Wednesday, 20 August 2008

Big increase in net capital issuance.

The more you examine this credit crunch, the stranger it gets.

Consider, for example, recent net capital issuance. Over the last three months, capital markets have raised quite a bit of new cash. In fact, recent volumes easily exceed the pre-credit crunch numbers. In July alone, the markets raised almost ₤50 billion.

Who is raising this money? Basically, this capital issuance is almost entirely confined to the financial sector, with banks and off-balance sheet vehicles raising approximately equal amounts. As for non-financial corporations, on a net basis, these firms actually repaid debt or withdrew equity. So the credit crunch does appear to be working its mischief in the real economy.

What exactly did financial institutions issue in July. It almost entirely bonds. A little equity was also raised, but as I said, all the action was with fixed income products.

I won't pretend that I can make much sense of these numbers. Superficially, I can see two possible explanations. The first suggests that everything is well, and that capital markets are operating as they should. However, that is not what I read in the financial papers.

The second explanation suggests that this increase in capital issuance is, in some way, a product of the credit crisis. This bond issuance could be some form of financial merry-go-round between banks and their off-balance sheet vehicles, covering up the cracks of steadily deteriorating balance sheets.

If anyone can do a better job at explaining these numbers, please go ahead. That is what the comments link is there for.

10 comments:

dearieme said...

Sometimes I find the lingo confusing. Do I understand that "capital issuance" refers to the banks sucking in capital by selling bonds? If so, who supplied that capital ie bought the bonds? Do we know? How did they come by the readies, these buying folk? Did they sell something else? If so, to whom; and how did they come by the money?

VADO said...

The second scenario seems more plausible.

mike said...

Perhaps some of the money is from share related rights issues. It could also be from organizations cutting back and making savings which are not then spent. This could explain the huge numbers involved.

One good reason for raising money would be a precursor to the declaration of some huge (to be written off) losses by large financial institutions. The money would help companies to remain solvent. Watch this space!

Anonymous said...

Remember these are highly leveraged businesses. So the cash raised by the debt issue reduces the leverage ratio by far more than the equal (in £s) liability it adds. These jokers often keep less than 8% of assets to cover the ballooned balance sheet, so the effect is a big one.

Debt has the advantage of not appearing to dilute shareholder equity, even though it clearly does.

Note the debt-as-capital (rather than routine funding) window has shut in the US and they are now moving away from hybirds and into common equity.

Nick

Anonymous said...

I think it's obvious.

It's because there is risk of default - and everyone feels it.

If a large non-financial goes down, shareholders and bondholder lose everything.

If a financial goes down, the Government will take it over, stiff the shareholders, and rescue the bondholders.

Where would you place your money?

aSteve said...

Alice, have you considered the possibility that "Bonds" are synonymous with treasury issued sovereign debt which has been swapped for mortgage backed securities?

If so, this would represent an undertaking by government to ensure debt to British people is either repaid by debtors or by taxation.

Anonymous said...

On Euphemisms:

"Off Balance vehicles" = lies

(lies to everybody about the true state of the company's finances!)

Who invented "Off balance" language? Enron?

B. in C.

Nick Drew said...

no, not invented by Enron: but like everything else it did, Enron exploited some established ideas in extreme and imaginative ways

some of the securitisations were really clever

(the banks were well impressed, nay gobsmacked, by what Enron came up with, and rushed to join the party)

Anonymous said...

At a rough guess, I'd say the change is sociological rather than economic in origin. Over the last few years, we've seen a clear trend: bankers have been getting rich by hawking get-rich-quick schemes of varying levels of complexity.

Every time they've been rumbled or the scam has gone sour, they've either moved onto something else, or found an even bigger, stupider mark to con (see Northern Rock for the latter trick).

All that's happened is that the FSA is still asleep at the wheel, and the hucksters have moved on from flogging mortgages to morons to hawking credit "investments" to hawking bonds.

The same theme is still present all along; "Trust us with your money and we'll magically make more money for you. As long as everyone believes, nothing can go wrong".

aSteve said...

All that's happened is that the FSA is still asleep at the wheel

I do not believe that the FSA were asleep at the wheel... I think they knew exactly what they were doing. They were headed John Tiner... who bailed just before Northern Rock failed... his previous job was with Arthur Anderson (Enron's Accountants) - and he bailed just before Enron failed.

Do you really think the FSA not regulating Northern Rock properly was a dopey mistake?