In America, debt-funded company take-overs are running at record levels. The game works like this. A private equity fund takes over Company X, funded by issuing bonds to suckers (i.e. your pension fund). Then a friendly accounting firm – they are all corrupt – certifies the private equity firm’s bogus prognostication regarding how the new owners will improve ‘efficiency’. This fraud goes by the name of ‘mark-ups on intangibles’.
In plain English, the private equity fund has created bogus collateral to underwrite the bond issue used to buy Company X, by claiming that future profits will skyrocket. The bonds are sold on behalf of the private equity fund by a ‘reputable’ investment bank. The investment bank, of course, turns a blind eye to this nonsense because it is earning an insane fee for the privilege of off-loading the debt on some unsuspecting pension fund. The equity fund then loots Company X of its real assets and either sells it on to another equity fund or closes Company X down, usually leaving the taxpayer too foot the redundancy payments.
This year highly leveraged deals – buying a company by issuing debt – made up 60 per cent of U.S. corporate buyouts, surpassing the previous pre-2008 peak. Meanwhile, here in Europe, matters are actually worse. Almost all such leveraged loans in Europe are being issued without covenant protection. That’s the corporate equivalent of a self-certified mortgage.
So why are pension and savings funds buying these dud bonds? Because there is nothing else to purchase. They need income-bearing assets to keep savers happy. But the zombie economy that has existed since 2008 can’t deliver enough profit, as interest rates are being held artificially low through quantitative easing. This, says the IMF, “is driving investors into riskier and less liquid assets.”
What is to be done? Personally, I think we might consider abolishing capitalism and replacing it with something more rational. The IMF is less radical. It wants more regulation and governments (at least those with some ability to borrow more, such as Germany) to replace quantitative easing with more fiscal expansion. In theory, that will allow a rise of interest rates to ‘normal’ levels without nuking the global economy.
However, the vested interests of cowboy finance have Donald Trump in the White House and Boris Johnson in Number 10. Trump is already putting the screws on the Federal reserve to force interest rates even lower through excess monetary expansion. Nobody in global finance cares a damn about what the IMF thinks. The latest IMF stability report is just bog paper.