Whether the stunning US$17.5bn three-tranche deal for the Kingdom of Saudi Arabia tells us more about the state of affairs in the Kingdom or about the desperation of investors for yield and diversification might be a moot point but I take my hat off to the borrower and the lead group for putting together a brilliant deal at the right price.
I’m not quite so sure about handing out plaudits to the powers behind the announced US$80bn takeover of Time Warner by AT&T. The FOMC meets on Tuesday next and, with the election just days away, the members are highly likely to just keep their heads down and do nothing. I recently suggested that the get-together of US central bankers will end up being little more than a convivial coffee morning. So who had the mad-cap idea of throwing such a highly controversial and transformative mega-deal into the mix just over two weeks ahead of polling day?
At a time when the candidates for the White House, the Senate, the House of Representatives or for governors’ mansions are all vying for the vote of Joe and Nancy SixPack and are trying to be as populistic as they can, the appearance on the horizon of a barnstorming deal which will make millions and millions for the members of management of both companies and generate hundreds of millions in fees for Wall Street banks while threatening jobs in the consolidation is about as insensitive as it gets. No wonder both Donald and Hillary came steaming out of the blocks denouncing the proposed transaction.
Did none of the advisors suggest to the involved parties that discretion might be the better part of valour and that it might be wise to wait until the elections were over? Or were they all too keen to make sure the deal hit the screens before the respective compensation committees had made their final decisions the 2016 bonus numbers?
British American Tobacco’s bid for the 57.82% of Reynolds it does not already own is, at US$47bn, quite tame in comparison. We’ve come a long way since RJR Nabisco (the RJR of course stood for RJ Reynolds) was in the centre of one of history’s great LBOs and a brutal fight between the management under Ross Johnson and the emerging KKR with Henry Kravis at the helm.
That was all last week and we go into this one with a few parties beginning to batten down the hatches ahead of the November 8 poll. The viciousness continues unabated and I have spent as much time as the next man watching, listening and shaking my head. The BBC brought us one very good piece with the economists Austan Goolsbee for the Clinton camp and Diana Furchtgott-Roth for the Trumpists in an episode of “In the Balance”. I’m not sure either of them was overly convincing in selling either “Clintonomics” or “Trumponomics”, respectively, but it did clearly mark out the massive differences in their approaches. The fight is always for the middle class or, as Barry O’Bama used to have it, “hardworking American families” and both sides are promising things the country will never be able to afford. Well, I suppose nothing new there…
The lines were well defined and whoever can find the programme on-line might do well to listen to it and if only for Furchtgott-Roth’s closing line which was “I’m an economist – I can forecast the past but I can’t forecast the future…” Says it all, eh?
My trip to London at the end of the week threw up some very thorny technical issues. I keep on running into small firms that are having their trading lines cut by the big banks under the pretext that they are not profitable enough.
I understand the small guys complaining that if they don’t receive sales coverage they can’t do more business. They’re quite right but it wasn’t until now that I understand why they are being so ruthlessly cut out. The cost to the banks and market makers of maintaining ongoing due-diligence under the ludicrous regulatory framework has become so high that they have to limit the number of counterparties they can deal with.
Level playing field? Didn’t somebody once say something about a level playing field? I am staggered. Not so many years ago it was simple. The regulator licensed a firm and that was good enough for the regulator, and good enough for us. Counterparty risk was covered by the clearing houses and their delivery versus payment system protected trading partners from all but a spot of market risk in the event that one of the parties failed to perform.
That system served markets perfectly well for a long time. Here in London it was regarded as perfectly adequate for a firm to be SFA, then FSA and now FCA-registered for it to become an approved and no-further-questions-asked trading counterparty to any other equally licensed firm. Can somebody please explain why such smaller players are being put to the sword with what appears to be official approval? The ocean can’t live on whales and sharks alone and there’s more to the Serengeti than lions, leopards and elephants. Taking out the bottom feeders will not make markets a safer place but they will end up being much poorer and with significantly shallower price discovery.
If regulatory costs are such that the “biodiversity” of the market place is being threatened, then something has to change and pronto. The system under which regulators are looking for their very own Teflon suit has now made the cost of doing business prohibitive without a guarantee that anybody who is crooked and who wants to game the system won’t be able to do so. Drive trading online at your peril. On the phone one can recognise one’s clients – “KYC” and all that – but online they could be any two-bit hacker… and events of the past week have demonstrated just how vulnerable fail-safe systems can be. You may gather that I’m not happy but I, at least, can say so.
Finally, while in London on Friday I went to visit my fellow “Teenage Scribbler”, Bill Blain of Mint Partners who is recovering in hospital from triple heart by-pass surgery, which he underwent this time last week. I found him in good spirits and intent on making a full recovery. I know that many of my readers also enjoy his daily column, the Morning Porridge, and that they might not be aware of why he’s absent. He will most likely be out until the end of the year but I can assure you that he looked just fine and that he’s a long way from “Bugger Bognor!”
Have a good week.