Monthly Archives: March 2009

More Interesting News For Business Types

The American Economy As Basketcase

A couple of weeks ago, I did point out that oligarchies do have their merits in stabilising systems. They’re uncompetitive, and perhaps even anti-competitive, but a stable economy seems to be built on oligarchic sharing of market segments, rather than a genuine free for all. Part of this might be because there simply aren’t enough smart people around to run a lot of tiny corporations, and in turn, there is possibly a natural pooling of talent in more stable environments which means the oligarchies tend to come out of the same social soil as the idiots who might be running these companies. With that in mind, check out this link from Pleiades.

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.

Oh dear. And Wall Street really ran with it, didn’t they now? The net result is the plum-pudding of financial doom we’re all being collateralised into. Who came up with this lousy plan?

It’s another rivetting read if you’re into why this Global Financial Crisis is so f*cked, begat in f*ckedness, and delivered from and unto f*ckednss by the f*cked.

Macquarie Bank Buys Into Brisconnetions

A couple of weeks ago, we looked at Brisconnections and its amazing collapsing unit prices, the $2-per-unit that had to be paid, and how one Nick Bolton who bought into these shares as penny-dreadfuls looking for a quick buck, has now moved to wind up the trust.

This week we find Macquarie Bank has waded into this mess by buying the trust units in order to forestall the windup motion.

What started as a circus sideshow has now turned into a serious headache for the investment bank, which is attempting to protect its $325 million exposure and a future fee stream.

Macquarie was a key member in the BrisConnections consortium that won the 45-year concession to build, operate and finance the 6.7-kilometre Airport link toll road in Brisbane.

But now the bank that turned infrastructure financing into a global franchise faces having one of its bread-and-butter tollroad projects derailed in a street fight with a 26-year-old internet entrepreneur.

Macquarie’s 8.1 per cent stake in BrisConnections, picked up for spare change, is aimed at thwarting Nicholas Bolton’s attempt at winding-up the toll road operator. This move had been looming as the escape plan for Bolton and thousands of retail shareholders who are holding onto toxic securities that have hundreds of millions of dollars worth of debt attached.

In rosier days BrisConnections represented a fee pot for Macquarie and a clutch of investment banks linked to last year’s $1.2-billion sharemarket float.

Macquarie secured a financial advisory fee of $56.1 million, a sponsor development fee of $12.5 million, and an equity underwriting fee of $28.2 million. It also stood to gain a dividend reinvestment plan underwriting fee of $14 million.

Deutsche Bank shared its equity underwriting exposure to Macquarie, and Credit Suisse and JPMorgan each had a small windfall in the underwriting fee.

Macquarie also stood to gain through an agreement that secured it as an exclusive financial adviser to BrisConnections for a decade.

Among all this is Deutsche, which is a not so disinterested bystander in proceedings. With Macquarie, Deutsche is the co-underwriter of the $390 million due to be paid on April 29. The two have a further $390 million underwriting obligation that is due again next year.

Unless there is a miraculous change in appetite for start-up infrastructure assets, the underwriters are likely to be left with the bulk of the shortfall, given the unrealistic prospect that retail shareholders will be in a position to pay for this.

Naturally, Deutsche Bank would rather not pay that sum of money just because Mac Bank floated the damn thing in a way that -pardon the pun – would sink rather than float. All very funny, and I do hope this Nick Bolton fella wins. The Mac Bank model of ‘infrastructure business’ is so reprehensible, they deserve this stuff to happen to them and probably more.

UPDATE: Of course  the news of the day (02-Apr-’09) is that Bolton wins the first round in court. BrisConnections can’t stop him from calling  the unit holders’ meeting to wind down the trust.

Rebel shareholder Nicholas Bolton has won his court battle with Brisbane toll-road builder BrisConnections.

Two planned meetings of unitholders will now go ahead, as scheduled, later this month.

The decision puts in jeopardy the future of Brisbane’s $4.8 billion Airport Link toll road, the biggest infrastructure project under way in Australia. The company’s unit holders will vote on a series of resolutions to have BrisConnections wound up at those meetings.

BrisConnections was seeking orders in the Victorian Supreme Court to have Bolton’s company, Australian Style Investments, wound up on the grounds it was insolvent and would not be able to pay a $77 million instalment owed to BrisConnections.

BrisConnections was also seeking orders to have two meetings of unitholders – called by Mr Bolton, ASI’s 26-year-old major shareholder – to be cancelled. BrisConnections told the court the meetings had been improperly called.

Justice Ross Robson found in favour of Mr Bolton and said the meetings could go ahead. “BrisConnections’ objections to the meetings are not valid objections,” he said.

The decision means that BrisConnections’ small shareholders, who control somewhere between 70% and 75% of the company’s stapled units, will be able to meet and vote on having the company wound up.

Whether that eventuates remains in doubt, as a special resolution to wind-up the trusts requires a 75 per cent vote.

Stay tuned. This is one interesting circus.

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