The Charge Of The Light Brigade: Or How Uncle Ben Helps Big Fish Eat Little Fish While Passing The Risk On To Us

OS kept noticing what looked like an arcane bit of news from last Friday. Karl Denninger noted it, and was howling about it, with this link to footnoted.org.

As we monitored filings on Friday afternoon, we wondered why EDGAR seemed unusually sluggish. But it wasn’t until late Friday that we realized why: Blackrock (BLK) had done a massive document dump on Friday afternoon of 13G filings related to its acquisition of Barclay’s Global Investors.
We counted over 1,800 13Gs that Blackrock dumped on Friday, which explains why EDGAR might have been a tad bit pokey. The stream started at just after 2 p.m. est and didn’t let up until just after 4:30, when the last one, which reported a 6.5% stake in Vodafone came in. For those less familiar with the 13G, since we don’t often write about these filings, it’s a requirement when ownership exceeds 5% of the outstanding shares. With few rare exceptions, these filings represented new positions for Blackrock since we only counted 11 amended 13Gs, which in itself seems very surprising, given the long list of stocks.

At least a 5% stake in 1,800 publicly listed firms in the US. That's a big ole' hunk of the US economy, especially to consume at essentially one gulp, even for a big outfit like a Blackrock.

Where/how do they get that much cash?
.
Robert Peston, of the BBC, is as urbane as Denninger is passionate. Peston picks up the story for us.

In rescuing the global economy, the western central banks have rescued the traditional mega takeover.

I'm not sure whether King and Bernanke would describe this as collateral damage or just one of those things. But they have accelerated the corporate Darwinian process of reinforcing the market clout of the world's biggest and strongest businesses.

Because huge companies are currently able to raise record-breaking sums at very low interest rates by selling bonds to investors.

Kraft, for example, yesterday raised $9.5bn to finance its takeover of Cadbury.

And Berkshire Hathaway sold $8bn of notes to fund its acquisition of the railway group, Burlington Northern Santa Fe.

These are both among the 15 biggest corporate bond deals ever.

Kraft and BH may be paying a smidgeon more for this money than would have been the case if there hadn't mean a minor global tremor caused by the collapse in confidence in the ability of Greece to service its debt.

But with the interest payable on the different tranches at low to middling single-digit interest rates, this is cheap debt - cheap enough to finance the purchase of substantial companies like Cadbury with stable profits.

Here's a fascinating statistic: Bloomberg has calculated that US companies are spending the highest portion of bond-sale proceeds in more than a decade - or around 70 per cent - on takeovers and expansion.

Long story short, the money for all this is being ponied up by Zimbabwe Ben. And, we the US taxpayers (and our children and grandchildren) stand behind it all, with our money, our assets, our lives and labors, our hopes and dreams for the future. Because, if the wheels come off at Burlington Northern, for instance, the Fed and Treasury will ride to the rescue.

On our backs.

Is it any mystery that Warren Buffett showed up in Washington in late January to cheer-lead for Uncle Ben Bernanke?

Now, look again at the final lines of Peston's quote.  All that corporate debt is being floated to finance takeovers and expansion. Not expansion of manufacturing facilities or the like, but expansion of portfolios by firms like Blackrock.  And all that debt will have to be serviced, and/or at some point paid off or rolled over. And interest rates are fluid things. They are at historic lows.  Which way do you think they'll go?

Takeovers, also, almost invariably initiate the process of 'rationalization', or 'down-sizing', or 'right-sizing'.

In other words, jobs are shed, often at a prodigious rate, in the wake of a corporate merger. It's not immediate, rather takes place a year or two later. The press has moved on to the next headline, and most people, even the folks who lose their jobs and livelihoods, don't ever connect the dots on how/why that humming plant in that small town is now shuttered, why the deer, geese and turkey have taken over the property, and why the town and its people look so much shabbier. The cause and effect are too far removed, both in time and geographical distance. (Demagogues thrive in this sort of scenario, as the anger builds, but has no target upon which to focus.)

But, all the same, almost all that capital is consumed in transactions, not in creation of new businesses or products.  You know, the activities that create jobs and careers for families, and allow families to be formed, and communities to function.

And Ben Bernanke has the enthusiastic support of Barack Obama, and garnered seventy votes in the Senate. Next time TheWan begins yammering about 'jobs', head back and read Robert Peston's essay again.

Alfred, Lord Tennyson describes the situation aptly, in the opening stanzas of Charge of the Light Brigade:

Half a league half a league,
Half a league onward,
All in the valley of Death
Rode the six hundred:
'Forward, the Light Brigade!
Charge for the guns' he said:
Into the valley of Death
Rode the six hundred.

'Forward, the Light Brigade!'
Was there a man dismay'd ?
Not tho' the soldier knew
Some one had blunder'd:
Theirs not to make reply,
Theirs not to reason why,
Theirs but to do & die,
Into the valley of Death
Rode the six hundred.

Cannon to right of them,
Cannon to left of them,
Cannon in front of them
Volley'd & thunder'd;
Storm'd at with shot and shell,
Boldly they rode and well,
Into the jaws of Death,
Into the mouth of Hell
Rode the six hundred.  

Friends and neighbors, OS fears we, and our descendants, are the 'six hundred', unless Heaven intervenes on our behalf (and he prays daily for this), and/or we show up again and again at the ballot box, at every level of government.