's the incestuous relationship between the funds like this and the power within the BofE and Fed which causes the same problems to recycle.
At least over here there is some ip service given to regulation.
Watching the bahaviour of small HBOS shareholders, I reckon they should have just tapped them up for all the cash.
Most of them seem to be well-off, near retirement age kind of people with little or no understanding of banking or finance.
There's one woman I work with was wailing on about all the money she was losing on her HBOS shares when they were still over a fiver. I suggested she sold them but she was convinced they were 'worth' a tenner.
They've successfully tapped her up twice for more readies now. Last time she was telling me "They were only 37p so I thought I might as well." I reckon she still thinks they'll go back up to a tenner if she keeps giving them more money.
I reckon they could have screwed her for thousands by now if they'd really tried.
SRB, "fiat money supports fiat lending"
a) All money is fiat money.
b) Borrowing supports lending and not the other way round.
"there is 10-20%ish good money and the rest is crap."
I'm a born pessimist but not even I would suggest that the total write down on all loans in the UK could exceed 20% or 30% of the original advance.
"fiat lending produces a 10-20% growth"
Nope. New ideas, new methods, learning by doing, experimentation and lots of hard work produce growth, some of it needs start up finance, most doesn't. Reckless lending on sterile assets like land is a hiding to nothing and probably slows down growth.
JH, I'd give the UK govt the benefit of the doubt and put our bail outs down to stupidity; pandering to the Home-Owner-Ist vote and angling for post-politics directorships. Over in the US it looks more like out and out fraud.
S_L, I wouldn't tell her that she's been well and truly conned, for while correct, that would be heartless.
> New ideas, new methods, learning by doing, experimentation and lots of hard work produce growth
You forgot the most important source of growth, namely more comparative advantage. This is the main reason taxes on transfers are so economically damaging.
http://en.wikipedia.org/wiki/Comparative_advantage
AC1, no I didn't forget it, that's why I keep saying that VAT is the worst tax as it is a deliberate and direct barrier to free exchange - it blocks off any exchange where the comparative advantage is < 17.5%.
Scrap the £50,000 deposit gurantee as well. It's a huge moral hazard issue, and anyway the average savings balances in UK bank accounts is - from memory- about £2,000.
By scrapping this stupid guarantee depositors - that is unsecured lenders to banks - would be forced to think about their bank's strength and safety rather than just the rate of interest that was offered.
All these 'guarantees' are false anyway. I have just been warned that my firm will be up for paying our share of the costs of another failed business selling 'guaranteed' financial products. We will have to increase our prices to our clients to cover this impost. The client's will pay. It's just a mad money go round.
In fact in the new year I am going to add a specific RAT (Regulatory Added Tax) to our fee invoices. It'll start at 15%.
L, maybe the guarantee should be reduced to £20k or £10k, I do not know. But it would be silly to expect every small depositor to carry out due diligence on his or her bank every six months, some things are best done by a regulator (albeit this lot have done it incredibly badly).
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