When Trusted Advisors Have Their Clients Over a Barrel

When times are good, investment bankers love to shower their clients with relationship guff. "We're not just selling products," they say, "we're building a relationship". They talk a lot about being a "trusted advisor," and the older ones might even mention the JP Morgan "blank tombstone" ad, the point of which was that good bankers would sometimes advise their clients not to do deals.

And then the markets turn, the bankers run for the hills and abandon their clients, and the clients get angry. Especially when the banks start acting like a cartel:

The head of a New York state agency that markets bonds for about 250 universities, hospitals and other institutions blasted securities firms for pulling back from the auction-rate securities markets.
David Brown, executive director of the New York State Dormitory Authority, said the agency aims to shake up its roster of underwriters for more than $4 billion in annual municipal-bond issues in order to improve auction results.
"As a whole, this is not the finest hour of the investment-banking community," Mr. Brown said. Auction dealers "are refusing to make a market in the securities, saying publicly this product is dead and everyone has to get out of it," then recommending debt restructurings "where they will earn yet another investment-banking fee."...
"Without any warning and simultaneously, the brokers stopped participating in the market," Mr. Brown said.

Brown can and probably should "shake up his roster of underwriters," but it's not going to do much good. This is just like underwriters refusing to fulfill their obligations to buy stocks or bonds when the market turns against them: banks swear up and down they'd never do such a thing, until they do it.

It is interesting to me that not a single Wall Street bank - not even Goldman Sachs - saw a golden opportunity to differentiate itself from the pack, here, and support its own auction-rate securities even as the rest of the Street let their bonds fail. From Brown's point of view - and, frankly, from mine as well - it looks decidedly premeditated: it's improbable, to say the least, that it's complete coincidence that all these banks stopped supporting their deals at exactly the same time.

But right now the banks have the issuers over a barrel: if none of the banks are supporting their auction-rate securities, and if they've all made the simultaneous decision to let the asset class die, then issuers have no choice but to refinance just when spreads are irrationally wide - and pay the banks hefty fees for the privilege. You can understand why David Brown is spitting mad.

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