Saturday, 21 July 2018

Well, then (no longer) alone

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I KNOW THAT I have a bit of a reputation for being a miserable old crow for whom the glass is usually not only half empty but cracked and leaking as well.

For quite a long time I was out there on my own as a grumpy old sod, but in the past weeks and months there has been a bit of a crowd building up of the like-minded.

The mass redundancies which have been announced across the banking sector are a stark reminder that something has gone horribly wrong.

What is perhaps more surprising is that it has taken this long for things to reach this sorry pass – a full eight years after the trigger was pulled on the starting gun for the global financial crisis, when BNP Paribas announced that it could not value the assets in one of its structured credit funds.

At the time, I was making a tidy living as a purveyor of CLO equity to the gentry. But once the crisis had struck, it didn’t take long for me to be made redundant – I was going on 54 and already had a target on my back.

What followed the near-bankruptcy of the banking systems in the US and Europe was a feeding frenzy, the likes of which we had never seen before and during which the investment banks made eye-watering trading profits. Having screwed their clients on the way up, they were happily fleecing them again on the way down.

The characters at the heart of the banking crisis were strutting around as though they owned the world while doing God’s work. The “s” in “hubris” was replaced by a very, very large dollar sign. The fact that bankers were getting rich in the middle of a credit crisis proved that something was very wrong.

Now we again have something other than good old real demand and supply determining what we do

I TOOK THE view that we had been living in a synthetic environment and that it would be best to take our medicine with dignity, acknowledge that wealth built on cheap leverage is no wealth at all, and go through what I termed a “shrink to fit” process.

As we know, that didn’t happen. The banks got bailed out, the central banks cut rates to the bone in order to encourage everybody to borrow, provided the cash for them to borrow, and now we stand here, eight years later, wondering whether it was all worth it.

BANKS ARE NOW contracting at a time when credit is still growing. Those borrowings have to come from somewhere, and that somewhere would appear to be an environment where providing debt capital is an asset allocation decision, a means to an end and not an end in itself as would have been the case if borrowing from a bank.

Pushing lending away from banks and into the public markets is not a problem until you suddenly get a case like Iceland.

The next Iceland won’t be sovereign and it won’t be the banks that bear the brunt. I understand that Petrobras has US$24bn of debt to repay within the next 24 months, US$10bn of which is financed in the bond markets. What if they try to issue and nobody shows up?

IFR reported last week that Carlyle Group’s financing package for the Veritas acquisition had foundered. When in the 1980s Michael Milken expressed that he was “highly confident” that he could refinance a trade, he had done his homework, lined up his investors and was in reality beyond being merely highly confident.

Chinese walls, level playing fields and the near-death of the knowledgeable salesperson who knows how to use not only an IB Chat but how to engage a client on the telephone have debt capital market groups dependent on the blithe assumption that there is no end of demand for whatever is on the slate.

The toxic mix of an artificial interest rate structure, artificial liquidity, artificial trading mechanisms and artificial communications has created something – I’m not quite sure what – which leaves old-timers like me worried.

I have always been worried when derivative markets believed that they – and not the underlying realities – were in the driving seat. And I have, in the fullness of time, been proven right, even if I did miss some of the happy times before it all went wrong.

Now we again have something other than good old real demand and supply determining what we do, when and at what price – and that is as wrong now as it always was.

We had one shot at letting markets collapse while in the process finding their own natural equilibrium again. We blew it or, to be frank, the authorities blew it.

I dread the thought of the whole thing happening again but there is now an increasing number of people willing to suggest that risks are building up to the point where it is all about to go wrong once more.

Are we surprised, therefore, that the central banks are so reluctant to normalise rates? They certainly don’t want anybody to know that they are the ones swimming without Warren Buffett’s famous shorts.

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