When I started blogging in February 2007, I did not know that I would be able to write on new topics for so long.? But I committed to writing two short posts a night initially, which became one long post per night, excluding the Sabbath.
I have admiration for many of the long-term bloggers who churn out content regularly.? It takes effort.? It’s not easy to come up with fresh content on a regular basis.? My well is not dry, but sometimes I wonder.? Still, I have the following when things seem dull:
- Book reviews
- Posts on “The Rules” (sadly/happily that will come to an end soon — the series will likely end at LX.)
- Series posts — the only open one I have at present is the Education of an Investment Risk Manager series, which should complete soon.
Much as I have non-consensus views on many matters, it is not my goal to write about those views all of the time.? I want to teach people about investing, and get them to avoid many of the traps that are common in the markets.
I try to write about a wide number of issues in the markets, both hot and cold, private and public.? My goals is to create skeptical investors that invest in valuable investments after doing sufficient research.
Much as I have become a better writer through blogging, that was not my goal in writing here or at RealMoney.? It is my goal to educate.? I want people to make better decisions, and avoid the scammers who push illiquid investments.? If an investment is illiquid, it deserves three times the scrutiny as to its value.
Avoid investments that lock up your funds.? I have two of them, one an incredible success, and one a horrible loss. On net, I have won, but I wish I had not invested in the loser.? Hindsight is 20/20 — could I have seen it in advance?? No.? Nor could I have seen the incredible turnaround in the other investment, which is now distributing 30%/year.
I like writing for my audience.? And thanks for reading me.? I am open to allowing a simpler commenting system.? If that is something you would like, please let me know.? In the past, I have been reluctant to do that because many comments on the internet are low value.? But if you want me to loosen up comments, let me know.
Hi David,
While you have written many a post detailing how *SOME* Wall Street sell side firms (penny stock promoters) screw over the public, I don’t remember you writing much about how the sell side screws over shareholders on more established companies… I bring this up because the Verizon bond issue seems like a rather classic example where the VZ shareholders got taken to the cleaners — yet the folks on CNBC are claiming it was a success.
The underwriting firms helping to sell a bond have an obligation to get the best price (aka the lowest borrowing costs) they can for their customer (Verizon in this case). That is why they get paid $500 million in fees. At the same time, VZ management is supposed to get the lowest borrowing costs to maximize shareholder return. That is why they get paid millions.
Take for example the 10yr part of the deal. Within a matter of hours, 10yr Verizon bonds rallied 35bp … from par ($100) to about $106. That is at least a six percent return in a matter of hours (because of the tax treatment of new issuance bonds, they are almost always sold at a slight discount — meaning less than par).
The size of the 10yr VZ issuance was about $10.4 billion; lets call it an even $10 billion to make the math easy to do in our heads. 6% on $10 billion means Verizon’s investment bankers / management gave away $600 million dollars on the 10yr issuance alone.
Of course, 30yr bonds had a bigger loss (to Verizon) while the shorter maturity debt had a smaller loss.
In aggregate, Verizon easily left about $1 billion dollars on the table — which the investment bankers were all too happy to accept. Thanks SUCKERS!!
This is not free money falling from the sky. It means $1 billion less for shareholders or worker salaries in whatever combination.
There is no Mark Zuckerberg sitting on additional shares (debt) that would benefit from the $600+ million issuance mispricing. The gains all go to underwriting firms (sell side, hedge funds that make immediate secondary markets — they help the investment bankers, and perhaps PIMCO / Blackrock if they do not hold the debt).
The losses go to Verizon — shareholders and employees; maybe customers if Verizon can figure out a way to raise prices. CNBC cheered as the price shot up (mostly **before** the public got hold of any bonds).
It appears that it is way easier to skim $1 billion from the public off a large blue chip deal than it is to weasel a much smaller sum from a penny stock scam.
And it just happened in front of everyone’s eyes.
(Actually, not everyone on Main Street got taken … the strip clubs and steak houses in lower Manhattan probably did quite well hosting the post deal celebratory parties)
Dear Greg,
When Household International sold itself to HSBC, it did one last bond deal, and it was a big one. I put in for as many deal-protected bonds as I could get, both 10s and 30s. The deal was a sweet one to reward their prior financiers. Classy. The technical term is called a “kiss,” and when I described it to Herb Greenberg, he did not believe me.
I traded away those bonds, realizing a gain, for 30-year non-protected bonds. I put everything on the line, because I trusted my analyst who said the deal had to go through. It was the biggest capital gain for the firm in a really bad year.
In order to get the biggest bond deal done, Verizon had to leave a lot on the table. That was a cost of getting the deal done. Personally, after the deal price “pop,” it is time to lighten up, because heavily indebted names don’t do well.
David,
I don’t know anything about the Household Intl/HSBC deal, but I think you spilled the beans with the quote: “the deal was a sweet one to REWARD THEIR PRIOR FINANCIERS”
Whether you also made a profit on the HSBC issuance has nothing to do with the ethics or the question asked. Some bank robbers dropped some money as they were fleeing the scene, and you grabbed some. Are you claiming your actions should exonerate the bank robbers?
Of course “Verizon” had to pay up to get the deal done. First a correction: VZ shareholders had to pay up (not management). Management got control of a bigger pie, and their compensation will go up accordingly.
Second, on the actual subject of my comment: the underwriting banks got paid twice (at least). They were paid a rumored $500 million in investment banking fees. Then, they also pocketed another $1 billion-ish in immediate market price changes … meaning the issuance was mispriced.
If Verizon shareholders had to pay extra yield on debts to actual lenders — that would be paying up to get a deal done.
But paying extra yield which gets immediately turned over to underwriters (and their crony friends) in the form of one day capital gains?
Back in the 90s, they were often labeled “Friends of Frank” (FoF) benefits after Frank Quatrone, who made sure his buddies got into IPOs at much better prices than the public. FoF’s then sold their shares at much higher secondary market prices, pocketing huge gains for themselves — not the issuing company or the final investors.
$500 million in fees on a $50 billion debt issuance (ie 1 percent) sounds a lot better to the public than the more honest $1.5 billion in fees that was actually paid (at least 3%).
Mutual funds charge around 1% per YEAR. The stated fee on this deal was 1% for about a month’s work — or 12% per annum. The true underwriting cost as 3% for a month, or 36% annualized.
This was a ***VERY*** sweet deal for the underwriting group, paid for by Verizon shareholders, customers and employees. Basically the same suckers who were forced to bail out the underwriters over the last 4-5 years.
If we are going to talk about ethics on Wall Street, we should mention that friends/cronies of the underwriters often get a much better deal than the public at large.
The question is: if this was merely paying up to get the deal done, why not do so on the up-and-up? Why not state publicly that the underwriting fees were actually $1.5 billion, instead of claiming they were only a third of the actual amount?
Mega deals like this usually end badly for shareholders and bond holders — but the investment bankers, securities lawyers and management walk away quite wealthy indeed.
That is the answer to the old question “where are all the customers yachts?”