Telegraph Writer Calls for Middle Class Revolution

[derspiess]

Oh I don't think they are exactly the same. Unlike you though, I don't really see the Dems as that much better with the urge of "Spend, Baby, Spend!"

They have other urges besides that.

Overregulate, Baby, Overregulate!

Whatever problems our financial markets might have, overregulation does not appear to be one of them.

Frank-Dodd is overregulation.

[frunk]

Whatever problems our financial markets might have, overregulation does not appear to be one of them.

Well, I suppose it was underregulated financial instruments masquerading as safer, regulated ones that got us into trouble.  Clearly it would be better if nothing was regulated so that the risk of misplaced trust in regulation would go away.  Or something.

[Martinus]

The bonds were PIK-toggle and paid a 10% coupon.
That is what I would consider pretty extreme on the speculative end.  No sane "middle class" investor should have been touching that paper.  It also suggests that the markets had a pretty realistic view about the precariousness of this business.  It is an unfortunate outcome for the bondholders but you do get what you pay for.

Ok I gotta agree with you, the compound interest of the PIK-toggle element would have been atrocious even without the coupon. For the record, I am not saying that poor investors were taken advantage of - I am just wondering whether bonds like this should be possible.

[Martinus]

Also - Marti - there is another way to look at this.
The big carriers are an oligopoly.  Their topline growth is slowing because mobile voice and data is a saturated market in Europe.  They are looking to defend margins and so the obvious move is to cut out the middleman and the associated commission expense. 
Now look what happens when EE follows Vodaphone and the others and ditches Phones 4U.
Days later EE and Vodaphone turn around and scoop up the best store locations at liquidation values.  So they expand their retail presence on the cheap and keep the margins up.

So is this story about rapacious financiers strip mining assets?
Or is it about monopolistic rent-seeking behemoths in a regulated industry abusing their market power over a business partner to grab their prize assets on the cheap?

Or maybe it is just about developments in the market rendering a business model obsolete, prompting an avalanche of overblown journalistic rhetoric?

Lots of ways to spin it.

Well, you are right of course. My posts were more of a general nature rather than addressing this specific case (I wanted to make it more nuanced but had to rush to work - but yeah, for example the leveraged buyouts are not always or even in most cases evil and they improve the efficiency of bona fide investments a lot).

[MadImmortalMan]

If they were impossible/illegal there would be an evil conspiracy to ensure weaker businesses fail because they can't get capitalized.

[Martinus]

If they were impossible/illegal there would be an evil conspiracy to ensure weaker businesses fail because they can't get capitalized.

Well, many regulated businesses (such as banks or insurance companies) already have limits and restrictions on the risk they can accept, solvency margins, own funds etc. I guess the question is to what extent we should expand this to other businesses. I am not sure I know the answer to be honest.

[Admiral Yi]

Why is there be any need at all? 

Venture capital counts on one hit out of eight tries.  Should we outlaw venture capital?

[Martinus]

Why is there be any need at all? 

Venture capital counts on one hit out of eight tries.  Should we outlaw venture capital?

We outlaw fraud or swindle. I suppose, if you are offering terms that you can't possibly deliver there is a certain breaking point where it becomes indistinguishable from fraud or swindle. After all, most fraud or swindle is (also) based on the greed of the dupe - but that does not make it less illegal.

[Admiral Yi]

I could see your point if the issuer of this bond had provided fraudulent financial data in the prospectus, but otherwise don't see how it applies. 

[DGuller]

I could see your point if the issuer of this bond had provided fraudulent financial data in the prospectus, but otherwise don't see how it applies.

I imagine that there is an implicit statement somewhere that when you issue bonds, you're using the proceeds to invest in business rather than channel them directly into the pockets of owners.

[Admiral Yi]

I imagine that there is an implicit statement somewhere that when you issue bonds, you're using the proceeds to invest in business rather than channel them directly into the pockets of owners.

I doubt it.  Apple recently borrowed 12 billion to finance a stock buy back.

[Martinus]

I could see your point if the issuer of this bond had provided fraudulent financial data in the prospectus, but otherwise don't see how it applies.

I imagine that there is an implicit statement somewhere that when you issue bonds, you're using the proceeds to invest in business rather than channel them directly into the pockets of owners.

Not really.

In fact, telecoms are a great example of why that is not necessarily a bad thing as they require a massively disproportionate upfront investment into infrastructure - and once it is built (and no further big investments are needed and the original debt is paid off), the shareholders may decide to effectively convert some of the equity into debt. Nothing wrong with that, per se.

[Martinus]

I imagine that there is an implicit statement somewhere that when you issue bonds, you're using the proceeds to invest in business rather than channel them directly into the pockets of owners.

I doubt it.  Apple recently borrowed 12 billion to finance a stock buy back.

True, although admittedly this trend is considered largely harmful.

[DGuller]

Ok, I need to put in a lot more qualifiers than that.  What I meant is that there is something somewhere that says that you can't start a company with $1 million of your own money, borrow another $5 million, and then give yourself a $6 million dividend and declare bankruptcy.  I'm pretty sure that would count as embezzlement, even without any covenants.

[Martinus]

Ok, I need to put in a lot more qualifiers than that.  What I meant is that there is something somewhere that says that you can't start a company with $1 million of your own money, borrow another $5 million, and then give yourself a $6 million dividend and declare bankruptcy.  I'm pretty sure that would count as embezzlement, even without any covenants.

Thats correct. But then most (all?) countries have regulations that say that in order to distribute dividend you need to have a so-called distributable reserve - which is generated from profit. So in theory you should be able to finance dividend with debt only to address the cash flow issue (eg your balance sheet has a lot of illiquid assets but your P&L is positive), not to create profit out of debt.