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US banks: overvexed, overpaid and over here

By Jon Hay, Ralph Sinclair
13 May 2021

In the film 'Annie Hall', Woody Allen recounts two diners’ experience at a restaurant. “One of them says: ‘Boy, the food at this place is really terrible.’ The other one says: ‘Yeah, I know; and such small portions.’”

That must be how US banks feel sometimes about the global sovereign, supranational and agency bond market, especially now that a row has erupted over underwriting fees.

The EU will be paying 6.8 cents, on average, below the standard rate, for its forthcoming syndications. No one disputes the EU discount. No other issuer will come close to syndicating that volume over the next couple of years. But now other SSAs want a discount.

US banks might look at this situation, compare it to their home market, and wonder why they bother.

US issuers pay fatter fees than SSAs. Banks argue — if they ever let US borrowers bring up this indecent subject — that they need paying to keep the secondary market humming with liquidity, making it attractive for investors.

Banks, from the US and Europe, use the same argument in the SSA market.

But in the US, the big banks enjoy an oligopolistic level of control that they cannot command in the SSA market. An issuer like Amazon can print dazzlers like this week’s tightly priced $18.5bn octopus, but not without mandating the top US houses.

If those banks were consistent, they ought to turn their noses up at the chicken feed SSAs pay. Do they? Quite the contrary — they are greedy for it.

The top five SSA underwriters this year are the five big US banks. They have been heard to complain that the EU does not give them enough mandates, even suspecting an anti-US bias.

Either the SSA market risks ruination if banks don’t get their fees, or companies like Amazon are overpaying. The two sets of issuers cannot both be paying the right amount.

By Jon Hay, Ralph Sinclair
13 May 2021