Monday, June 30, 2008
Bankers Ever the Optimists
Investment Houses Tout Second-Quarter Rebound That Isn't All It Might Seem Ever meet an investment banker who didn't say his mergers-and-acquisitions pipeline was just bursting? The next time, he was probably unemployed. It is unbridled optimism that fuels investment banking, especially during the roughest patches. It is what has chief executives daftly chirping about the end of the credit crunch. Take this year's second quarter. Bankers will tell you European equity issuance bounced back to the second busiest second quarter on record, corporate bond issuance set a record, and big acquisitions by companies were on the rise -- all according to preliminary data released June 27 by Thomson Reuters and Dealogic. That certainly is one way to look at it. On the other hand, most of the equity capital-markets activity hinged on banks helping to raise capital for one another. The rescue rights issues helped mask a 67% global drop in quarterly initial public offering volume. Something similar happened in the debt markets. Investment-grade issuers rushed in to sell paper when credit risk premiums narrowed in May, fearing what could happen to liquidity and interest rates in the second half. But high-yield issuance, which typically generates three times as much in fees as the investment-grade side, plummeted 57%. Then there are the mergers and acquisitions, where the dollar value of announced deals fell 35%. That is OK, bankers say. That puts it in line with 2005, which was a very good year. But in 2005 the trend was up, whereas this time it is down. By the same logic, volume in 2009 would look something like it did in 2002. And that could mean plenty of bankers with no pipelines at all. Not that they would ever admit it. An Economic Lesson So much for the stimulus. U.S. consumers' disposable income rose 5.7% in May, largely because of $48 billion in tax rebates the government sent out in an attempt to prop up spending. But instead of blowing their windfalls on flat-screen televisions, the latest fashions and sundry strip-mall offerings, consumers did something more remarkable. They squirreled most of it away -- sending the savings rate for the month skyrocketing to 5%, a 13-year high. It is a one-time thing so far, but it could be a first step toward addressing U.S. economic imbalances. If so, it is welcome over the long run. But shorter term, it may signal that pain from the credit crunch could worsen -- that is, if the Scandinavian economic crisis of the early 1990s is any example. Some of the parallels are eerie. Negative real interest rates and financial deregulation set off a boom in the late 1980s in Finland, Norway and Sweden. Savings rates dropped, and even turned negative. Banks eased lending standards. A wave of leveraged buyouts took place, and real estate boomed. Finnish home prices, for example, doubled from 1987 to 1989. The subsequent unwind proved nasty. House prices started to fall rapidly and credit became scarce. The first financial victims were smaller banks and finance companies that relied on hot money. Although the details varied in the different countries, in general the financial companies were allowed to fail, while the smaller banks were merged with healthier competitors. The crunch really hit, though, when consumers started repairing their own debt-laden balance sheets. Savings rates turned positive. That caused consumption to fall quickly, sending the economies into tailspins. The resulting pressure on the banks forced governments throughout Scandinavia to recapitalize and effectively nationalize several large banks. Luckily, the bailouts were eventually effective. While the downturns were sharp, expansion in the three economies soon resumed. Of course, the U.S. could well muddle though. The ability of Americans to consume beyond their means is legendary. And one month's data don't prove they have renounced their spendthrift ways. But the day when they do so, at least for a while, is surely coming.