The FT reports this morning that:
UK banks are raising debt at the fastest pace since the aftermath of the financial crisis, as lenders prepare for tighter regulatory capital requirements and scramble to replace cheap funding that until last month was supplied by the Bank of England.
British banks sold a net £16bn of bonds and short-dated commercial paper in March, according to figures from the Bank of England – the highest monthly amount since January 2009.
In the 12 months to March they raised a net £52bn of capital, comparable to the amount they raised over the course of 2009; £31bn of that total came from bonds while a further £21bn came from commercial paper. Both categories of capital raising were at near-decade highs.
Three things to note: first the banks thought cheap money was running out. I think they're wrong on that. The BoE decided not to raise rates yesterday, and they won't be any time soon in my opinion.
Second, the banks remain under-capitalised. They still need backing to face the risks to come.
Third, they aren't using share capital to increase their funding. No one does. As I have noted, the plan is to make sure shares are in as short supply as possible to artificially inflate their price. Why? It boosts management bonuses; it makes it look as though markets are humming; it keeps pension deficits down and it spins the lie that all is well in the body corporate.
The reality is that the stock markets do not do the job of supplying businesses with capital anymore. So why are they used as savings mediums when they serve no further social or economic purpose?
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Article at the turn of the year would suggest otherwise
https://www.ft.com/content/ae9e6500-e69b-11e7-8b99-0191e45377ec
I also suggest you look at this private equity firms website (HG Capital) and see the capital they invest in small businesses to help them grow. HG get their capital from UK investors via the Stock Market
https://hgcapital.com
Obviously i could go on.
You could but that utterly misses the point
What point do i miss? The FT article says global equity issuance is at a decade high and the HG Capital website explains how they provide capital for new business to grow and is a great example of how capital markets provide a conduit to economic growth.
And there is still almost no issuance to raise capital
Most is M&A or paying off founders
All of HG , and the private equity sector in general, is raising new capital to grow business. The sector is massive. Many of the private equity firms raise there capital through the stock market. When a private equity backed company IPOs the company is typically mature enough to invest through retained earnings. The majority of listed firms pay little or no dividends to shareholders for this reason.
Massive?
Really?
Go on….data
The Private Equity sector is in excess of $2.5 trillion. Preqin Global Private Equity Report contains all you need to know. This is where capital is employed to grow fledgling / pre IPO companies.
With respect, you couldn’t even manage a link
Do you charge for them?
Haha..you think I work for them? No i don’t, I just responded to your assertion that capital markets do not provide equity for businesses to grow when they do. Here’s a free report report from 2016 http://docs.preqin.com/samples/2016-Preqin-Global-Private-Equity-and-Venture-Capital-Report-Sample_Pages.pdf
There are many other sources to establish the size of the private equity market. I would expect you to have good intuitive idea anyway but if you did then I suppose you wouldn’t have made the comment.
But nothing there seems to say how much is new capital and how much is buu out, etc
Surely a share represe ts a portion of the value of the company. The shareholders are the owners of the company.
If the value of the company increases the the the share value increases.
Maybe I am too simple in my understanding.
A shareholder owns a share
They do not own the company unless they control more than half the shares
“So why are they used as savings mediums when they serve no further social or economic purpose?”
Because the bull is running. And this time will be different ?
You know the answer to that……
“they serve no further social or economic purpose” except to a wealthy minority, who profit from wealth extraction. Wealth extraction should be taxed like smoking for the damage it causes to others health and quality of life.
Only a tiny fraction of stock market activity is to do with funding new capital – real investment, the rest is just rent-seeking.
In her 2016 book ‘Makers & Taker’ NY’s Financial Times associate editor Rana Foroohar states: “Only about 15% of all of the capital coming out of the biggest U.S. financial institutions today goes into business — goes on to Main Street. The rest of it is basically about the buying and selling of existing assets, which brews bubbles, which creates instability in the system…. And I’m arguing that that’s had a very deep and degrading effect on the real economy in America.” I wouldn’t imagine much has changed in 3 years nor that the City is very different to Wall St.
While I have no experience in the world of finance, I’d hazard a guess that there’s a logical correlation between the increasing financialisation of the economy and a disproportionate availability of new capital for the productive economy.
I am staggered it’s 15%
I’d suggest it somewhat less than that
That’s certainly not true for UK. The figure I heard at a recent talk was a single digit.
Come off it Richard you know as well as I do they serve the social and economic purpose of keeping a massive number of snouts in the trough. Namely those of our financial services industry and the political, class and oligarchic interests it serves.
can you help with this question, who pays the RBS fine,
the public part that the tax payers baled out
or do the Bankers/Share owners pay the fine
and can the bankers clam it back has a tax loss
The public should not have to pay any more money out to save the bankers, there fine there loss.
It is paid by the company
It reduces the value of the company to the state
I doubt there is tax relief – but they have a stack of losses anyway
“The reality is that the stock markets do not do the job of supplying businesses with capital anymore.”
The reality is that many businesses do not seek capital anymore. The purpose of the stock markets seems to be to allow founders of successful start ups to convert their shares into cash rather than to continue to be paid from profits. This gives those founders the ability to transfer the risks of future failure onto the new shareholders and cash in their chips. This is also the principle aim of Private Equity.
Simon Gray says:
“The reality is that many businesses do not seek capital anymore.”
An interesting observation – I’m doubtful; there don’t seem to be many business models that don’t require capital to start in the first place, and to expand.
“The purpose of the stock markets seems to be to allow founders of successful start ups to convert their shares into cash rather than to continue to be paid from profits.”
As with so many activities, this could be perfectly sound or merely a speculative ploy open to abuse. Some people love to start a new project and then get bored with it, others would prefer to maintain something that already works.
The idea of the stock exchange is a brilliant way to bring together enough finance to build, collectively, but there’s always somebody who will spoil even the best of ideas. Very often, and in so many walks of life, it seems to be the desire to take an unearned profit or benefit that causes the damage.
Business does want capital
But the simple fact is that it rarely uses shares
It’s really not hard to understand
Richard this just isn’t true. When providers of capital (Private equity funds, business angels etc) see a good idea they want to participate in its growth by taking an equity stake in exchange for capital. Aka dragons den.. I have illustrated already the scale of the market. When a provider of loans (Banks, Orb issuance, corporate debt, funding circle etc) they do so with some kind of restrictive covenants in place most notably someone is standing in front of them re the risk of the business I.e equity. No business of any scale is financed solely on debt.
You have not answered anything – and the links give no clue how much NEW capital goes to companies
Nor do you give any indication of the significance of this in terms of the stock market
The stock market does not supply capital to businesses & never has done. When you buy stock – share or loan – you write the cheque to whoever’s running the issue. Effectively to the company. Nothing to do with the stock market, whatsoever.
The stock market simply enables you to sell the stock you’ve bought to someone else & liquidate your investment.
I know that
But the point is that the overall supply of stock is declining
And that’s deliberate
I don’t need to be taught to suck eggs
sasha saya:
“The stock market does not supply capital to businesses & never has done. When you buy stock — share or loan — you write the cheque to whoever’s running the issue. ”
Whether literally true or not, (and I don’t think it is, given that it is a part of the mechanism of financing businesses) I consider it to be nitpicking of a high order.
The highest, I’s say: wealth wants the best
just to recap on a couple of comments you made..
“But the point is that the overall supply of stock is declining”…the plan is to make sure shares are in as short supply as possible to artificially inflate their price’…..The FT article in the opening link clearly proves this not to be true..”Almost 1,700 companies floated in 2017, an increase of 44 per cent over 2016 and the most initial public offerings since 2007, according to Dealogic. Proceeds rose 44 per cent to $196bn, the largest amount since 2014″ ..so the supply of stock is rapidly increasing not decreasing
” the links give no clue how much NEW capital goes to companies”..Well a good business idea rarely prompts an immediate fund raising and a stock exchange listing. Typically an entrepreneur or small business looking to grow is backed by a Private equity / Venture Capital company to provide capital in exchange for equity in the business and then they provide on going development finance. If successful then the Company IPOs and is bought by conventional fund managers and Pension Funds as the Private Equity / Venture Capital firms sell their equity and re employ their capital into start ups and development finance. Out of the 1700 companies floated in 2017 the vast majority will have followed this process. This process is above is always in motion . I previously mentioned the size of the Private equity market to be in excess of $2.5 trillion and $450bn of new funds was raised in 2017 https://www.reuters.com/article/us-privateequity-fundraising/global-private-equity-funds-raise-record-453-billion-in-2017-preqin-idUSKBN1ET23L .
Finally to state the obvious even when a Company lists they still rely on equity (shareholders) and the vast majority of listed companies used retained earnings to invest and grow their business.
Many of the statements you make on this point Richard are off the cuff and incorrect.
No, hang on
What was the new equity raised?
You’re talking nonsense
The float value is not new equity raised
An IPO is new listed equity.,the vast majority comes from private equity which is in listed. You were staying the listed equity market was shrinking., it isn’t it is massively expanding.
And to re iterate the $2.5 trillion of private equity capital is continuously in circulation supporting new businesses and is growing each year.
So the listed equity market is increasing each year and the unlisted equity market is also increasing each year.. seems pretty conclusive!
Maybe you have some data to the contrary?
But there’s no new capital in that
So this is complete nonsense: nothing has disproved my hypothesis
What do you define as new capital?
New money to fund active investment raised via a new issue
I thought so that’s my definition too..in the private equity market in 2017 $250 billion of new money raised and invested in start up companies and development capital (2nd, 3rd round etc financing) I.e money given to newish companies to grow. That is simple and indisputable!!
Obviously when companies list then more money comes into the equity market – an early link showed this to be at $196bn in 2017 – where does this come from? The gilt market probably crowded out by QE but who knows. A large proportion of this money will be given with Private Equity firms in exchange for their holdings in companies getting listed.. they (the Private Equity firms) now have cash wish they will again deploy in start up companies and new financing for fledgling companies looking to grow. This is the cycle and is how capital markets work and how the stockmarket is a conduit to new cash being given to new companies I.e it allows Private Equity to exit and re deploy the cash to small companies. We may dispute on the size but not the process as I would expect you to understand as well as I.
Well, I need some evidence of that.
Your figures do not stack.
Please use LSE data. And link to it. Right now you’re talking marketing spiel.
Hang on Richard I have provided links so supporting the figures so you dispute the numbers of datalogic & Preqin? They are leaders in their field I doubt very much their work is flawed.
Your assertions throughout are really off the cuff anti capitalists comments that do not stand up. You are thorough in your work on tax and if you explored this area with the same level of detail you would understand this.
You supplied some marketing puff from an organisation I had never heard of
I asked for evidence
James says:
“…. that’s my definition too..in the private equity market in 2017 $250 billion of new money raised and invested ………That is simple and indisputable!!”
Sorry, James. It’s not ‘indisputable’. The figures may be correct. I tend not to argue the toss about numbers because they are largely irrelevant or untrue.
What I am inclined to dispute is that this represents ‘new money’.
How is it ‘new’, exactly? (In so far as money exists at all, and let’s not go there) I think you’re talking about money which already exists and is simply being reallocated to a new purpose.
New money is something else; created ‘out of thin air’ as the saying goes, something which did not previously exist on anybody’s ledger. It is created in response to the issuing of a promise to repay by someone or a company that wishes to create something new. It represents growth rather than simple redistribution.
The political and economic right pretend to be very sniffy about ‘redistribution’, but it appears that is not so. The past four decades have seen the biggest redistribution of wealth from public to private ownership than probably has ever occurred in the history of mankind. I suspect it dwarfs the continental scale American land grab in the early decades of the 19th century.
I reckon we’ve created close to bugger all in the last four decades just shuffled what we had into different piles.
What data have you supplied to support your argument? Some recent data on banks issuance and you extrapolate that to represent the entire marketplace. Perhaps you don’t have the knowledge of financial markets I assumed you did and you don’t understand the scale of Private Equity and the impact it has on economies.. or you do and choose instead to try and bluster your way out of an argument. Still this is a message board I doubt you would make the same assertions in academia as you would be discredited in a heartbeat.
This is not academia
Well spotted
“The reality is that the stock markets do not do the job of supplying businesses with capital anymore.”
Every time a company distributes less than the full earnings for the year, the shareholders are funding the company – essentially acquiescing in allowing company management to retain control of some of their funds. If the company had funded itself with debt it would have had to pay out the full amount of interest and principal as it fell due. Hence the existing shareholders are providing further finance the longer they hold the shares.
Furthermore, the stock market may not be providing fresh equity issues to raise money for listed companies, but it provides an exit route for shareholders and an entry for new shareholders. Essentially it plays the same role as the bank debt capital markets in providing a revolving source of capital. It just does it in a different way. In the debt markets loans and bonds are redeemed at par at maturity, while in the equity market, shares are sold between investors (and brokers) at any time after issue at the prevailing market price. Either way, the company has a revolving source of finance.
As usual, apart from suggesting you are called Alex when I suspect that incredibly unlikely, you also show your very limited knowledge
Shareholders do not declare or even approve company dividends: directors do and withhold cash from shareholders by doing so
And yes, stock markets do provide a mechanism to trade second had capital. Do you really think that means they deserve the attention they are given? What it does not do is provide the company with finance. You are simply not making a case
Your problem, Richard is that just don’t understand the philanthropic instincts of capitalists. You clearly think they are just in for what they can get.
I can’t think where you get your ideas from. 🙂
“Shareholders do not declare or even approve company dividends: directors do and withhold cash from shareholders by doing so”
Shareholders (or the market) can agitate to remove directors who do not produce sufficient profits and/or withhold dividends unnecessarily. And yes, stock markets do provide finance to the company, either by primary or secondary issues, or by providing shareholders with an exit when companies retain some of their earnings and the share value increases (the company is financed by the retained earnings while the investors can sell through the stockmarket and receive the value of the retained earnings or an approximation thereto from another party). We give stock markets attention because they reflect the expected view of investment analysts of the profitability and financial health of listed companies.
Oh come on….shall we stop being silly here?
Alex says:
“We give stock markets attention because they reflect the expected view of investment analysts of the profitability and financial health of listed companies.”
What a splendid idea(l).
“Oh come on….shall we stop being silly here?”
I think you mean you don’t like others being right. Simple example: IBM has issued $54 billion of common stock up to the end of 2017, and most of that a long time ago. In the same period it has accumulated retained earnings of $153 billion, which rightfully belongs to the shareholders. For many years the company was financed by those retained earnings. More recently those shareholders who have wanted to redeem their shares have been able to sell their shares to the company under share buyback shemes totalling $163 billion. So that’s $54 billion of initial offerings, $153 billion of financing through retained earnings which the shareholders were happy to allow because the stock market gave them liquidity and $160 billion of share buybacks through the stock market. Sounds to me that the stock market has been very instrumental in the financing of IBM for a long time after its initial public offering.
Precisely: shares are being withdrawn from the market and equity is being reduced in supply.
The market does not deliver funds: it is now a mechanism for liquidating them.
That was my argument. Thank you for agreeing.
Of course the market delivered funds to IBM for decades. $54 billion in initial offerings and $153 billion in retained earnings left in the company. The share buybacks only started after IBM’s mainframe business collapsed and it decided it didn’t need as much capital to run a software and consultancy based business, whereupon it returned capital to shareholders who didn’t want to own the new business.
Another example is Shell, which has about £600 million of share capital and £177 billion of retained earnings. What is so hard to understand that the difference between the profit attributable to shareholders and the amount paid in dividends represents an annual source of funding for the company? The fact that dividend yields are generally lower than the rate of interest on long term debt, and particularly subordinated debt, indicates that investors are willing to forego current income in return for incremental investment in the company.
I understand all that
It has nothing to do with my thesis that buy backs now dominate capital markets and they are not supplying new capital
Why not address the issue?
Alex says:
“The fact that dividend yields are generally lower than the rate of interest on long term debt, and particularly subordinated debt, indicates that investors are willing to forego current income in return for incremental investment in the company.”
Does that mean they are investing in the company or ‘merely’ speculating, I wonder.
There is a fine dividing line sometimes between investment and gambling.
Interesting that you make specific reference to the oil industry. I don’t hear much braying about ‘small government’ when it comes to the vast government expenditure involved in turning the Middle East into a war zone in order to manipulate the price of crude. That represents an enormous government subsidy to private wealth.
And that’s before you even consider the environmental effects which are simply not priced in by the market. The phrase ‘blood money’ springs to mind.
If the company does not use the money paid for its shares to invest (and in about 98% of cases that is unlikely the last time I looked) then you are at best saving and not investing and as likely are gambling
“There is a fine dividing line sometimes between investment and gambling.” I would say that there is a bleeding obvious line between putting your savings into stocks and shares and actual investment in new capital.
“buy backs now dominate capital markets and they are not supplying new capital”
Factually not correct. While share buybacks exist rightly in a mature market (as companies mature and/or die), there are clearly many companies left in the market with a positive share capital and retained earnings. In other words, historic share issuance and retained earnings predominate.
I am not saying there is no share capital
Don’t you know about the difference between stocks and flows?
I despair
I’ve read through this thread with some interest, and the discussions about funding of companies via share issues or not. I’ve a couple of questions;
– in your original post you say that the markets serve no social or economic purpose and should not be used as savings mediums. I haven’t seen in this thread what the alternative for investment should be. From your previous posts would it be correct to say you favour Gilts and/or a National Investment Bank or similar?
– Also, should the markets be closed or just allowed to slowly die, and how are investments to be disposed of?
– in the thread there is some discussion about ‘new money’. Surely the definition of new money to the company raising capital is that it is new to them – whether ‘recycled’ or borrowed by investors?
Tell me what social purpose a market that does not provide new capital to business delivers?
Tell me why something is new money if it does not fund real investment – i.e new productive capital?
I think much of your work is brilliant, particularly on the tax gap. I also fully understand the certain factions of financial markets definitely serve no social or economic purpose. But much of what you state on this thread is factually incorrect and shows little more than a layman’s insight into how capital markets work. The bluster you used to dismiss facts that are blatant and are staring you in the face does you no credit whatsoever.
I have to disagree
Sure it is what a layperson might think if they thought about it
But it’s also what an informed person would think if they thought about it
I have dismissed no facts: the simple reality is that markets as used by the vast majority of users function as I suggest – and that means far from serving a social purpose they are being used to manipulate value to extract value from that majority – and that’s fraud
But ti takes some courage to point out the obvious truth and that is what I think I am doing