Wednesday, October 8, 2008

Two Charts

The Federal Reserve of NY publishes the following two charts in its National Economic Indicators series.

  • First, the net issuance of corporate bonds has plunged 77% from the high reached in 2007. A lot of the decline can be accounted by the total seizure of the mortgage market and the related products (CDO's, CMO's, etc.).

  • But it is the next chart I find more interesting. Equity proceeds, i.e. IPOs and secondary offerings, were running negative since 2004. Repurchases, LBOs, etc. were removing equity from the economy very fast. The process reached a dizzying peak of -280 billion dollars in the last quarter of 2007 alone, meaning that equity was being removed at a pace of $1.12 trillion per year! This fact alone was enough to account for the puzzling behavior of the stockmarket - until recently.
Well, what a difference a year makes... net equity removal is now down -71% from the peak and pretty soon I expect the process to reverse. Or, actually, I expect that very little activity will be taking place in the takeover/LBO/private equity business for the next couple of years. The plunge in oil prices is rapidly removing a main source of funding from those guys, i.e. oil money.


  1. If I recall correctly, it was the investment banks who encouraged the corporates to "retire" equity and replace it with debt. The idea was that it would increase the leverage in the corporation, which was then seen as "a good thing".

    Finance Directors are rapidly learning the old rules, that shareholders still have to be there in the bad times, whereas banks willing to refinance debt often are not.

    Another mess created by the investment banks!


  2. I second your sentiment Dome, I remember balance sheets in the early-mid 70's commonly had much higher levels of equity & retained earnings and liabilities were only a fraction of equity and short term leabilities were often less than 5% of the balance sheet and usually matched by liquid working capital on the asset side. Safe and boring, ho-hum.

    I saw an article (sorry didn't save link) that Islamic banks will try to take advantage of the new-found aversion to debt to expand because they operate on 100% equity and P&L sharing which greatly reduces the chances of bankruptcy as there is no debt service. I wonder if bushler ever contemplated that he might be helping launch a rival banking system with all his free market deregulation.

  3. Trenchant posting today Hell

    ... Agree with yoyomo, a similarly mordant observation by Dome as well ("hi" by the way, haven't read your thoughts on the blog for a while).

  4. If oil revenue is dropping and demand for finished products dropping, who is going to fund our trillion dollar budget deficit?

  5. so, can it be said that, since '04 those
    who benefit from such high finance have
    been running away with the store ? where
    did all that equity withdrawn gone into ?

  6. LOL!!!!!

    I just read your new subtitle :-)

  7. From TheAutomaticEarth:

    "The UK comes with a mind-boggling scheme to prop up the biggest banks in the country. The total amount involved is $876 billion. For comparison: in the US, 5 times as big, that would mean $4.38 trillion. The British government says their idea is much better, since it involves ownership shares, but what are those shares worth when you’re talking about banks that lent out cheap credit that caused home prices to rise 5-fold in 10 years? The survival rate among those banks will be low. And guess who pays for what’s left."

    I wonder how that's going to play out

  8. Hmm. Speaking of oil, IF one is a subscriber to the doctrine of Peak Oil, one of the greatest investments one can make going forward will be in energy stocks. Does anyone disagree?

  9. Edwardo, are you only asking for Peak Oilers to respond?

  10. anonymous
    Where has all the equity withdrawn too? It has been invested in overseas banks. Which then invested it in US treasury bonds. Which then used that money to buy up the equity that was sold in the first place.

  11. thanks wkwillis...

    what a Ponzi scheme...

  12. 気楽にエッチができるセフレはほしくないですか?