Sunday, January 13, 2008

Whithering Rights

Yves Smith at Naked Capitalism ruminates upon FT reports of another al-Waleed rescue of Citicorp in this post. Perhaps this is, as it should be, since pegged GCC currencies and petrodollar surpluses are primary enablers (not to discount Asian mercantilist, nor US FRB and fiscal policy's role) of encouraging the so-called savings glut of capital uphill to the US to finance yet another round of drinks for the pickled and overextended revelers.

But something else struck me as curious: the disappearance of the most humble and ordinary "rights issue"?? Has economic concentration made it simply a waste of time to canvass ordinary existing shareholders, when a single call to Temasek, ADIA or CIC does the same thing? Does the lack of rights of first refusal upon existing shareholder dilution mean that - like the American political system - finance and markets is becoming less democratic? So while American activists are harassing Japanese management about "shareholder rights", a large disabuse might be unfolding in their backyard. On the other hand, maybe, like the financing of America's CAD, there are no private buyers (of sufficient size) to recapitalize the myriad of financial institutions requiring top-ups. A look at the share price performance of the US financial sector suggests that this may have some merit. Perhaps the avoidance of market-based capital raising has do to with with structural considerations of markets as any issuer of equity, or convertible-linked equity has found. For even a whiff-of-rumour of further issuance brings with it a veritable avalanche of secondary market stock from hedge funds hitting bids and decimating values with newly initiated short positions setting up and arbitrage to buy at the secondary, or cover via rights bought in. This admittedly serves no one's interests (except the underwriter and the arbs) , but raises important questions about investor-type concentration, faux-"arbitrage" strategy pari-passu risk, and a market structure that both allows and encourages it.

I don't have any answers, but diminishing democracy reflected in rights of, and to, shareholders along with increasing power ond concentration of surplus holders - whether mercantile or resource-based seems to reflect a sign of the times. The case of financials may be special, for much rests upon their shoulders, but I'd be interested to hear whether other observers find this curious, and if so whether they view it as benign or something more nefarious.


Anonymous said...

There is a pending rights offering of $500 million by MBIA at $30/share, with backup financing provided by Warburg Pincus. This is in addition to the pending $500 million stock purchase by them at $30/share. The deal was announced Dec.10, 2007, and the stock closed at 16.59, up 2.48 on Friday 1/11/08.

In the current environment, rights offers without sponsors are too slow. Even with a sponsor, had MBI simply sold stock without the complication of the rights offer, the cash would be in the till NOW as opposed to the chance of Warburg reneging on the trade.

I prefer rights offerings as well, but in more stable markets.

Anonymous said...

Trust me when I say I am in way over my head on this subject, but if you look at a little article in CFO magazine, titled "Deloitte forecloses on Novastar stock offering" it indicated that the disclosures which would be required by the accountants in a rights offering might include a lot of things a needy potential issuer would not want publicly revealed. In Novastar's case it would have required restatements of prior year's financials, and a footnote containing a forward looking outlook regarding its future prospects as a going concern.
All this can be avoided by a private placement.

Anonymous said...

In a specific depositor-insurance sense and inasmuch as some 21 large banks have preference at borrowing from the Fed directly (primary dealers), and bank audits and capital requirements demanded and implicitly guaranteed by the Fed Govt, it seems the implied partner of all major banks is the US taxpayer.

Now come the banks declaring only their private interests when raising cash for equity, ignoring their continuous support from the public. In their trumpeted privacy they sell of huge blocks of equity to foreign public and quasi-public lenders at great advantage to those lenders, under beneficial terms. Those lenders were also complicit in the mercantilist acquisition of the very funds lent back to US banks.

Hmmmm. Now who's going to bear the burden if the $11.7 trillion CDS market goes south? Five US banks hold some 99% of that notional exposure, some of which is in their own portfolios. Are their foreign official or quasi-official shareholders going to bear their share of the burden, or throw in on the bowed shoulders of American peasantry? Hmmmm. Think about the Resolution Trust Corporation's bailout of banks in the 1980's. Hmmmm. I'm shorting banks soon.

Anonymous said...

Benign??? What isn't nefarious nowadays? The criminals at the top are hellbent on bringing serfdom back, and are willing to risk crashing the whole system in the process. You'd think these pirates would want to leave the game intact for their grandchildren.

The funny thing is seeing how optimistic finance-types are about the whole situation.