Second chance for investment banks to go on a looting spree

Some things don't change. The investment banks, whose blind pursuit of fees at any cost played a large part in bringing the global financial system to its knees, are now gouging yet more money from those they have crippled as their price for putting them back on their feet. Each day brings a new rescue rights issue as companies seek funds to pay off debt they can no longer afford to service.

Many of these only have such debt in the first place because they were duped by their silver-tongued snake-oil salesmen, who insisted they took out loans to buy back their own shares or make ill-judged acquisitions "because that is what the market expects".

Now these deals are being reversed and, having fleeced their clients on the way up, the investment banks are doing so even more on the way back. It reminds one of a comment made on TV by Tony Gooda, one of the underwriters who bankrupted a generation of Lloyd's Names in the 1980s. Relaxing in his offshore luxury, he said that if God had not intended them to be fleeced, he would not have made them sheep.

Thus it is with today's boards. Rights issues for companies a generation ago in equally difficult circumstances would be fully underwritten at an all-in cost of 2%. Today, the most expensive are said to have cost 15% by the time all the different advisers' pots are aggregated. The new average seems to be about 10%, and you can't get an investment banker out of bed on a Monday morning for less than 5% - to borrow a phrase from supermodel Naomi Campbell, though even she would be hard-pressed to match some bankers with their tantrums.

What do they for the money? These rights issues are at such deep discounts that, in all but the most extreme cases, shareholders have almost no choice but to subscribe. So where is the finely judged market skill in that? What is the company paying for? What risk is there in underwriting a tranche of shares that is being sold at such a massive discount, particularly given the pre-rights price is probably already a 10-year low for the stock?

There is also a significant structural issue here that is leading to a further erosion of confidence. Companies are asking for so much money that the only way institutions can meet their needs is by selling something else. So each rescue results in the further erosion of share prices elsewhere, and each fall in the index puts further pressure on key financial institutions such as insurance companies, and adds more to the pension deficits threatening to drag down the corporate sector. The players in the financial system have an obligation to seek to refinance companies while doing the minimum of damage to everyone else - but they ignore this responsibility.

Directors who agree to these terms are guilty of a gross dereliction of duty, though they don't seem to realise it - presumably because it is the one thing their advisers neglect to tell them. They are allowing themselves to be held to ransom, with the result that they are refinancing debt with equity, which is even more expensive.

* Charging fees at this level plays havoc with the cost of capital - more money going into the advisers' pockets than the company probably pays in a year of dividends. But perhaps we should not be surprised. Company boards have been pretty poor in aggregate at keeping the financial engineers at bay in the good times, so why should we expect them to be any better in the bad times?

Advisers say these are difficult markets, and they are up against time pressure, but neither excuse is worth bothering with. That is what they are there for. Rather, they have become far too used to being paid at levels that bear no relation to the level of service they provide or the need they fulfil, and they think they can continue to get away with it - which is a bit rich given that they are only in business at all because the taxpayer has bailed out the financial system.

Theirs, far more than Sir Fred Goodwin's pension, is the iniquitous reward for failure. Directors and fund managers need to remember their job is to protect and promote the interests of the end investor, not to stand politely to one side while the bankers loot their company.