Political Forum - View Single Post - Free Market: It's a case of immense bank greed...

DanteAugustusGermanicus · #1 (**permalink**) 06-21-2008, 06:22 PM

I referenced this article in a few posts earlier this week. No one seems to have picked up on it because I assume they do not read the WSJ. I am surprised as so many here speak about economic issues.

Quote:

Submerging Markets: Brazil's IPO Rush Hits Rough Patch
By ANTONIO REGALADO, AP
Posted: 2008-06-20 10:00:31
Eds: Via AP.

By ANTONIO REGALADO

The Wall Street Journal

SAO PAULO, Brazil - Brazil's stock market is one of the best performing in the world; its main index is up 22 percent over the past 12 months. But for investors who took part in an unprecedented rush of IPOs last year - when 64 companies went public, more than on London's busy stock exchange - the returns have been decidedly more mixed.

Two-thirds of those IPOs are now trading below their offering prices. Some investors are blaming the banks that brought the deals to market, saying they cashed in on the frenzy for emerging markets by rushing to take unprepared companies public. Along the way, say investors, banks engaged in questionable practices, including lending some companies large sums before taking them public and then collecting extra fees on opening day.

"It's a case of immense bank greed and a lot of naivete on the part of investors with a lot of money on their hands," says Paulo Bilyk, co-head of Rio Bravo Investments, in Sao Paulo, which invests in the local market. "It's our version of the subprime mess."

Quote:

The difficulties facing Brazil's IPO market show how a loose regulatory environment might have helped feed the frenzy. In 2007, about one in nine companies that went public in Brazil did so after receiving large loans from the underwriters that handled their IPOs. These loans were used to quickly prepare for an offering, in some cases by buying new assets. In exchange for lending money, underwriters collected extra fees after the IPO, either in the form of cash or stock options.

Such loans have the potential to create a huge conflict of interest. The job of an underwriter is to act as an intermediary, advising a company on the opening share price and lining up investors to buy those shares. It then pockets a small fee for each share it sells. But when a bank has a bigger-than-normal stake in the outcome of an offering - such as a large loan it wants to recover or the promise of shares - experts say the bank might set prices too high or rush an IPO of an unprepared company.

Banks in Brazil "took companies without credentials, and gave them credentials," says Octavio Castello Branco, who helps run the Sao Paulo private-equity fund Patria Investimentos.

Quote:

Credit Suisse says it isn't responsible for Agrenco's performance. The bank says if Agrenco had waited to get a cheaper government loan, it wouldn't have been able to grow as quickly. Credit Suisse says further that it has sponsored some of Brazil's best performing IPOs, including farm company SLC Agricola, up 121 percent since its IPO in June 2007.

Quote:

But other investors say banks, riding a frothy market, simply arranged too many deals too quickly. For instance, partly because of the success of offerings by home builders like Gafisa, which went public in February 2006, banks piled in, taking 19 more home builders public. By contrast, the U.S. has 10 public home builders and Mexico has six.

Quote:

"A lot of those companies should never have gone public," says Thomas McDonald, an associate of billionaire Sam Zell, whose investment fund backed Gafisa. "I think the overzealous bankers convinced founders their dreams would come true, and at valuations they never imagined."

Quote:

Ilan Goldfajn, head of the investment fund Ciano Investments in Rio de Janeiro, was among the investors who bet heavily on new domestic stocks, in retail and other sectors. Partly as a result of wide declines in those shares, his fund sharply underperformed the index last year. "So now I am whining," he says.

my point is that the free market is often pretty ugly. imagine if this were health care?

even many of the rah rah free marketers often blame government for NOT regulating them well enough