Blain's Morning Porridge - What if we'd invested in the World's poorest rather than nega
Blain’s Morning Porridge - June 21st 2017
“Fat, drunk and stupid is no way to go through life son… ”
I spent an excellent day at the Euromoney Global Borrowers and Investors Forum y’day. Some very interesting discussions and great to talk to so many old friends and get a chance to meet new ones!
Perhaps the most interesting and thought-provoking comment of the day came from World Bank Treasurer – Arunma Oteh. As other panellists wondered about the possibilities of recession, the new-neutral, the new-normal, credit-rating trends, political instability and global uncertainty, she rather put the current global economic picture in context wondering how much better if: “the $40 trillion invested in negative yield assets could have been invested with the world’s poorest and generated a positive return..”
It’s a fascinating thought..
Such a massive redirection of global economic flows from the haves to the have-nots would come with very real risks, such as corruption and inflation, but could generate enormous gains. Surely it would be better if under-employed global capital was put to real work rather than just chase financial asset (negative) returns.. after all, that’s all we’ve really seen since some central bank bright-spark dreamed up QE!
Another observation from a panellist – “it’s not right that we’re buying equity for income and bonds for capital appreciation” – sums up the zeitgeist.
However, three fascinating panel discussions on bank financing confirmed everything what I’ve long believed – the current structure of bank capital is confusing, ill-considered, overly-complex, lacks transparency and is going to be horribly messy if another crisis hits.
Its 10 years since the Global Financial Crisis kicked off, yet global regulators are still dithering about what the future shape of bank capital looks like. We’re still mid-journey, sidelined in a very confusing gobblygook of TLAC, AT1, non-preferred senior, Op-co/hold-co capital, etc and seen the traditional capital subordination ladder smashed. It’s the result of a chaotic stream of messy compromises trying to placate Politicians desperate to appear strong by promising no more tax-payer bailouts, regulators deflecting blame and inflating their sphere and terms of influence, national self-interest, and by banks trying to swim against the tide. (More about that below.)
Panellists argued the investment case for the various forms of bank capital. Some investors still won’t buy anything that sounds subordinated, so have ruled themselves out the FIG market. Others prefer Hold-co debt, while others favour Op-Co structures. A key moment came as one particularly smart investor said: “We don’t care about the structure, we will invest right across the capital instrument curve in the right bank names” – an approach that makes perfect sense.
When it came to AT1/CoCos, the conference hosts arranged a digital vote: as a result of the Banco Popular “event” 41% of attendees remain hostile and won’t buy AT1 securities, 41% think AT1 are investible and will still buy, while 18% weren’t aware of what happened to Popular.
Another fascinating comment came from one frustrated fund manager deeply suspicious of the new Senior Preferred Securities which he reckons aren’t as solid as investors have been led to believe: “The investment banks pushing these deals have done a superb job selling them..” convincing buyers they are not bail-in bonds (as LT2 bonds proved to be during the Popular event), but act like deeply subordinated bonds n a traditional subordination ladder in a wind-down. He added: “At the PNOV (Point of Non Viability) a Senior Non-Preferred is just another CoCo”. He’s right.
My conclusion is simple – Bank Capital is complex. But there is a simple investment rule – buy the banks which are solid and going to thrive.
Leading to the question – who are they? It’s clear large swathes of European banking remain essentially unreformed. Italy – still massively uncertain. Spain – some great banks, but still questions about NPLs. Germany – shipping loans provoke a series of questions. And you could go on…
Which leads us to the question of the day… Are Barclays and the Barclays Four Saints or Sinners?
A large number of my contemporaries in the City believe John Varley and the rest deserve medals or canonisation for what they did back in 2008. They saved Barclays from requiring a government rescue, saving the tax payer billions…………. perhaps.
Yep. Barclays squeezed through. As one of the two UK megabanks to survive, it looked set to thrive in the post crisis less-competitive environment. (Subsequently.. it’s not worked out so well.. let’s not talk about Diamond Bob and the rest)..
But, the allegations against them are they broke The Law in multiple ways. There are questions about the fees that were paid, the role of Ms Staveley, the rights of other investors, the loan to Qatar, and a host of other things.
The Law is the Law is the Law.
I’ve been writing about his case since the first capital raise in 2008. On one hand I understood the urgency of the capital raise, but was concerned at the fact existing investors were pre-empted and not offered similar deals. I was appalled at the allegations the bank had given a client money to fund a purchase in its own shares.
The facts are now in court so we can’t comment. The bank did avoid a tax-payer bailout, but to do so it allegedly broke the law and presented a picture of its financial state that was not true. If that is true then it garnered a competitive advantage that enabled it to grab business the bailed-out banks lost. Its executives did not see their personal holdings wiped out and were free to continue amassing large bonues – which would have been stopped if under government control. It allegedly broke the law relating to financial offerings. The court case will determine if these allegations are true.
I’m trying to work out how this plays out. The Times points out the UK Serious Fraud Office has adopted a very high risk strategy in charging the bank and the four individual. As the trial is unlikely till 2019, that’s two years of distraction. If the Bank pleads guilty, then it could prove very difficult for the four defendants to receive a fair trial. I suspect we could see a deal. And even then the Bank will face a host of legal challenges and claims from disgruntled shareholders and others..
No matter how messy this gets, the law is the law..
I’d be interested in what readers think – Saints or Sinners?
Out of time…
Fastnet Charity: http://www.sail4cancer.org/fastnet-2017-bill-blain
Bill Blain