How bad has the credit crunch been on investment banks? According to Robert Kindler, a top M&A banker at Morgan Stanley, the private equity boom looks like a net loser for Wall Street.
As pointed out in this WSJ Deal Journal post, Kindler’s quote on the subject goes as follows: “When you net out all the profit versus all the losses, Wall Street hasn’t made money, it’s lost money.”
Kindler was speaking on Monday at a New York M&A conference sponsored by Penn State’s Dickinson School of Law. He was talking about one of the key issues facing investment banks as the debt pipeline slowly unclogs. That issue being whether write-downs banks take for the hung loans ultimately offset the amount of fees banks made during the private equity boom.
According to Deal Journal, Dealogic shows that banks received roughly $34.2 billion in revenue in the past three years for all types of business associated with private equity debt underwritings, M&A fees and related transactions.
Through August alone, private equity firms announced around $800 billion worth of deals, an amount that funnelled those fees to Wall Street.
But the credit crunch caused banks to be stuck with more than $350 billion of leveraged buyout loans.
As a result, most major investment banks have announced whopping write downs. So the question remains, in the end, did the credit crunch wipe out private equity profits at banks?
Here’s how Deal Journal puts it, when framed next to the $34.2 billion in revenue.
“To post that steep of a loss, the banks would have to lose about 9.6% of the $353 billion bank loan and high-yield commitments created this year. That number seems hard to reach given that banks are selling off some of their loans at about 95 to 96 cents on the dollar.
But if you factor in the reduced value of the banks’ equity bridges - as well as some of the lower carrying costs for the remainder of the loans - Kindler’s estimate at least seems plausible.”
Equity bridges, by the way, were the up-front cash piles banks gave to private equity buyers as a way to help the firms seal the deals. They were high risk, low return loans that came back to bite the banks in the you-know-what. Just ask Kindler.
The banks “were getting paid nothing for the bridges,” Kindler said, according to Deal Journal. “They were not pricing the risk they were taking.”
(Photo. Robert Kindler, www.dealbreaker.com)
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Citibank owns a lot of SIV entities and the SIVs own low quality mortgage backed bonds, that are defaulting, or likely to default soon. JP Morgan Chase and Bank of America own the same kind of toxic waste, but already have this toxic waste on the books, rather than on the books of a technically separate entity they guarantee. In all three cases, however, the “official” values, being placed on these sometimes worthless securities, is far higher than they could possibly be sold for to a true third party. In spite of the recent writedown of $6 billion, Citibank, alone, still has some $80+ billion in such paper, all of which is being claimed at a value it cannot be sold for, in the open market.
None of the banks want to tell the truth about their true losses, in terms of the real value of such securities, at this point in time, to a third party. Accordingly, with the help of Henry Paulson, Secretary of the U.S. Treasury, and wheeler/dealer extraordinaire, they just formed a new Super-SIV to make a false market in such bonds. In effect, the banks will start to buy a small number of these bonds, from themselves, at inflated prices, and then claim that the false price is the real price. then continue to use the inflated prices as the The value of the toxic waste, whether on or off the books is what the real market will pay for them, so, in some cases, they are entirely worthless, and, in others, they are worse only a fraction of the original purchase price.
At any rate, JP Morgan and BofA are not getting involved in this charade simply to earn some fees. That is just petty cash to them, and they would never take the risk of guaranteeing Citibank’s losses. The truth is that they are as desperate, or more so, than Citibank. If the true value of these securities ever appears on their books, their alleged “working capital” might be wiped out, and the banks might be technically insolvent. Federal laws require minimum capitalization, and the truth might result in these banks falling below the minimums, at least temporarily. That would leave the FDIC no choice but to put certain divisions into receivership. Since these banks are too big to fail (at least without an attempt at taxpayer bailouts) desperation causes Henry Paulson to try to legitimize what would otherwise be an illegal restraint on commerce in violation of the Antitrust Act, and a fraud in violation of the SEC Act. With the imprimatur of the Treasury, criminal activity, in falsifying the books, suddenly will gain legitimacy. The entire plan is designed to “cook” the books, and it smells really bad. In the long run, it would be better if Citibank takes an honest $26 billion dollar writeoff, and for BofA to take a $14 billion writeoff. To keep them out of receivership, the government might temporarily relax the minimum capitalization standards, with the priviso that, if they didn’t rebuild their capital within a set time, a receivership would be set up. Certainly, no receiver could have run these banks any worse than current management did, so, maybe, it would be better not to relax capitalization standards. How novel is this idea…how about just treating them like the rest of us. How about letting them fail, just as smaller banks would be allowed to do?
- Posted by Jim