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Society of fools

The BOE buying corporate bonds- what are the implications for competition ?

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Just wondering, has there been enough in-depth discussion on the effect of Central Banks buying corporate bonds ?

http://www.bloomberg.com/news/articles/2016-10-06/boe-bought-507-million-pounds-of-corporate-bonds-in-first-phase

As somebody who has spent much of the last 20 years locked in battle trading against corporations with shaky credit, ( actually, to be frank, ZOMBIE corporations who only limp along for years on end by virtue of very low interest rates) it would seem to me that this kind of move by a central bank has several pernicious effects, such as :

(1) it would seem to favour large corporate bond issuing companies against their much smaller competitors- who may be locked into expensive bank credit. This has extensive implications for competition. Even if the corporate bonds being bought are from supposedly ultra-safe companies, a company's profile can rapidly change in an era of disruptive tech change. The large company is effectively getting cheap credit by virtue of a central bank.

(2) Once a central bank does own a large slice of company's corporate debt, what then happens if that company is under genuine competitive threat ? What influence does the BOE exert in the event of a restructuring, or even the prospect of an outright  liquidation ?

I think this is a dead stupid, market fighting move. Surely this development is just another taxpayer funded, under the table crutch to limping sectors of the economy ?

Why not simply allow failing corporations to fail and allow their healthier, smaller, nimbler and smarter competitors to take over ?

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13 hours ago, Society of fools said:

Just wondering, has there been enough in-depth discussion on the effect of Central Banks buying corporate bonds ?

http://www.bloomberg.com/news/articles/2016-10-06/boe-bought-507-million-pounds-of-corporate-bonds-in-first-phase

As somebody who has spent much of the last 20 years locked in battle trading against corporations with shaky credit, ( actually, to be frank, ZOMBIE corporations who only limp along for years on end by virtue of very low interest rates) it would seem to me that this kind of move by a central bank has several pernicious effects, such as :

(1) it would seem to favour large corporate bond issuing companies against their much smaller competitors- who may be locked into expensive bank credit. This has extensive implications for competition. Even if the corporate bonds being bought are from supposedly ultra-safe companies, a company's profile can rapidly change in an era of disruptive tech change. The large company is effectively getting cheap credit by virtue of a central bank.

(2) Once a central bank does own a large slice of company's corporate debt, what then happens if that company is under genuine competitive threat ? What influence does the BOE exert in the event of a restructuring, or even the prospect of an outright  liquidation ?

I think this is a dead stupid, market fighting move. Surely this development is just another taxpayer funded, under the table crutch to limping sectors of the economy ?

Why not simply allow failing corporations to fail and allow their healthier, smaller, nimbler and smarter competitors to take over ?

I largely agree with you. A facility such as this should only be used is very exceptional circumstances. The Asset Purchase Facility was created during the financial crisis where you could argue that the situation was so extreme that the market was failing and that some liquidity was required. 

Sterling bond market participants might point to how poor liquidity was last year and this year even before the referendum, but central bank intervention should not be part of business as usual of the markets. 

 

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It's worse. its organised crime. A banking monopoly instigated by govt decree using other people's money aka. Taxpayers money, to prop up private institutions of their choice and shield them from the market? ! 

Its in the mafia league. 

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Just now, evetsm said:

It's worse. its organised crime. A banking monopoly instigated by govt decree using other people's money aka. Taxpayers money, to prop up private institutions of their choice and shield them from the market? ! 

Its in the mafia league. 

Quite. I completely agree.

I remember reading a book titled " A colossal failure of common sense" by Larry McDonald, about the Lehman's crash in 2008. Much of the tail end of the book was about the actual last few months of Lehmans, but the author had actually spent most of his finance career in the distressed corporate bond market. His team would research in forensic detail the financial accounts of shaky airlines, energy companies, and suchlike, and then position themselves in the corporate bond market to make a killing if their analysis showed that the bonds were worth more than they actually sold for on the marketplace- pre-bankruptcy. If, for example, Delta Airlines corporate bonds were selling at 40 cents on the dollar but this Lehman's distressed debt team through they were worth 65 cents on the dollar then they would buy in big, and upon bankruptcy occurring, ( They could predict a future corporate bankruptcy with considerable accuracy, that was their essential skill) sell the bonds for a profit at the appropriate time.

It struck me at the time that this kind of investment banking team really did in fact perform a very useful function.

But I wonder how such a team would operate when Central Banks were now in the mix, buying corporate bonds on the marketplace with their unlimited resources ? Wouldn't it make their job much much harder ? Predicting a future bankruptcy must be a lot harder when your central bank is actually one of the holders of your target corporate bonds.

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1 hour ago, evetsm said:

It's worse. its organised crime. A banking monopoly instigated by govt decree using other people's money aka. Taxpayers money, to prop up private institutions of their choice and shield them from the market? ! 

Its in the mafia league. 

It is the destruction of capitalism through the backdoor isnt it.The business cycle was what delivered our huge increase in living standards over the years.The odd couple of years of pain were what saw new ideas and companies fly.If the BOE had done this back in the 80/90ss they would of been keeping Acorn Computers going,and ARM wouldnt of been able to be spun out of the bankrupt company.

Its just the same with interest rates of course.Companies who grew by re-investing capital and had strong balance sheets are being destroyed by competitors who should be bankrupt,but are able to keep borrowing at almost free levels and keep going at loss levels for years.

Of course this should simply make the crash even bigger at some point.

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12 minutes ago, durhamborn said:

It is the destruction of capitalism through the backdoor isnt it.The business cycle was what delivered our huge increase in living standards over the years.The odd couple of years of pain were what saw new ideas and companies fly.If the BOE had done this back in the 80/90ss they would of been keeping Acorn Computers going,and ARM wouldnt of been able to be spun out of the bankrupt company.

Its just the same with interest rates of course.Companies who grew by re-investing capital and had strong balance sheets are being destroyed by competitors who should be bankrupt,but are able to keep borrowing at almost free levels and keep going at loss levels for years.

Of course this should simply make the crash even bigger at some point.

Public sector deciding private sector companies.

Thats going to end well.

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14 minutes ago, spyguy said:

Public sector deciding private sector companies.

Thats going to end well.

Nobody can fail,nobody with the elite holding bonds in anyway.

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3 hours ago, durhamborn said:

It is the destruction of capitalism through the backdoor isnt it.The business cycle was what delivered our huge increase in living standards over the years.The odd couple of years of pain were what saw new ideas and companies fly.If the BOE had done this back in the 80/90ss they would of been keeping Acorn Computers going,and ARM wouldnt of been able to be spun out of the bankrupt company.

Quite. At the bottom of this course of action lies one fundamental and very establishment point of view: The people ( sheeple?) cannot take pain.

No matter how much money needs to be borrowed, no matter how much Central Bank interference needs to take place in the free market, one thing must remain inviolate, and that is that somehow the charade must continue, without a recession, without any large corporations going bust, without any asset destruction, and without any increase in unemployment.

Its actually a pessimistic and cynical view of human nature that's being displayed.

Actually, the people can take a great deal of pain in a good cause, a just cause. And history shows that there's actually little real progress in human endeavour to be made without genuine pain, but somehow, somewhere, in the decision and policy making echelons of society, that seems to have been forgotten.

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20 hours ago, Society of fools said:

The large company is effectively getting cheap credit by virtue of a central bank.

When staff leave the BoE they are unlikely to go work for little firms struggling for more expensive credit. They may well get jobs at the larger firms the BoE are enabling to get cheap credit, the savings from which will no doubt flow into executive pay.

 

 

 

 

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1 hour ago, Democorruptcy said:

When staff leave the BoE they are unlikely to go work for little firms struggling for more expensive credit. They may well get jobs at the larger firms the BoE are enabling to get cheap credit, the savings from which will no doubt flow into executive pay.

ABSOLUTELY. But the inherent stupidity of the policy boggles the mind.

What exactly did the Bloomberg article say ? That the BOE was buying "ultra-safe" non-financial company debt ? Like Glaxo Smith Kline ? Since when, exactly, is big Pharma "ultra safe" ? All it would take is for GSK to take a big gamble on a promising new drug and market it aggressively into the litigation-prone USA. If the drug leads to large scale fatal side-effects then  the result will be the "ultra-safe" pharma company being sued into oblivion, as the Yanks threatened to do to BP after the Macondo well screw-up. And the BOE will be on the hook for its resulting toilet -paper bonds.

But let's bring this discussion back to real estate. Who's amongst the biggest land owners in the United KIngdom ? Would it be a corporation named Land Securities by any chance ?

Let's posit that a situation arises- perhaps out of a difficult Brexit process- where Land Securities finds that the fundamental underpinnings of its business model- a rising real estate market for both the residential and commercial segments- no longer hold true, and it begins to slide into financial disaster. Forced selling of vast land holdings, commercial property, and residential property are mooted.

Let's speculate for  a moment: would the BOE having a large holding of Land Securities debt create an obstruction here to an unwinding of the Land Securities enterprise, and perhaps, therefore, the British property bubble ?

By the way Land Securities has plenty of corporate bonds for sale. Maybe the BOE sees those bonds as "ultra-safe" too.

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27 minutes ago, Society of fools said:

ABSOLUTELY. But the inherent stupidity of the policy boggles the mind.

What exactly did the Bloomberg article say ? That the BOE was buying "ultra-safe" non-financial company debt ? Like Glaxo Smith Kline ?

darkmarket posted a link to a spreadsheet  http://www.bankofengland.co.uk/markets/documents/cbeligiblesecurities.xls

and this:

Had a closer look at the corporate bond purchases of the BoE.

Worried about sub-prime car lending?

  • BMW FINANCE NV
  • DAIMLER AG
  • DAIMLER INTL FINANCE AV
  • GENERAL ELECTRIC CO
  • MOTABILITY OPERATIONS GR
  • TOYOTA MOTOR CREDIT CORP

Concerned about successful anti-smoking campaigns?

  • BAT INTL FINANCE PLC
  • IMPERIAL BRANDS FINANCE

Anxious about Chinese not visiting your northern powerhouse?

  • MAN AIR GRP FND P

Can't sell enough junk food?

  • MCDONALD'S CORP
  • NESTLE FINANCE INTL LTD
  • PEPSICO INC
  • UNILEVER
  • WAL-MART STORES INC

Fear recession when you see high street brands go insolvent?

  • MARKS & SPENCER PLC
  • NEXT PLC

Thinking twice about those property investments?

  • HAMMERSON PLC
  • SEGRO PLC

Troubled by privatised basic infrastructure failing?

  • ANGLIAN WATER SERV FIN
  • BG ENERGY CAPITAL PLC
  • DONG ENERGY A/S
  • E.ON INTL FINANCE BV
  • EASTERN POWER NETWORKS
  • ELECTRICITE DE FRANCE SA
  • ELECTRICITY NORTH WEST
  • ENGIE SA
  • ENW FINANCE PLC
  • LONDON POWER NETWORKS
  • NATIONAL GRID GAS PLC
  • NATL GRID ELECT TRANS
  • NIE FINANCE PLC
  • NORTHERN GAS NETWORKS
  • NORTHERN POWERGRID YORKS
  • NORTHERN PWRGRID HOLDING
  • NORTHUMBRIAN WATER FIN
  • RIO TINTO FINANCE PLC
  • SCOTTISH POWER UK PLC
  • SEVERN TRENT WATER UTIL
  • SHELL INTERNATIONAL FIN
  • SOUTHERN ELECTRIC POWER
  • SOUTHERN GAS NETWORK PLC
  • SP MANWEB PLC
  • SSE PLC
  • SUEZ
  • THAMES WATER UTIL FIN
  • UNITED UTILIT WATER FIN
  • VATENFALL AB
  • VEOLIA ENVIRONMENT SA
  • WALES & WEST UTIL FIN PLC
  • WESSEX WATER SERVS FIN
  • WESTERN POWER DIST EAST
  • YORKSHIRE POWER FINANCE
  • YORKSHIRE POWER SERV FIN

 

 

 

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It is an absolute disgrace, if the average man in the street had any idea what was going on he would tut loudly.

We have a referendum about brexit, a judicial review and all that fuss, yet these central banker clowns just do what they like because the politicians are so thick and weak.

They wonder why we don't want a them to have anything to do with brexit.

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1 hour ago, Democorruptcy said:

Had a closer look at the corporate bond purchases of the BoE.

Democorruptcy, a huge chapeau to your post, and to darkmarket's link also. That is superb, thank you.

This is an utter disgrace, worthy of a banana republic, not of one of the oldest capitalist democracies in the world.

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On 04/11/2016 at 5:47 PM, Society of fools said:

I think this is a dead stupid, market fighting move. Surely this development is just another taxpayer funded, under the table crutch to limping sectors of the economy ?

Why not simply allow failing corporations to fail and allow their healthier, smaller, nimbler and smarter competitors to take over ?

but there are people who think that controlling a monopoly on resources is a good idea.That is why you're getting the pulling up the drawbridge on any competition.Ultimately it's an "age" thing. They can't accept they are getting on a bit,and running out of ideas/virility.....hence they go for the cosmetic surgery/botox approach to try and delay the effects of old father time.

 

i agree it's dead stupid,and people who have better innovation/ideas should be the ones who ultimately rise+replace the old dinosaurs.

 

It will ultimately fail,of course.you can't beat the laws of nature,but these guys would rather fight to the death than grow old gracefully.

 

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22 hours ago, oracle said:

Ultimately it's an "age" thing. They can't accept they are getting on a bit,and running out of ideas/virility.....hence they go for the cosmetic surgery/botox approach to try and delay the effects of old father time

A perfectly natural reaction Oracle, except in this case its not a private credit card they're using for the facelift, its the country's credit card, and they're restraining others from achieving success and finding happiness as well.

I know a better analogy. I was in Biarritz a few years back, and there was serried ranks of single ladies "of an age" , mostly aged from 45 up to about 55, sunning themselves on the beach. Along came a few young lassies in their late teens and early twenties, who immediately stripped off to their briefs and allowed their mammaries to catch a few rays. Well, some of the older ladies immediately took it upon themselves to tell the younger ladies to cover up, and they, in turn, ended up leaving the beach in a huff. Later on a spoke to a couple of the older women concerned, who were quite frank in admitting that the reason they told the young women to shove off was nothing to do with Christian morality, but simply that they couldn't stand the competition. They were under the fond illusion that without the hot and obvious competition around, someone might actually notice them.

It was a lose lose all around. The younger ladies had their freedom to display their very attractive wares severely diminished. Guys like me who were looking up from their Spectator had a lot less to look at. And the older women, well, hell, they went back to their hotels from the beach all alone anyway.

Restraining  fair competition sucks all around.

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