Slam the stable doors too hard after financial shenanigans and the result is market distortions.
The impact of the post great financial crisis (GFC) Dodd-Frank Act in the US and the clampdown on British and international banking by the G20 Financial Stability Board, headed by Bank of England governor Andrew Bailey, is being felt across the globe.
Business activity has been driven into the secretive world of private equity and credit. That is always going to be an opportunity for recklessness and finagling.
The consequences are coming sharply into view. The collapse of closely held car parts maker First Brands, which expanded exponentially through acquisition, looks an unlikely candidate to hobble financial markets. But it could be the canary in the mine. Some $2.5billion of funds allegedly disappeared as the sums were done in the bankruptcy courts. The US Justice Department has opened a probe.
Britain’s City regulator, the Financial Conduct Authority, also is monitoring developments in case the ripples cause stress in the Square Mile. As we know from the Lehman Brothers implosion, you can never tell where the dominos might fall.
Some of the disclosures could pose a threat to stability. Technically, private finance ought to be off limits to the regulated financial sector. It has now emerged that funds managed by UBS and fast-growing investment bank Jefferies have substantial exposures through arms-length offshoots. If that rings a bell, think of the Special Purpose Vehicles (SPVs) holding dodgy assets which exploded in the GFC, leaving investors across the globe nursing losses.
Secretive world: By dipping into private credit in the search of superior returns, rash fund managers expose us all to danger
Initial reports suggest that the liabilities of First Brands were in the order of $10billion, but a figure as high as $50billion has been mentioned in some reports.
The liabilities of sub-prime car lender Tricolor also are worrying debt markets.
Asset manager Aegon is sounding the alarm. Jim Schaeffer, head of leveraged finance at the $380bn fund manager, is warning of trouble ahead with ‘more and more companies just hitting the wall’.
He told Bloomberg that firms are ‘going down’ after years of elevated debt payments. They also are under pressure because of Donald Trump tariff wars and surging import costs. Schaeffer cites the danger of private credit markets where exposures are estimated at $1.7 trillion.
The First Brands crisis has similarities to the Greensill scandal in the UK. The motor group took factoring to the extreme by double-pledging its trade receivables – invoices to suppliers – to third-party investors. By dipping into private credit in the search of superior returns, rash fund managers expose us all to danger.
Waving goodbye
British pharma trailblazer AstraZeneca is not taking risks with its future. A drug-unfriendly Starmer Government raised the levy on sales to the NHS and has done nothing to lower the barriers to the use of new medicines in hospitals and clinics.
Across the Atlantic, AZ is listening to Trump’s call for more medicines to be manufactured in America.
The response has been rapid. AZ is scuttling off to New York for a second main market listing for its shares. It is also delivering on its pledge of $50billion of new investment in the US. Ground has been broken in Virginia on a new $4.5billion research and manufacturing plant for its innovative cancer medicines and weight loss market.
New investment in its Cambridge labs is at a halt and a proposed Liverpool vaccine development site derelict. Bonkers.
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