Expanding its Program of Financial Darwinism
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
In June, the ECB began buying the bonds of some of the most powerful companies in Europe as well as the European subsidiaries of foreign multinationals. This pushed the average yield on euro investment-grade corporate debt to 0.65%. Large quantities of highly rated corporate debt with shorter maturities are trading at negative yields, where brainwashed investors engage in the absurdity of paying for the privilege of lending money to corporations. By August 12, the ECB had handed out over €16 billion in freshly printed money in exchange for corporate bonds.
Throughout, the public was given to understand that the ECB was buying already-issued bonds trading in secondary markets. But the public has been fooled.
Now it has been revealed by The Wall Street Journal that the ECB has also secretly been buying bonds directly from companies, thus handing them directly its freshly printed money.
It has been doing so via “private placements.” These debt sales are not open to the broader market. There’s no need for a prospectus. Only a small number of institutional investors participate. It allows companies to raise cash quickly, without jumping through the normal hoops. Private placements are not unusual. What’s new is that the ECB used them to buy bonds.
There have been two of these secretive private placements. And Morgan Stanley arranged them. The Wall Street Journal determined this by analyzing data from Dealogic and national central banks.
The two companies involved were the Spanish energy giants Repsol and Iberdrola. The Bank of Spain, now no more than a local branch of the ECB, was among the select buyers of a €500 million bond issued by Repsol. It is also the owner of part of a €200 million bond issued by Iberdrola. Among the advantages of issuing debt in a private placement is that it allows companies to raise cash quickly. According to Apostolos Gkoutzinis, head of European capital markets at law firm Shearman & Sterling, cited by The Wall Street Journal: because there is no prospectus or the other formalities required in a normal bond offering, “there won’t be any transparency, there won’t be a press release. It’s all done discreetly.”
Discretion is something at which the ECB excels. It’s how its most important constituent, the world´s biggest banks and hedge funds, have been able to book vast, risk-free profits by front-running the ECB’s future actions. A decision is made in secret to buy a certain type of asset or to lower interest rates. That decision is then communicated in secret meetings to hedge funds and certain other market participants so that they can buy into those positions and start pushing up prices (and pushing down yields). The ECB already got into hot water over this when it first came out.
The central bank is able to operate this way for two reasons: first, the general lack of public awareness and interest in what it does; and second, the blanket immunity it and its employees enjoy from virtually all forms of legal redress. As we recently reported, the ECB and all of its affiliated national central banks are, by law, above the law of national jurisdictions and answerable only to the European Court of Justice, provided they are fulfilling the functions and responsibilities assigned to them by EU law.
Since the crisis, those functions have mushroomed beyond anything imaginable during the days of the ECB’s creation, in the early 90s, to the extent that the central bank is now arguably the EU’s most powerful institution. The bank’s latest move, to participate in these discreet private placements, was only confirmed when it quietly admitted as much on its website.
Now, the race is on for eligible companies to wet their beaks in this new, much more discreet free-money fountain, while so-called “investors” scramble to divine what the biggest fish in the pond is about to buy next. If they’re lucky they may even get a heads-up straight from the horse’s mouth.The ECB’s favorite banks will also get juicy fees underwriting the deals. The Journal reported that Credit Suisse has already “reshuffled its coverage of national central banks” in an attempt to tap into the new market.
The ECB’s new role as “debt-buyer of first resort” raises a whole litany of concerns. Perhaps worst of all, it grants the ECB an almost god-like grip over Europe’s financial markets: According to The Journal, Citigroup figured “that bonds eligible for ECB purchases have already outperformed ineligible bonds by roughly 30% since the bond-buying program was announced in March.”
It’s Financial Darwinism writ on a heretofore unimaginable scale. Thanks to ECB intervention, Europe’s biggest companies with the strongest finances — including some that are majority state-owned such as French energy giant EDF — are gaining access to funds (many of them public) quicker, more easily, and at cheaper rates than anyone else in the market. From now on, they may even get the money in secret.
It’s an artificial competitive advantage that most companies could only dream of, and which will almost certainly serve to accentuate the concentration and consolidation of Europe’s markets.
All the while, the EU continues to publicly pride itself on the robustness of its competition policy. Just last month, the Commission issued its biggest-ever antitrust fine to great public fanfare, hitting four truck manufacturers with a total penalty of €2.93 billion for illegal collusion. Meanwhile, it turns a blind eye to the role of its partner institution, the ECB, in massively skewing Europe’s corporate debt market even more in the favor of the biggest and strongest. By Don Quijones, Raging Bull-Shit.
The Italian Banking Crisis would complete Europe’s “Doom Loop.” Read… The Impossible Italian Job
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Let’s give money to everyone apart from the consumer who needs it to increase demand.
The Central Bank ideologues are unable to take the one course of action that will help.
Just what I was thinking too.. The poor get the moral hazard BS lecture and austerity rammed down their throats while the connected get everything. When this blew up in 2008 there was a lot of anger over the bailouts but “cooler heads” prevailed because we can’t allow our banks to fail. That won’t happen this time.. The peasants will be coming with pitchforks and torches..
Sounds like you want helicopter money. Well you may be in luck, some countries are already talking about giving money straight to the people and it could very well happen in the coming years.
it IS already happening: people with a mortgage, government workers and those on social security don’t have any austerity in my country, on the contrary: their finances are improving year after year, for homeowners even hugely (many people make more – virtual – money from rising home prices again than from their day job). Although in some cases the purchasing power may still decline because inflation is understated. I don’t think it is any different in much of Europe.
Those in power are making sure that a majority of the voters get some spoils while the elite is filling their pockets like never before.
Really? Your country must be called Utopia then. Here in the UK the Tory government clobbered the poorest for the vast bankster bailouts. There is a 4 year freeze on benefits for the unemployed, ditto housing benefits (this when greedy landlords are charging sky high rents, so many on benefits are now having to pay their meagre benefit money on rent). Even the disabled have been clobbered with cuts, also those on low incomes who rely on tax credits.
So perhaps you would like to let us know where you live exactly, so we can all emigrate there for a life of wealth on benefits!
I live in the Netherlands. Thanks to NIRP (debt is cheaper than free for the government) politicians have no problem handing out money to those on social security (up about 1% per year) and government workers (up 1-3% per year, the higher percentage of course mostly for higher government levels). If you believe the official inflation percentage of around 0, all who receive their income from the government are ahead in the game.
And I’m not even counting the huge windfalls for most people with a mortgage (rates below 1% now), which means at least 10-30% more spending power and rapidly rising capital for those with a maximum mortgage – which is a big chunk of the population.
This is the curse of fiat currency- you have no way of knowing how much each nation is printing, enabling consumption by their citizens, only that for reasons you have no control over, prices inexorably rise in your own. An honest free market is Financial Darwinism- what we are seeing is Klepto-Cronyism, a big difference.
President James Madison
�History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control of governments by controlling money and its issuance.�
President Abraham Lincoln
�The money power preys upon the nation in times of peace and conspires against it in times of adversity. It is more despotic than monarchy, more insolent than autocracy, more selfish than bureaucracy.�
President James A Garfield
�Whoever controls the volume of money in any country is absolute master of all industry and commerce.�
President George Washington
“Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.”
“There will always be the intoxication of power. There will always be at every moment the thrill of victory; the sensation of trampling on an enemy who is helpless.”
This sort of ‘central planning’ behavior will contiue until it can’t. The CB’s and assorted government ‘planners’ have dug themselves a truly deep, deep hole. When the whole thing crashes, it will be sudden and significant. It will catch everyone off guard.
Why would the WSJ release this obvious link to their collusion?
Financial Darwinism, indeed.
I read quite a bit about that in the excellent book, “How We Got Swindled” (http://howwegotswindled.com/).
We have a fact. We have names of companies that were privileged for the help of ECB. However, this precedent is always the same: when the things go well none remember from de State. When the things go down or comes to red line, the private groups ask solution help to the States Sctors. Until when it?
Socialize losses, privatize gains.
Two adages or catch phrases seem to sum it up quite nicely, one ancient and one from the Victorian era:
* From classic Greece “Those who the gods would destroy, they first make proud;” and
* From Victorian England “Power corrupts, and absolute power corrupts absolutely.” First Baron Acton (1834-1902)
Watch out for these scam artists, this is a you scratch our insider backs we scratch your insider backs rigged world. Connecting the dots reveals a den of snakes.
As a retired private-industry finance professional, I absolutely cannot believe the ECB has actually done this.
It distorts the (supposedly) capital markets now, and there’ll be severe distortions if the corporation defaults (inexperienced government officials will not want to admit they made a bad loan).
The fact the ECB is doing this without a public auction says it’s pure favoritism or there’s no market for the bonds – or both.
This is beyond dangerous stupid.
Oh it’s all peachy… ECB doing what other CBs are doing. Guess Janet will do the same IF the US stock market corrects?
BoJ has been busy buying up the shares and reported to the biggest shareholder of 55 top Japanese companies.
SNB is busy buying US stocks with reported $60 bil in US stocks.
And all these CBs are instantly creating “money” (no real printing mind you but digital few key strokes) to buy equities per astute Jim Grant who stated that:
“They create Swiss francs from the thin alpine air where the Swiss money grows. Then they buy Euros and translate them into Dollars. So far nobody’s raised a sweat. All this is done with a tab of a computer key. And then the SNB calls its friendly broker – I guess UBS – and buys the ears off of the US stock exchange. All of it with money that didn’t exist. That too, is something a little bit new.”
As has been often observed “you can’t change just one thing.”
It may well be that the global economy “dodged the bullet,” or indeed a whole salvo, and was prevented from collapsing into another “Great Depression” by the massive creation/injection of “capital” by the central banks, as well as their monumental purchases of toxic assets.
The difficulty is that no provision was ever made for forced allocation of this “ersatz” capital into productive activities, with the result it was almost entirely used to fund the types of activities and “financial engineering” that had created the economic crisis in the first place, such as 0 down/84 month new vehicle loans, stock/commodity speculation on margin, stock buybacks, anti-competitive M&A, massive student debt, etc.
If NZIR policies are to be imposed, it is clear [to me] that minimum and maximum interest rates on various types/categories of transactions must also be imposed, if gross mal-allocation of funds and asset bubble creation is to be minimized. For example:
* New vehicle loans not more than 4 years, 10% down, APR 4 to 8%
* Used vehicle loans not more than 3 years, 10% down, APR 6 to 12%
* Residential owner occupied mortgages, 5% down, 20 year max, 3 to 9% APR (no ARMs), uniform amortization [no balloon notes]
* Stock/commodity margins – 100% – no speculation with borrowed funds
* M&A loans – collateralized, 10 year max term w/ uniform amortization, 10 to 20% APR
* Stock buyback loans – collateralized, 10 year max term w uniform amortization, 10 to 20% APR and no capital gains tax treatment of share sale “profit”
The ultimate aim is to own everything and by everything I mean every single thing from countries to corporations down to the people. Then and only then will they be able to install the ……. “And that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his name”.
But their plan will not last long.
Financial Darwinism is a cruel, cruel concept i deeply respect (for its power). Glad to see it mentioned here; only regulation can help against it.
So sometimes i dream what would happen if the situation were reversed .. What if the system was set up so smaller companies get the bigger boost? If entrepreneurship was encouraged and banks were sensible and stable? If regulations had teeth to root out anti competitive behavior, to bust up monopolies? The innovation and hope would do wonders for our economy.
And why not set up a public vehicle similar to the superfund? Saving up capital in the good Times (one fund per industry) could greatly help protect against the self reinforcing spirals of downturns. Who even knows if an economy needs to cycle? I’d rather it be like a growing tree than a diseased heart full of drugs with a propensity for cardiac arrest. One can always dream..
The real Italian mafia must be envious of the Draghi mob … although I don’t doubt they get their fair share of the loot.
All over the countryside over here I see wealthy elite renovating huge ‘farms’ (that are no longer farms but just private homes) and estates with free EU money. The same happens on a larger scale throughout Europe especially in livestock farming etc.. No doubt that most of that money is wasted and billions (maybe even trillions) are siphoned off to non-existing companies and projects. Nobody cares, the ECB money has to go somewhere … and it is great for the elites who can get their hands on the money first and exchange it for real assets.
It’s really more like anti-Darwinism, isn’t it? (Or anti-Spencerism if you’re a purist). Anyway, aren’t the usually outrageous ‘fees’ are really a discount rate = interest, for the taker of the bonds? And why do ‘fit’ companies need to borrow huge amounts of money? And why is the ECB participating in private placements, which is an investment bank function? And don’t zero interest rates imply a lack of demand for money? What then do negative interest imply, if the bonds are not sovereign bonds (not that it really matters anyway; what is the future value of the fiat currency, and states can default, if only by revaluation/inflation. The US defaulted on its own, and corporate, gold bonds by decree in 1933).
So many questions in a financial world gone wrong …
CBs have monetizing the financial markets al a John Law, the world’s first central banker. It is important to note that the bonds and stocks purchased by the CBs will never be sold. Doing so would allow for price discovery and market chaos. As is noted here, CBs have an infinite supply of money created by fiat. This money will be used as needed to put an end to market volatility. Individual stocks and bonds may go up and down to give the appearance of an open market, but the market as a whole will never again be allowed to correct more than 5% without massive intervention. The expectation of this intervention will keep the markets fixed and flat for an indefinite period of time. Today’s low volume, low volatility market is the result and the proven model for the foreseeable future. The free market is now a command and control economy with state owned enterprises that will never be allowed to fail. We are all Chinese now. We took a separate path to arrive at the same place. Only war or social unrest can break the spell.
At least in China the little guys have profited hugely over the last 15-20 years; look at the bigger cities and many Chinese citizens seem as well-off nowadays as the average citizen in my country (not in the economic statistics of course, but those are just that, statistics).
In Northern Europe for many people the financial situation has steadily worsened over the same period – especially for the self-employed / middle class, less so for government workers who are still doing pretty well over here (although I doubt they will receive the gold-plated pensions that are promised to most of them). All thanks to central banksters going berserk with the markets.
This is mere subsidy.Where are,the WTO,G 20 and the IMF?
looks to me like they are prepping to collapse the economy, buy highly rated bonds, then cut off lending, economy collapses, they take the corporations. Its called communism only the state will be the banks. the governments of Europe have already showed they will wage war on their own people, now they have their scape goat in place for martial law when it gives, the refugees, check, check and check. some people just cant see the forest for the trees. The governments of Europe are a wholly owned subsidiary of the ECB except maybe Britain. Showed some spunk didnt they! that is I call it.