Should not the bond holders bear that risk?
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You can’t force them to hold all of it, and there is probably insurance that banks can buy (much like insured bonds) to remove the risk of those bonds from their books even if they were forced to hold it.
There are a lot of domino’s to fall before it gets to the bond holders.
Andy
The bold holders are the lenders. They are the ones that ultimately decide if they want to allow said company to load up on all that debt.
Good Point Hawkin but in reality they are not looking out for the Equity investor so while the Debt maybe good for them it could be bad for everyone else.
Andy
Bond holders and others putting up lots of money in a leveraged buyout are actually getting a good deal. If the buyer ultimately makes the business work, they get a nice return on their bond investment.
And if the buyer fails, they effectively get the company out of bankruptcy. Shareholders are wiped out, and smaller creditors are more interested in getting something rather than nothing. So the bond holders can offer to pay the smaller creditors more than they’d get in a liquidation in exchange for agreeing to a takeover of the business by the bond holders.
With the bonds effectively moved to equity, the big debt overhang is gone and the business can be milked one more time, this time by the former bond holders now appearing to be the “saviors” of this “failed” business. But they really just do exactly what the previous ownership did - find another set of lenders, give a passing nod to resurrecting the business out of bankruptcy, pay themselves generous wages and bonuses for actions of questionable value, all while taking out as much cash as possible in as many ways as possible.
–Peter
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What a minute. The equity owners are the ones that are deciding to borrow in the first place. If you don’t want your company to borrow money, then either don’t do it, or sell your stake in the company.
Not really. Management of the business decides to borrow. Equity owners can only vote to change the board of directors.
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Seems we had this discussion a dozen years ago. The lending banks will complain that, if they are forced to retain the loans they have made, it will 'crash the economy". They will insist that they need to sell the loans, to get cash, to make more loans. If they can’t fob off the first batch of loans, lending stops, and the economy stops.
Insurance isn’t any better than the solvency of the insurance company. How much did the government put into AIG, so it could make good it’s commitments to the TBTF banks?
Steve
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I don’t think that would be the argument, at least not directly. More that it would be a massive risk for one entity to own 100% of the debt of a company. No one in the right mind would want that.
Tesla has $5 billion on debt. Nvidia has about $12 billion. What banks wants to own all of that? It would be a massive amount of risk to be forced to hold all that debt - and I guess in that respect, it would probably help crash the economy. If banks were forced to hold all corporate debt and individual investors could not buy it, then there were maybe would be just 5% to 10% of the total amount of money available for corporate lending.
U.S.: corporate debt securities 2022 | Statista.
23.9 trillion U.S. dollars. Of this latter total, 16.3 trillion U.S. dollars was debt issued by financial corporations.
United States - Total Assets, All Commercial Banks - 2023 Data 2024 Forecast 1973 Historical.
Total Assets, All Commercial Banks was [23 Trillion] of U.S. $ in June of 2023,
I heard exactly that argument in 08, when banks were being blamed for the securitized loan packages they had sold, which then lost significant value as components turned non-performing. This isn’t about one bank holding all the debt of one company, but banks holding any of their loans at all. iirc, one of the reforms introduced after the crash was that banks retain some portion of the loans they wrote, to try and force some responsibility on to them.
Steve
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The majority of investors wont really know much about what they are doing.
A larger part of management is also in the dark. Does stop anyone from trying to get the money. It is called risk.
I don’t think that is what is being proposed here. What is being proposed is that the banks, as a group, that extend loans for these kinds of ventures should hold the paper rather than sell it to insurance companies, pension funds, mutual funds, and individuals. So when PE company X takes company ABC private and borrows $10B to do so, JPM take $1.5B of the deal, GS takes $2B of the deal, WF takes $1B of the deal, Citi takes $1.5B, etc. The proposal is that each of the banks have to keep that paper on their books for some period of time to keep the risk of issuing it “in house” until the deal becomes seasoned somehow, maybe 5 years, whatever. It’s not a proposal that a single bank hold ALL the debt of the private equity deal, just the portion of that debt that they were willing to extend up front.
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That would still seem to result in a crash of the corporate debt market if individuals, pensions, etc. are effectively removed from the ability to purchase debt in the primary market, and then excluded from purchase the debt in the secondary market for X years. There simply is not enough bank liquidity to soak up all that debt.
$4.1 trillion corporate debt was issued in 2022. The 15 largest banks in the US are only worth $14 trillion as of March 2023.
'Sides, banks often do hold some corporate debt when they work on a deal. It has been a long time since I took my Series 6 and 67 so I had to look this one up.
Underwriting syndicates already do what you propose, form a group of banks to underwrite a large issuance. Members of the syndicate will take receipt of the bonds into their inventory, and then can sell them or hold onto them. Of course the difference is that they are not required to hold them for any specified period of time (usually).
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That is the argument the banks make, the economy would crash because, if the banks can’t sell the debt, they can’t obtain cash to write more loans. The problem is, the banks are not accountable for the performance of the debt they sell. Profit, without accountability, is a sure recipe for abusive/deceptive practices. The people buying the debt have no idea what standards/schemes the bank employed to “qualify” that borrower.
Of course, we old phartz remember when banks funded their loans with deposits, then splitting the profits from the loans with their depositors in the form of interest on their deposits.
As offered before, the “supply side economic miracle” has been floated on a mountain of debt. Deposits can’t provide enough cash to lend, so the debt markets grow. Abuse grows. Borderline fraud grows. All to finance the “supply side miracle”.
Steve
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How is that any different than any other investment?!? Morgan Stanley is not responsible for the performance of the Tesla stock you buy through them any more than they should be responsible for the Tesla bonds you buy through them.
Now, if you allege that a fraudulent prospectus was filed, then you likely have something actionable but as the person buying the asset, you are responsible for doing your own due diligence.
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Remember the mortgage lending problems of 2007-9? Banks lent money, packaged the loans into CMOs, then sold the CMOs on the open market, taking a fee for themselves along the way. Once sold off, they didn’t care how the loans performed. They had made their money. And the way to make more money was to write more loans so that they could sell more CMOs. Underwriting standards for the loan fell into the basement because the original lenders had no skin in the game. Make payments, don’t make payments, the original lender didn’t care since they sold off the loans. Not only did they have no incentive to make good loans, they actually had incentive to make bad loans because they profit off of selling off those loans.
Trying to compare that to the brokerage side of anyone is silly. It makes no sense. Morgan Stanley didn’t create Tesla then sell it off. They merely act as a facilitator between someone who wants to sell Tesla stock and someone who wants to buy Tesla stock. They also help owners of Tesla stock by holding their shares in an account for safekeeping.
But banks ARE creating the loans being talked about here. They are the ones deciding to lend the money.
–Peter
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That is not true.
Fraud offenders can face criminal charges and civil cases.
The 2008 meltdown was systemic. The FED/Treasury and the US government lined it up to individualize a great depression because of the cyclical knowledge of our economy as opposed to an economic collapse where foreign powers would have come out economically on top. A great depression as a result of supply side economics was otherwise in the cards. Loose lending individualized the depression.
When Morgan Stanley helped take Tesla public as part of a initial public offering, they created a prospectus in the same manner they would if Tesla was offering bonds. The process is the same. Note, I am not talking about being a broker for stocks or bonds in the secondary market, I am talking about being an investment bank that brings both stock and bonds to the primary market.
https://ir.tesla.com/press-release/tesla-announces-pricing-initial-public-offering
Goldman, Sachs & Co., Morgan Stanley, J.P. Morgan and Deutsche Bank Securities are acting as the joint book-running managers* for the offering.
The offering of these securities will be made only by means of a prospectus, copies of which may be obtained from Goldman, Sachs & Co., via telephone: (866) 471-2526; facsimile: (212) 902-9316; email: prospectus-ny@ny.email.gs.com; or standard mail at Goldman, Sachs & Co., Attn: Prospectus Department, 200 West Street, New York, NY 10282-2198; from Morgan Stanley & Co. Incorporated, via telephone: (866) 718-1649; email: prospectus@morganstanley.com; or standard mail at Morgan Stanley & Co. Incorporated, Attn: Prospectus Department, 180 Varick Street, New York, NY 10014; from J.P. Morgan Securities Inc., via telephone: (718) 242-8002; or standard mail at c/o Broadridge Financial Solutions, 1155 Long Island Avenue, Edgewood, NY 11717; or from Deutsche Bank Securities Inc., via telephone: (800) 503-4611; or standard mail at 100 Plaza One, Jersey City, NJ 07311 Attn: Prospectus Department.
A registration statement relating to these securities has been declared effective by the Securities and Exchange Commission. This press release shall not constitute an offer to sell or a solicitation of an offer to buy, nor shall there be any sale of these securities in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or jurisdiction.
*Bookrunners are responsible for everything that has to do with underwriting.
So, the banks ARE creating the equity being talked about here. They are the ones deciding to create the equity (and occasionally must buy the unsold equity).
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