The FT reports that:
Goldman Sachs is examining turning into bonds some of the £25bn owed by Northern Rock to the Bank of England, as a possible solution to the crisis surrounding the refinancing of the stricken bank.
Now I've nothing against bonds: in fact I promote their use by local authorities and for specific circumstances. But let's be clear that's not what is happening here. As the article also notes:
Goldman has suggested that part of the Bank loan can be converted into bonds, which can then be sold to investors. However, Northern Rock, which is dependent on government support for its current credit rating, might use that guarantee to issue bonds. It could then decide to lay off some of the potential risk with a specialist insurer.
Let's be clear then what this actually means:
1) The risk is still on the government
2) Anyone will however ask 'why buy these bonds when gilts are available instead/', so the cost will be higher
3) Laying off potential risk is just putting this stuff back in the CDS market in which some $45 trillion is currently 'insured' (although this is not a regulated insurance market) and no one has any clue what the ramifications of that are right now anyway.
Put together this is not a solution to a problem; it's a typical merchant bankers attempt to repackage a financial product with a margin for themselves. Which is the reason why we had the whole sub prime crisis in the first place.
Is that really the best Goldman Sachs can do? If so, sack them.
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My definition of a merchant banker is someone to whom you voluntarily give your wallet and at whom you smile when he gives you only 95p in the £ of whatever money was in there back to you.
Investment banks are in a win win situation almost no matter what happens in the financial markets- its only when the they make a mess of proprietary trading that they can get into really deep water.
The big US banks were deeply involved in Enron but survived despite Enron generating over $300 million in underwriting fees for them over 5 years.
They were behind the creation and distribution of the complex derivatives which enabled banks to move assets off balance sheet and circumvent the rules and who is advising the Government on sorting out the mess at NRK – the same Goldmans who were raking in fees from Enron and creating complex derivatives.
As you say Richard if their bond scheme with insurance added to sweeten the sale goes ahead everything just gets wrapped up given a bit of plastic surgery so it’s not instantly recognised and pushed back into the same market for someone else to sort out sort out years down the line after the fees have been paid out in 7 figure bonuses.
As Philip Augar, ex investment banker ,wrote in the preface of his excellent look at the world of investment banking ie ” The Greed Merchants”….
“If you look hard enough the games that are played in American capital markets can be found wherever you live. And if you look hard enough you will find that you are paying the price.”