Monday, January 21, 2008

Could this be the next blowup?

Hybrid Securities

It seems like these were a great idea during runups in the equity and debt markets. Whoopsie. "The new guidelines establish a "debt-equity continuum" and allow institutions to classify part of the hybrid security as equity and part as debt (in a shift from the previous policy, that counted the entire amount as debt). This change allowed companies to issue hybrid securities at a time of record low interest rates (and thus gain access to cheap capital) and then use the proceeds to repurchase equity shares (which have a very high cost of capital). Since only a fraction of the recapitalization would be listed as debt on the balance sheet, hybrids allowed companies to repurchase more shares than previously without negatively affecting their credit rating."

Posted by lvmreader @ 05:42 PM (686 views)
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5 thoughts on “Could this be the next blowup?

  • Interesting angle. Take a quick look through Financial Week: Hybrids let foreign investors skirt Fed’s 9.9% wall. Hybrid Securities are used by sovereign wealth funds (e.g. Abu Dhabi Investment Authority) to buy up shares in US banks above the 9.9% foreign ownership limit. They seem relatively benign compared to CDOs and all the rest. Thoughts?

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  • japanese uncle says:

    As mentioned before, global financial business must shrink by half through getting rid of these phony products devised by the ‘financial wiz-kids’ just to serve their purpose of pocketing investors’ money.

    ——————————————–
    In 2028 somewhere in the City:

    A fund managers is addressing a group of prospective investors “Our investment fund may not be generating remarkable return, but this is because our policy, as you know, is to exclude any unacceptable risk and uncertainty in consideration of what happened to the global financial market 20 years ago (crossing himself with a shudder), yes the notorious “Inferno of the Summer of 2007”. (All those present crossing themselves, but a couple of them murmuring Allahu Akbar) . “So please understand that our rate of return is just 0.3% higher than the Post Office Bank”

    One of the prospect investors saying “No problem at all. 0.3% over the Post Bank interest rate is just fine. I do appreciate your stance as you people could be sent to Guantanamo Bay and possibly hang under the Special Criminal Code for Financial Fraud, besides your bonus is capped at 1000 pounds p.a. We can hardly complain.”

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  • @drewster,

    Now that is a great find. I was unaware of this until today.

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  • Answer to the dilemna of Pay Structure for Bankers – Make it like it is for Engineers….

    If I designed a building and it stood for 20 yrs then collapsed killing anyone at all – I would go to jail. Or at the very least I would be investigated and if found culpable I would certainly be sued and possibly jailed.

    The same needs to happen for bankers. If any decision they have made blows up costing people money, they are found, sued and jailed.

    Pension Fund Managers too. If the fund doesn’t perform, they don’t get their management fee. 0.1% and 20% is better than 2% and 20%. It would be fairer, no?

    Unfortunately, currently a quirk in the LP and GP agreements allows Hedge Fund Managers to use their clients’ money to defend themselves against lawsuits FROM the same clients. Go figure that one!

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  • (LP = limited partner, GP = general partner)

    —– Original Message —–
    From: Hedge Fund Manager in CT, USA

    that’s just the way the docs are written… in fact, they even use the lp’s
    money to defend the gp against lawsuits….

    —– Original Message —–
    From: Me
    At: 1/17 23:11:33

    How they allowed to keep it? They clearly misrepresented what they were doing.

    —– Original Message —–
    From: Hedge Fund Manager in CT, USA

    yeah, i tend to agree… the system for paying for management performance is screwed up…. (witness the fact that Amaranth took in hundreds of millions in Dec of 2005, and even though they blew a ton of it, its still a lot of money to keep, after you consider what happened….)

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