Thursday, July 02, 2009

No Funny Business to See Here ... Please Keep Moooving!

At the risk of stating the obvious, money is the raw material of the financial industry. Banks need a constant stream of new money, just as a microchip factory needs silicon. In fact, most banks can't go even a single day without new money (a dangerous strategy that has not gotten the attention it deserves through our recent little trouble). For a period of weeks in late 2008, even good banks couldn't raise money at a rate they would accept.

Enter Uncle Sam, who agreed to do what most other countries have done for years: guarantee bonds issued by banks (called GGBs by most, TLGP-IDIDGP by the Feds). This was a tacit subsidy. It meant banks could issue bonds (=borrow new money) at a much lower interest rate than the panic-driven market rate they could otherwise get. The argument was, with all the turmoil and tumult, nobody could tell the good banks from the truly bad, so they had to throw them ALL a lifeline.

The panic has more or less subsided, but the subsidy has persisted (as Reagan predicted). By now, its clear which banks are bad (Bear, Lehman, WaMu, MS, Citi, GMAC). Absent government guarantee, these zombies were or would be gone in 60 seconds just like Memphis Raines.

Then there are the "Chosen" banks. These banks have carped all along that they're fine, they're healthy, they don't need government help ... but in the interest of a strong, patriotic esprit de corps, they'll take a share of whatever the government doles out to help Uncle Sam's PR campaign.

Suuuuure, dude. Not for nothin' the definitive book about Wall Street is titled Liar's Poker. Bankers are bulldog deal-makers. They're ruthless prestidigitators. They're voracious precision-tuned, profit-hunting machines. They're self-proclaimed Ayn Rand Dollar-worshipping Capitalists ... though I'm not sure Ayn would agree.

Clearly, the Chosen banks saw the meltdown coming last fall and realized that the winning strategy was to get as cozy with the US Government as possible. Led by the ultimate opportunist Jamie Dimon (who had spent 15 years kissing and conniving his way to the helm of JPMorganChase), the Chosen banks played lapdog to the Treasury and the Fed. "See that maimed bank in Seattle, Jamie? See it? See it? GO FETCH!" And he did. Time and again. Tacit, of course, was the agreement that Hank, Ben, and Timmy would make sure his dog food bowl always runneth over and that he got a steady diet of Scooby Snacks.

Which is where the GGBs come in. The Chosen banks don't need the subsidy, but as it tuns out, they're some of the biggest beneficiaries of it. By borrowing at artificially cheap rates, they're able to artificially boost their bottom line. Deals and businesses that would be unprofitable at market rates suddenly look brilliant. Recent headlines tell the tale:

Last week, the quarterly summary was published on these GGBs, the vast majority of which are bank bonds. The numbers are telling...

  • The Zombies and the Chosen continue to gain huge advantage from the GGB program, issuing mountains of the stuff.
  • Uncle Sam is clearly routing the business of creating these GGBs to the Zombies and the "Chosen." The list reads like a junior high BFF list. Each bank's rank in the list is exactly commensurate with the level of coziness they've achieved with the government.
  • The same is happening worldwide. If you want to know the Chosen banks worldwide, look no further than the 5th through 10th ranked bookrunners in this list (see link below). HSBC and Barclays in the UK, BNPP in France, Deutsche in Germany, and Commonwealth in Australia

So much for Geithner's and Obama's promises of government non-interference in the market.

4/1/2009 - 6/25/2009 (US$ MLN) RANK SHARE ISSUES
JP Morgan 13,896.9 1 21.2 10
Citi 13,449.9 2 20.5 13
Morgan Stanley 6,920.6 3 10.5 12
Goldman Sachs & Co 5,113.1 4 7.8 10
Bank of America Merrill Lynch 4,535.9 5 6.9 6
1/1/2009 - 6/25/2009 (US$ MLN) RANK SHARE ISSUES
Citi 46,105.0 1 20.7 33
JP Morgan 38,853.1 2 17.5 30
Bank of America Merrill Lynch 34,737.0 3 15.6 21
Morgan Stanley 29,086.8 4 13.1 29
Goldman Sachs & Co 20,896.0 5 9.4 27
Source: Thomson Reuters

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