Cerberus can afford to buy Chrysler because its bankers, led by JP Morgan,
have agreed to lend the company $12 billion. That’s great for Cerberus –
and bad news for those bankers, who have found themselves unable
to syndicate the loan. And so $10 billion of junk finds itself onto the
balance sheets of JP Morgan, Morgan Stanley, Goldman Sachs, Bear Stearns, and
Citigroup. Let’s call it $2 billion apiece. (The other $2 billion is now coming
from Daimler and Cerberus.)
With the exception of Citigroup, these are all investment banks, first and
foremost. They are happy to lend money, but only when they’re getting big fees
from the deals as well: their balance sheet is used to drive investment-banking
revenues.
But now they’re worried. Look
at OSI, whose junk bonds have fallen 10 cents since the beginning of June, or
Dollar General, whose bonds are down 7 cents since ethe end of June. If the
Cerberus paper falls in value by just 5 cents on the dollar, that’s $500 million
in losses spread between the five banks – a good order of magnitude larger
than the amount of money they can expect to earn in fee income from the deal.
Of course, investment banks justify their enormous fees on the grounds that
they’re sophisticated financial intermediaries; when they underwrite a deal,
they underwrite the deal. So it’s only right and proper that from time to time
they should be forced to put their money where their mouth is.
But as DealBook notes
today, the M&A departments of those investment banks might well be moving
towards advising strategic buyers, now, rather than private-equity shops who
invaribly demand enormous loans. Suddenly, underwriting billions of dollars
in junk-rated debt looks less like a profit center and much more like a very
bad idea.