Good morning

The headlines:

  1. Wall Street fined for using lobbyists.

    Link: this watchdog is not serious.

    The Financial Industry Regulatory Authority has fined five banks “over $4.48 million” for requesting the reimbursement of fees paid to lobbyists as “underwriting expenses”.

    So to be clear: there is no issue with the banks spending money on lobbyists*, just an issue with them trying to pass these costs along to the California Public Securities Association as part of their underwriting fees** on some Cali state and municipal bond offerings.

    And the fine was less than five million dollars? Split between all five banks? Oh please. That’s not even a rounding difference on their income statements.

    Clearly, Cal PSA is doing its job.

    *The money in question was actually the banks’ subscription fees to Cal PSA – an organisation whose “activities include lobbying on behalf of companies seeking to influence California State Government”.

    **”Underwriting” in a bond offering is basically like offering insurance on the sale of the bonds to the issuer. For example: let’s say that the State of California wants to issue $100 million worth of bonds. The investment banks come in to manage the issue of the bonds and underwrite the issue in exchange for a fee. If all the bonds are sold to the public and/or their pension funds, then the bank gets to leave with their fee. If only $80 million of the bonds are sold, then the underwriters pick up the $20 million balance and try to on-sell those bonds at a later date. And they still get the fee. There are variations of this arrangement (eg. “we will underwrite to a maximum of 10% of the original issue”, etc) – but that’s the basic idea.

  2. When bad Bankias go badder.

    Link: the price of the bailout.

    The spanish Bankia was formed sometime last year with the merger of several provincial savings banks. It seems that lots of people were encouraged by their bank managers to buy shares in it.

    Which seemed like reasonable logic, in some senses. You have a bank whose creation is being encouraged and virtually-underwritten* by the Spanish government – what are the chances that it would go bankrupt? Few, I would say. Lots of room for Spanish bailouts and EU bailouts and all that Greek-style jazz.

    But just because a company/bank is reasonably certain to go on does not mean that it’s a good investment**.

    Because bailouts come with a cost. And the cost of the Bankia bailout from the EU (18 billion euros that are due to arrive today) is a broad issue of shares in January. What does a share issue do?

    An example: you hold 10 shares out of 100 shares issued. You own 10% of the company. The company gets a bailout and has to issue the bailer with 900 shares. You now hold 10 shares of 1000 issued. Or 1% of the company.

    In some cases, this would not matter. Firstly, investments in banks needing bailouts have already lost most of their value (since listing in July 2011, Bankia shares have lost 80% of their value). Secondly, if the bank was going to go bankrupt anyway, then being left with something small at least leaves you with the chance of the investment recovering in the future. And finally, you are now entitled to some of the money that the share issue brought in (18 billion euros?), as opposed to the -4.2 billion of negative equity that you were entitled to previously.

    So when sources “close to the Bank of Spain” start making observations like “I can assure you that they will lose up to the shirt on their back”… I would just point out that the shirt is already full of holes and any backs are fully exposed.

    *There’s that little word again.

    **I think it’s a point that we often forget. Apple, for example, is a great company with a dedicated consumer base (most Apple users, self included, update their product religiously). It isn’t going anywhere. But its share price in September did not make it a great investment. Great companies are not always great investments. #Fact

  3. Some predictions.

    Link: I do love the New Year season.

    Lots of columnists are in the seasonal spirit of making some calls for 2013 – now that we know that the Mayan-interpreters were wrong. And this column was fun to read:

    A Russian financial crisis: if Europe drops its environmental facade in order to export shale gas and energy in a bid to do something about state revenues, then Russia, as the current main exporter, suddenly faces competition.

    Bye bye Angela Merkel: German elections soon – and no other EU head of state has lasted through elections since the Euro crisis began… Will Angie?

    The iCar: well Apple needs to do something other than modify the old models of phones and tablets. And we’re already bored of the iTV story.

That’s all for now.

Have a good day.