Bond Outlook February 25th

The enthusiasm for new high-quality corporate bond issues continues, implying a further displacement of bank credit to the bond markets. This helps the major corporations but leaves smaller companies out in the cold. It does not look feasible to bypass banks in assisting small businesses, so our expectation is that governments will further increase pressure on banks to force them to recommence lending.

Last week we raised the issue of how banks can be bailed out but not bankers (lawyers must currently be relieved no longer to be the most despised profession). The question goes to the heart of how the banking industry has developed in recent decades. Thirty years ago bankers received salaries and shareholders received profits. The emergence of hedge funds encouraged banks to develop proprietary trading themselves in order both to retain key staff and also to increase profits, with managers compensated much like hedge fund traders – with bonus schemes taking a large proportion of profit. The problem, as pointed out by Nassim Taleb (of “Black Swan” fame) is that short-term profits go into the pockets of the bankers while the losses are absorbed by the banks.