Monday, November 30, 2009

The cost of finance

Looking at the Kraft attempt to take over Cadbury, the FT makes the following observaton:

An investment grade company would look at paying between 300-325 basis points above Libor for bank debt today. Before the economic crisis an equivalent borrower could have obtained those funds for less than 100 basis points.

That compares with the average cost for investment grade companies issuing bonds for acquisitions of about 120-125 basis points over Libor. "There is an overwhelming trend to use the capital markets," said Ivor Dunbar, co-head of global capital markets at Deutsche Bank. "The cost of financing is more attractive and the banks generally cannot compete with that at present."

Sunday, November 22, 2009

Dark Pools

There is an item in the FT looking at possible SEC regulation of Dark Pools. It includes the following:

“Before computerised ‘dark pools’ existed, traders often chose to keep their bids and offers undisplayed . . . by giving a ‘not-held’ order to the floor brokers on the exchange who would then keep sensitive orders ‘in their pocket’,” said Dan Mathisson, head of the advanced execution strategies unit of Credit Suisse, to a US Senate panel in late October. Dark pools migrated from brokers’ shirt pockets to their computer systems by the late 1980s, and some of the largest systems are managed today by Goldman Sachs, Credit Suisse and LiquidNet.

These Dark Pools are increasingly controlled by investment banks and other financial institutions that run virtual market-making that are run by machines and controlled by algorithmic black-boxes. The system can take prices from major exchanges like the NYSE and the LSE and provide some price improvement for customers. The black-box can take positions based on simple mathematical rules and can be over-ruled by operators. The system remains very much dependent on the pricing information provided by major exchanges.

Monday, November 16, 2009

Lloyds bad debts

The FT looks at some of bad loans that Lloyds acquired from HBOS.

The development is a further sign of the fallout from the bank’s ill-fated acquisition of HBOS, made during the banking crisis.

At the end of last year, Lloyds took a £12.4bn impairment charge, mostly related to HBOS’s lending spree in commercial property. Lloyds took a further £13.4bn of impairments in the first half of this year, of which £9.7bn again related to HBOS’s corporate loan book.

However, Lloyds believes that will represent the peak of its impairment charges.

Lloyds is also Kenmore’s main lender and joint venture equity partner through its Uberior arm. The listed Kenmore European Industrial Fund is unaffected.

The Edinburgh-based investment and development property group was backed by Peter Cummings, who ran the corporate bank at HBOS. Largely as a result of his dealmaking, loans and advances in HBOS’s corporate division rose from £85.8bn in 2004 to £116.9bn by mid-2008.

Saturday, November 07, 2009

Inflation expectations

Haubrich, Pennachi and Richken take a closer look at inflation expectation by using forecasts, break even rates and inflation swaps. They conclude that the risk premium has been steady between 29bp to 61bp over the last 30 years, suggesting that break even rates provide a pretty good estimate of anticipated price pressure.

Sunday, November 01, 2009

Central Bank Discussion

There is a discussion about the central bank and the nature of its assets at Worthwhile Canadian Initiative. A flavour:
There is some truth in this criticism of standard theories of the value of money. There are indeed two equilibria: the normal one, where paper money has value, and a weird one, where it is worthless. But Ludwig von Mises, for example, addressed this problem in 1912 with his Regression Theory of Money. Historically, money needed to be commodity money, or have commodity backing, in order to get started. But once it does get started, as a social institution, the demand for a medium of exchange supplements the industrial demand for the commodity, and the commodity backing can eventually be withdrawn as custom keeps us out of the weird equilibrium. (When Cambodia reintroduced paper money, after the fall of the Kymer Rouge, it could not create paper money ex nihilo, but initially made it convertible into rice, IIRC.)

Some interesting commentary as well.