Europe's largest banks are preparing for Basel III by doing what banks love to do the most: Issuing new securities.
A recent article in the Financial Times discusses the latest round of securities innovation, ostensibly designed to allow banks to comply with the new capital requirements set forth in the Basel III standards.
The term of art for the process under discussion is 'LM,' which stands for liability management –a fancy way of saying debt restructuring.
(Perhaps the antiseptic sounding initials avoid the unpleasant connotations of the blunter, direct phrase.)
Paul Hawker, head of liability management at Credit Suisse's European and Asian operations is quoted saying: "Before 2008, LM trades were considered by some as only for emerging markets and high-yield names. Now all banks will regularly consider LM as one of a suite of products they can deploy."
A turn of phrase like that is what happens in the moment when savvy marketing meets elegant salesmanship: Absolute perfection.
The article goes on to discuss some of the 'old-style' securities issued by banks—then points out the need for newer securities, built with Basel III compliance specifically in mind.
It concludes: "Together with the long transition to Basel III’s full introduction, the reforms mean plenty of work for banks. But there is little guidance on how to meet new capital requirements. The answer may be plenty of debt restructuring."
It's enough to make someone with an overdeveloped sense of irony chuckle slightly beneath their breath.
After a market meltdown caused, at least in part, by 'financial innovation', it certainly sounds like the penance banks are required to perform now include the creation of an ever expanding array of novel securities.
To wit: Commerzbank recently issued €1.25bn in 10-year subordinated notes, which are being offered in exchange for existing eight-year junior bonds.
The Financial Times article points out in reference to the underwriting: "However, the new bonds are designed not to comply with Basel III, but to match the requirements of a transition period from 2013."
Which means, presumably, a fresh round of underwritings shortly thereafter.
And also a fresh round of underwriting fees.
I sincerely hope that the next round of securities innovation solves all the problems caused by the last round of securities innovation.
If the investment bankers underwriting those deals are finally able to create successful capital structures—structures that properly allocate risk, then price and distribute that risk accordingly —they will truly be deserving of every penny in compensation they receive.
But even if they fail, their checks will still clear.
Which may be enough to make you realize: Investment banking is nice work if you can get it.
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