Abigail with attitude: Diamond and the ominous new constellation


Abigail Hofman
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And talking of Lehman’s bankruptcy, I was intrigued to read an opinion editorial in the Financial Times written by Bob Diamond, the former chief executive of Barclays Bank. Bob of course pounced on the corpse of Lehman Brothers as it was drowning and made off with a succulent limb: the US broker-dealer operations. As regular readers know, buccaneering Bob’s tenure at Barclays was not all plain sailing, especially when it came to relations with the regulators. There were heated discussions over the Protium transaction, quibbles over the emergency fund-raisings in 2008 and then the issues around the manipulation of Libor. Come to think of it, surely didactic Diamond lost his job because of a regulator? Last July, Sir Mervyn King, the governor of the Bank of England, insisted that Diamond had to take responsibility for the Libor scandal and step down. It was therefore quite a surprise to read Bob’s piece, which comes across as a passionate plea for a “robust resolution regime”. In other words, a mechanism for winding down important financial institutions so that too-big-to-fail is no longer a problem. Diamond also urged regulators to introduce a level playing field for global banks: “Big banks must be subject to the same or very similar levels of capital, liquidity and leverage across all large markets.” Diamond’s op-ed concludes with a flourish: “Implementing these measures will give confidence that the rules are strong and that regulators are coordinated and will be equipped to facilitate the winding down of failing banks in an orderly fashion.” Is something amiss? Are we witnessing an ominous constellation forming in the sky? You have important stock markets hitting new highs. You have prominent investors such as Warren Buffett and Carl Icahn sounding cautious and claiming that stock markets are no longer cheap. And then you have Diamond – the man who probably irked regulators more than any other senior banker -– exhorting regulators to do a better job.
And that’s before we even start talking about the recent Time magazine cover: ‘How Wall Street Won’ with a picture of a grinning bull adorned with sunglasses and a party hat. However in smaller text the key to the story is revealed: ‘Five years after the crash, it could happen all over again.’ Today, once again, there is a touch of froth in the autumn air. In mid-September, Twitter tweeted that it had filed for an IPO. Commentators believe that the 140-character phenomenon could be worth as much as $15 billion. I find Twitter a useful resource, but I sometimes ask myself: If it had never been invented, would we miss it? Also in September, Verizon undertook a $49 billion multi-tranche bond offering. This deal was to finance the purchase of Vodafone’s stake in Verizon Wireless. This transaction was much larger than Apple’s previous record-breaking, $17 billion bond offer in April. On the first day of trading, Verizon’s $15 billion, 30-year tranche traded as high as 106.01, up from its issue price of 99.88.

Obviously the deal was cheap and came at a concession to existing Verizon paper. But surely we must be hovering on the threshold of a new bear market for bonds as the Fed contemplates how to end the easy-money party? So why rush in and buy 30-year paper when the long-term trend in rates is up (and so bond prices will decline). I will be interested to see where these Verizon bonds are trading at the end of the year.