Money for old rope as usual suspects cash in

For many in the investment banking world right now, the C in GFC stands for cream.

The most obvious sign this week came from deep with the bowels of Wall Street, although there is plenty of evidence of the same phenomenon right here in the harbour city.

The US investment bank Goldman Sachs this week produced a record $US3.4 billion ($4.25 billion) in the 12 weeks to the end of June based, not on cost cutting, but a surge in revenue.

That's right, the very institution that ploughed the global landscape, sowed a toxic crop of crap and then watched while the world reaped a bitter harvest, is having a whale of time helping the US Government raise enough debt to finance the Wall Street bail-out.

The whole idea of the bail-outs and stimulus packages was to nurse the system back to health, so in one respect, it has been hugely successful. But try telling that to the one in 10 Americans now out of work.

Goldman Sachs certainly wasn't alone in hawking worthless bits of paper around the globe. Wall Street's other big outfits were up to their ears in it, as were European banks such as UBS. And that brings us just a little closer to home.

Unlike the rest of the globe, our economy has not been shaken to the core. There have been a few tremors among smaller scale and lesser ranked banks and handful of collapses among the racy boomtime high flyers.

But the debt binge of the boom years left plenty of hangovers within our boardrooms, debt that couldn't be rolled over because of the icy winds blowing through credit markets.

The only way out was to go cap in hand to investors for more cash. In the past year, depending on how you do the sums, investors have kicked in about $55 billion an extraordinary amount considering the market collapse and the global recession.

And at each step of the way, the investment banks have been there, creaming off a handsome commission. The average is about 4 per cent. That works out to more than $2 billion on the commission alone, and that goes a long way to restoring those handsome bonuses.

Leading the charge has been UBS, followed in close order by J.P. Morgan and Goldman Sachs.

There's nothing wrong with earning a commission for structuring a great deal. But this has been money for old rope for investment bankers.

And it has reinforced the notion of a playing field tipped very much in favour of the big end of town and against retail investors.

I'll explain why.

Most of the big capital raising has been done by issuing new shares at a huge discount through what's known as a non-renounceable rights issue.

Take Bluescope Steel. For every share you owned in Bluescope, you had the opportunity to buy another one at a massive discount. At $1.55, it was close to a $1 below the market price. From the company's point of view that sort of discount meant it was a certainty to succeed, that the necessary cash would be raised and debt reduced. With a deal like that, the company shouldn't need an underwriter.

But the term non-renounceable means that if you don't take up the offer, perhaps because you can't raise the cash, you lose out. You can't sell those rights to someone else, so they are returned to the investment bank.

And in many cases, that's exactly what happened. But other small shareholders wanting to buy more than they were entitled were refused. Instead, the spare stock was auctioned off to the big investment institutions, which already had taken up their full entitlements.

So the initial effect has been to transfer quick and easy profits away from smaller investors and into the hands of those in control downtown.

It gets worse. In extreme cases, such as Bluescope, the number of shares in the company has been doubled. That means the profits are split between twice the number of shares. So if you haven't taken up the new shares, you get a smaller slice of the action for evermore. And even if you have, you are still out of pocket because the big end of town got more and now will receive a bigger share of future dividends.

In the worst cases, retail investors have been deliberately diluted. The big institutions were allocated more shares from the outset and then given the opportunity to take up any shortfall from small punters.

National Australia Bank last year deliberately limited retail investors in a $3 billion raising that was designed to bolster its capital reserves but merely inflamed the ire of its small shareholders.

But the worst example is the latest - the massive recapitalisation of the ports and rail group Asciano. Of the $2 billion to be raised, just $439 million would come from retail investors, resulting in a massive dilution of their holdings and earnings.

Exactly why our big corporations have been sucked into paying a 4 per cent commission to investment bankers for doing pretty much nothing is difficult to fathom. The huge discounts guaranteed investors would tip in the cash.

Perhaps most chief executives are still jittery, worried that another sharemarket tremor will rock their world right in the midst of a big cash-raising exercise and want the security that comes from an underwriting agreement.

Fear. It's just as powerful a force as greed. And, as it turns out, every bit as profitable.