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Bernanke: "I Want to Bring Back Irrational Exuberance"

Bruce Krasting's picture





 

On January 25th we got word from the Fed that ZIRP would be extended until at least 2014. Bernanke's guarantee of another two years of cheap-cheap money has lifted the market's animal spirits. Since the Fed announcement (33 trading days), the S&P got a 7% lift. But that's not the measure of Ben’s success. I’m seeing it in deal flow:

*There have been 29 IPO's that raised $3.3B

*Another 35 deals got inked for secondary issuance of common, preferred and/or convertible stock totaling $3.7B

*The visible calendar for both IPOs and secondaries is big. $4.3B is registered for sale; another boatload of paper wants to get sold on top of that.

*The High Yield market blew out $70B of paper.

*Leveraged loan activity has totaled $75B.

I want to focus on six deals (of the 22 that got completed) from last week that I find troubling. These are referred to as Dividend Deals. The borrower takes on new debt in order to pay a stock dividend to common shareholders. (I prefer to see dividends paid from cash flow from operations, not new debt.)

 

#1
Borrower:
SeaWorld Parks & Entertainment
Amount:
$500 million
Bank syndicate:
Bank of America Merrill Lynch, Barclays Capital, 
Deutsche Bank, Goldman Sachs, J.P. Morgan, and Macquarie
Use of Proceeds
To fund a $500 million dividend to Blackstone Group.
 
#2
Borrower:
Armstrong World Industries
Amount:
$250 million
Bank syndicate:
Bank of America Merrill Lynch, J.P. Morgan, and
Barclays Capital
Use of Proceeds:
To fund common share dividend.
 
#3
Borrower:
Getty Images
Amount:
$275 Million
Lead Manager:
Bank of America Merrill Lynch
Use of Proceeds:
To fund a common share dividend.
 
#4
Borrower:
Telesat Canada
Amount
$2.55 Billion
Bank syndicate:
J.P. Morgan, Credit Suisse, Morgan Stanley, and UBS
Use of Proceeds:
$705 million will fund a dividend to common 
shareholders including: Loral Space, Canadian Pension Board 
and option holders of common shares.
 
#5
Borrower: 
 4L Holdings
Amount:
$300 million
Lead Bank:
J.P. Morgan
Use of Proceeds
Refinance of existing debt and to pay common share dividend.
 
#6
Borrower:
Grede Holdings
Amount:
$250 million
Syndicate:
GE Capital, Jefferies
Use of Proceeds:
To fund a $216 million dividend and general purposes.

Note: Grede Holdings was bought by Wayzata Investment Partners LLC in February of 2011. GE capital provided a portion of the financing. The 2012 Grede deal arranged by GE will result in GE receiving dividend income. This is lining up at the trough for these financial players.

On balance, I think that Bernanke is delighted with these results. He wants the Fed's cheap money to fund this type of financial activity. When debt is used to pay dividends, it creates equity from debt. When the likes of GE and Wayzata have more (paper) equity, they can borrow more, and do more deals. Ben loves it when financial players do deals. He believes that creating financial wealth for GE ends up creating jobs. But there is also a cost:

 

.
 
.
 
 

.

 

 

Another credit bubble is forming. Credit quality is deteriorating, while financial engineering is back in vogue. The Fed keeps making the same mistake of fueling these bubbles. It is celebrating this process as a “success” while at the same time it is sowing the seeds for another bust. Does the Fed really think Americans are better off if Blackstone receives another $500 million dividend?

The problem is, that is exactly what it believes.

.

HT:sc

 


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Mon, 03/19/2012 - 22:47 | Link to Comment malek
malek's picture

Great find, Bruce.

Karl D. must be going hyper too.

Mon, 03/19/2012 - 18:22 | Link to Comment steve from virginia
steve from virginia's picture

 

It's not 2003 any more. Crude @ $125/barrel means the real deal is elsewhere.

It is good, however, to see the Bernanke Money Laundry back in full cry. It looked for awhile that the Chairman had lost his touch ...

Mon, 03/19/2012 - 11:06 | Link to Comment WTF_247
WTF_247's picture

If companies cannot fund dividends from operations, they do not have the ability to pay the debt back either.

The next economic downturn will turn that into hard truth.  While things are pretty good, the debt payments seem manageable.  However, a small bit of simple math can show that the payments get harder when revenues and cash from operations drops.  The economy has always worked in cycles, and it seems at the top (or near the tops) of cycles the piling on of debt to do stupid things is easiest - only to find out 1 or 2 years later it was a stupid idea.  

No matter - those at the top will get paid their bonuses and additional stock options for their efforts - even if it bankrupts the company in a few years.

Mon, 03/19/2012 - 12:07 | Link to Comment JamesBond
JamesBond's picture

damn,

this is one of the better comments written at ZH

Mon, 03/19/2012 - 11:03 | Link to Comment non_anon
non_anon's picture

living in an Ivory Tower tends to do this

Mon, 03/19/2012 - 11:00 | Link to Comment AN0NYM0US
AN0NYM0US's picture
Time for a boycott of seaworld

 

further to BK's comments above

Blackstone extracts another dividend from SeaWorld

 

and of course all of the ususal suspects are at the trough

 

"Bank of America Merrill Lynch, Barclays Capital, Deutsche Bank AG, Goldman, Sachs & Co., J.P. Morgan Chase & Co. and Macquarie Group Ltd. launched the add-on"

SeaWorld accused of keeping whales as SLAVES by animal rights campaigners  http://www.dailymail.co.uk/news/article-2053540/SeaWorld-accused-keeping-whales-SLAVES-animal-rights-campaigners.html#ixzz1pZiQ56z1
Mon, 03/19/2012 - 10:50 | Link to Comment baserunr
baserunr's picture

It's only irrational exuberance if you're on the outside looking in.  If you're on the inside, these deals make all the sense in the world.

Mon, 03/19/2012 - 10:48 | Link to Comment Judge Arrow
Judge Arrow's picture

debt to pay dividends - this is the unkindest cut of all - it is bizarre, what next - debt to make revenue projections ?

Mon, 03/19/2012 - 10:51 | Link to Comment Judge Arrow
Judge Arrow's picture

oh wait it has - is there nothing debt cannot do?

Mon, 03/19/2012 - 10:17 | Link to Comment Problem Is
Problem Is's picture

"word from the Fed that ZIRP would be extended until at least 2014. Bernanke's guarantee of another two years of cheap-cheap money..."

Fascism

Corporate owned governance...

Administered by the Finance Capital ruling oligarchy...

They win and we all lose every day...

Mon, 03/19/2012 - 09:47 | Link to Comment HungrySeagull
HungrySeagull's picture

And tomorrow AM brings a hangover and a OH NOES what did I do?

Mon, 03/19/2012 - 09:45 | Link to Comment SoundMoney45
SoundMoney45's picture

Perhaps the best way to view debt funded dividends is as a removal of equity from the company.  Post divident date, in a free market, the stock price would drop commensurately with the equity reduction, unless being an ongoing concern becomes an issue.    

Mon, 03/19/2012 - 09:32 | Link to Comment IslandMan
IslandMan's picture

Bernanke won.  You lost.

Mon, 03/19/2012 - 09:29 | Link to Comment geno-econ
geno-econ's picture

Ben is caught in a trap, cant get out, hooked on printing credit until the song ends. 

Mon, 03/19/2012 - 10:24 | Link to Comment FEDbuster
FEDbuster's picture

Zimbabwenomics.

Mon, 03/19/2012 - 09:20 | Link to Comment dcb
dcb's picture

bruce I like you, but this comment is stupid:

Does the Fed really think American’s are better off if Blackstone receives another $500 million dividend?

 

The worst thing you pundits keep thinking is that these psychopaths are actually doing what they think is best for america and not best for their cronies and themselves. it drives me insane. These people are sociopaths and you have to analyze them as such!!

Mon, 03/19/2012 - 09:41 | Link to Comment smb12321
smb12321's picture

You don't get it.  It's like all the quacks - doomsday prophets, those calling for an authoritarian state, preachers, scientists wanting a "rational, regulated" society, politicians - all are true believers.  

They are not purposely engaging in a scam (politicians and the debt excluded).  They are earnest.  The dollar/world/market/Europe WILL collapse next week. An invisible being knows if you're being naughty.  The government MUST force you to eat, buy, read, say and act "good" for your sake. They're all believers.

Mon, 03/19/2012 - 09:07 | Link to Comment SheepDog-One
SheepDog-One's picture

$5 gas. End of story.

Mon, 03/19/2012 - 09:06 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Don't worry Bruce, should these deals go bad, all that private debt will be piled onto the backs of the taxpayer, again.  Same as it ever was.

Mon, 03/19/2012 - 08:51 | Link to Comment RiverRoad
RiverRoad's picture

Just more of what is going on all over the world (see Greece) in banking circles right now.  It never ends.

Mon, 03/19/2012 - 08:50 | Link to Comment DavidC
DavidC's picture

"The borrower takes on new debt in order to pay a stock dividend to common shareholders. (I prefer to see dividends paid from cash flow from operations, not new debt.)"

We're clearly into the insane, taking on debt to pay dividends.

DavidC

Mon, 03/19/2012 - 08:55 | Link to Comment Zero Govt
Zero Govt's picture

they're paying off (big) shareholders, the last dip at the well, before the sack of debt that is the company implodes

 

Mon, 03/19/2012 - 09:04 | Link to Comment TruthInSunshine
TruthInSunshine's picture

This is precisely what is happening. It's developing on the LBO front, as well, though I haven't taken the time or effort to compile a detailed list (as Bruce K has) of the shit pile of LBOs (is that redundant?) that have been done lately.

Mon, 03/19/2012 - 09:57 | Link to Comment mess nonster
mess nonster's picture

I have to agree. This thing is going to get taken down, just like a side show at the carnival when the show is over. (Or)Kind of like the movie Point Break, when the criminals jump out of the airplane, only here it's with golden parachutes.

Mon, 03/19/2012 - 10:21 | Link to Comment FEDbuster
FEDbuster's picture

Or the "wire house" at the end the movie "The Sting".  They are just a bunch of greedy grifters. 

 

Mon, 03/19/2012 - 08:45 | Link to Comment MFL8240
MFL8240's picture

Irrational Exhuburance is already back.  Dow 13,000 in the mist of a depression that has been masked by false goverment numbers,  lies  and a courtrpt banking cartel is the essence of craziness.  

Mon, 03/19/2012 - 08:51 | Link to Comment Zero Govt
Zero Govt's picture

Let's face it Blowjob Ben is 'solving' the problems/bubbles caused by his equally idiotic forbear, Alan 'am I senile yet?' Greenspan

The Fed like every meddling Dept of that toilet called Govt mis-directs money and mal-invests

instead of a normal churning free market economy the politicians and bankers sold their souls to bubble blowing fake wealth, dating back to the 70's, and fanning it toward the unproductive spaces of finance, housing and consumer credit 

the productive economy gets sidelined, real wealth gets sucked into the 'easy-ride' of mis-directed investment flows and a huge sack of frothy puss develops across the country (Greshams Law)

"Another credit bubble is forming. Credit quality is deteriorating, while financial engineering is back in vogue."

Bubble blowing and mis-directing capital never went out of vogue at the Fed.. it's a dog chasing its tail (solving problems/bubbles it previously created)

the 'Money Industry' has been usurped by Robber Barons and academic village idiots

Mon, 03/19/2012 - 08:21 | Link to Comment HD
HD's picture

Ben has far too many spinning plates. He has to maintain zirp, hold off bond vigilantes, hold up the S&P, keep the dollar down, stop the primary dealers from imploding, buy all the T-bills China and Russia are dumping and hold inflation at bay - all while growth and jobs are stagnant (at best).

Add the fact that the general public is actually starting to pay attention to the Fed - and slowly making the connection between money printing and food and gas prices...

Ben has his work cut out for him.

Mon, 03/19/2012 - 08:24 | Link to Comment LongSoupLine
LongSoupLine's picture

Don't forget Bennie's newest responsibility...fending off the tidalwave of vigilantes from his boss...Goldman Sachs.

Mon, 03/19/2012 - 08:20 | Link to Comment krispkritter
krispkritter's picture

Start the compressor's! Let's see how big this thing can get! 

I still have friends in the markets, gambling on how high this can go of course. I ask them if they're sure they can time the pop. Because the ride up is nice, it's when the hot air's gone and gravity takes over that things get scary and I'm pretty sure they're not the ones with the parachutes...

Mon, 03/19/2012 - 08:04 | Link to Comment LongSoupLine
LongSoupLine's picture

Don't forget the biggest "multiplier" of them all...AAPL rumors of a dividend payment.  CNBS is only talking about it every 5 minutes.  Fuctards.

Mon, 03/19/2012 - 07:58 | Link to Comment Dollar Bill Hiccup
Dollar Bill Hiccup's picture

IRRATIONAL EXUBERANCE!

Or

"I made them an offer they couldn't refuse ..."

BK, last sentence, second to last paragraph, meant to read "Blackstone"?

Blackstone is extremely adept at the payout.

Mon, 03/19/2012 - 08:39 | Link to Comment Bruce Krasting
Bruce Krasting's picture

OOOPs. Thanks. I fixed it. It's all my editors fault.........

b

Mon, 03/19/2012 - 07:43 | Link to Comment gookempucky
gookempucky's picture

Similar to more borrowing to meet payroll..etc etc etc. quadruple down on government currency units.

Thanks for all the great work Bruce

Mon, 03/19/2012 - 07:42 | Link to Comment Everybodys All ...
Everybodys All American's picture

Mission accomplished ... Dow 13000 is as irrational as 20000 would be. Bernanke is the biggest fool to ever hold the position of Fed chairmen.

Mon, 03/19/2012 - 10:23 | Link to Comment Problem Is
Problem Is's picture

You can install any cue-bald moron at the Fed...

The Bernank, Crazy Chester Greenspan, on and on...

They are just Useful Idiot front men (e.g. Obama Bin Lyin') who take their marching orders from the real rulers of our society...

Mon, 03/19/2012 - 12:25 | Link to Comment Theosebes Goodfellow
Theosebes Goodfellow's picture

Sir, I take great umbrage on behalf of all "cue-bald morons"! The expression you were looking for was "cue-balled", though it is true we do aspire to being "Useful Idiot Front Men" for the vampire squids.

Mon, 03/19/2012 - 08:15 | Link to Comment Uchtdorf
Uchtdorf's picture

Unless it's all part of a master plan...

Mon, 03/19/2012 - 07:30 | Link to Comment booboo
booboo's picture

Ponzi machine needs more grease, Mighty Ben the Oiler, Oh, and you are the grease.

Mon, 03/19/2012 - 10:07 | Link to Comment FEDbuster
Mon, 03/19/2012 - 07:30 | Link to Comment SoundMoney45
SoundMoney45's picture

If Bernanke wants to "Bring Back Irrational Exuberance", all he has to do for me is revert to gold backed currency.  I cannot see how more of what created a crisis can do anything other than create short term irrational exhuberance in banking circles over bonuses.

Mon, 03/19/2012 - 07:21 | Link to Comment SmoothCoolSmoke
SmoothCoolSmoke's picture

So Bruce, what you are saying to me is DOW 20,000.  No?

Mon, 03/19/2012 - 07:27 | Link to Comment Bruce Krasting
Bruce Krasting's picture

That would be Bernanke's objective. Markets always overshoot.

I'm not so sure. This "house" is sitting on sand.

Mon, 03/19/2012 - 09:06 | Link to Comment Zero Govt
Zero Govt's picture

are you saying the stock markets are sitting on sand?

Mon, 03/19/2012 - 09:03 | Link to Comment AN0NYM0US
AN0NYM0US's picture

Bruce, take a walk on the beach in the Hamptons, those houses all sit on sand. So what the banksters do is excavate and drop a few hundred piles so when Hugo comes ashore as it surely will Casa Dinero will remain unscathed and to hell with the rest of us.

Mon, 03/19/2012 - 09:32 | Link to Comment t0mmyBerg
t0mmyBerg's picture

This is true.  2 years ago I was visiting a friend in South Hampton.  His house was right next to Stephen Schwarzmans, speaking of Blackstone.  Schwarzman was either digging piles or something because there was heavy equipment running constantly for months.  Quite annoying when you are trying to relax by the pool.

Mon, 03/19/2012 - 09:45 | Link to Comment HungrySeagull
HungrySeagull's picture

I don't think you folks have much to bitch about between the roar of the CAT or the Whine of the Lears.

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