Morning:
8°c
Peep peep. That's the rights issue gravy train steaming across the City, throwing off vast amounts of investors' money to any investment bank passing. This express has been bustling along for months, with little sign of any slowdown.
As we reported here on Friday, the investment banks have helped public companies raise £40 billion from share and bond placings and rights issues so far this year, taking fees of roughly £1.5billion in the process.
As a percentage of what they raised from investors, the amount they are creaming off the top is far higher than usual (they used to get 2%, lately it's up to 6%). In other words, large chunks of money that our pension funds wanted to give to large companies to expand, are instead getting diverted to the firms mostly responsible for the financial crisis, many of whom needed a taxpayer bailout to survive.
The banks say this is a reward for risk - because they underwrite the share issue, they temporarily take that stock on to their balance sheet. If they then fail to place the shares, they are left holding them, until they can place them elsewhere (big deal).
The notion that the banks are taking big risks in the first place looks even more like self-serving twaddle than usual - recent share placings flew.
A semi-competent middle manager with a few call centre staff could have got them away. No million pound bonus required, but do take Friday off. The problem is that the banks are so powerful that no one much feels like getting on their bad side by complaining about the fees.
For the fund managers signing up to rights issues, it's an irritant. But then, they aren't investing their own money - just ours - and they are worried that if they moaned they might get locked out of other deals.
For the chief executives of the companies raising the cash, a row with, say, Cazenove boss Naguib Kheraj is to be avoided at all costs. If you were launching a takeover battle or fending one off, you'd want him on your side. So they look at the underwriting fee, sigh, and sign the cheque.
Kheraj, rather sweetly, doesn't like to see his name in print. He'd rather be a private person - in which case, you might say, don't become chief executive of the most influential investment bank in the City.
As one of the few industries that feels not the slightest need to publicly justify itself, the investment bankers speak off the record, if at all, a bone we canine reporters are supposed to be grateful to have been tossed.
The off-the-record briefing always goes like this: We are great. And if you have the temerity to think otherwise, you don't understand what we do.
You can take only so much of this.
Gratifyingly, in the past two weeks, signs of irritation from clients began to emerge. I asked three chief executives unveiling fund raisers if they thought the banks were overcharging.
The answers were these: "no comment" (that's a yes), "you have to grin and bear it" (definitely yes), and "erm, erm, could we discuss that on another occasion?" (can I buy you a beer so I can unburden myself on this issue?).
The bankers' defence for the fees is this: it's the going rate for the job, in line with what others are charging.
So as soon as one of them gets a higher fee, they all do.
That's not a functioning competitive industry, it's a cartel - a tax on investors and companies.
The bankers' biggest skill has been to persuade companies of their brilliance. No one else could be trusted to secure backing from large investors, they warn.
But most banking is just a utility. Rights issues and the like are the plumbing and wiring of the City- like cleaning the drains.
The irritating thing about those millions in bonuses is not so much that the bankers get them, it's that they really think they are worth it.
If behind closed doors they were laughing with incredulity at what they were getting away with, you could at least admire their chutzpah.
Enron owned US politics... now explain that in court
Enron, the play, debuts at the Royal Court Theatre in September with an impressive cast: Samuel West as chief executive Jeffrey Skilling and Tim Pigott-Smith as chairman and Bush-buddy Ken Lay.
Previous attempts to dramatise this scandal (two made-for-TV movies, if memory serves), struggled to explain the complex financial deals behind this extraordinary business while keeping up with the human drama.
I don't know what writer Lucy Prebble has in store but the easiest way to grasp what happened to the company is to see it as a result of how US politics are funded: Enron owned so many senior American politicians it was allowed to do whatever it liked. It didn't want the energy derivatives market to be regulated, so it wasn't.
Enron collapsed in 2001, at which point all the right people made noises about "learning lessons" so that this never happened again.
Soon after that, Alan Greenspan said the financial derivatives that are behind the recent crisis should not be regulated - they were, he reckoned, good ways of lowering risk (pause for breath). Wall Street, which pays for America's presidential elections, didn't want them regulated either. So they weren't.
The play is timely, and I hope it makes the links between then and now. Suggest to the anti-regulation crowd that one single rule-change in a specific case might have been helpful and they do two things: 1) change the subject to talk about general principles rather than individual cases; 2) foam at the mouth.
In theory, laissez-faire means government shouldn't intervene in the market. In practice, in America, it means it intervenes all the time on behalf of its sponsors.
Besides what Enron meant for the rest of us, it didn't work for investors (they lost everything), it didn't work for staff (they were fired), nor Enron top brass (they are now dead or in prison).
Time for a change?
Having a stake gives you a say
Hats off to Mark Burgess, the head of equities at Legal & General, for a well thought-out take on corporate governance.
In his June investment commentary, Burgess asks what the role is of institutional investors and when they should get more active.
L&G hasn't been shy about expressing displeasure of late, and that's a thing to be encouraged. Too many big investors nod when management say nod and jump when they say jump.
At most, if they really don't like what a company is doing, they sell their stake - a dereliction of duty, Burgess doesn't quite say.
He's particularly good on the divide-and-rule strategy employed by many a company to shove things past shareholders.
By talking to them individually, a chief executive can persuade a truculent investor to pipe down, assuring them that everyone else is on board. Shareholders should be willing to risk going out on a limb if they think a principle is at stake. More please.
