Machismo in New York
Crazy things happen in the Eurobond market. Everyone admits it. But it's doubtful if the craziness will end in 1986.
Call it what you will, mispricing, under-pricing or aggressive pricing, was a practice which intensified last year. But there's been a general reluctance to acknowledge that the true reason for it is the oldest one in the book: the desire by some houses to increase market share, to buy their way up the league tables, to shower themselves with publicity, to prove their machismo in the emerging global securities market.
Instead, other explanations have been devised. Between 1980 and 1983, the argument for the pricing battles was simple: we can take it, because we're big and we're hedged. When that line of defence was breached, the swap factor was wielded in an attempt to convince the sceptics. "Yes, we're losing money on this issue, but we're making a ton on the swap,' was the chorus.
The fragility of this reasoning was soon exposed. In the last 18 months, fees on the more straightforward swaps have shrunk to so little that the compensation for mispricing the underlying bond issue became negligible.