DBO Partners

The Wall Street Journal today discovered that universal banks that lend money to companies for cheap tend to want investment banking business in return for that lending and I guess that’s a scandal:

As the market for technology IPOs revs up and the biggest banks seek to capitalize on the size of their balance sheets, the practice of selecting underwriters that also provided loans is coming under focus, spurred by Facebook’s IPO process.

Critics of the practice say the choices aren’t accidental and reflect the “you-scratch-my-back-I-scratch-yours” way that Wall Street works.

Bankers, for their part, say they aren’t allowed to make loans on the condition that they receive other business, but borrowers can use the loans as a factor in choosing underwriters. Some bankers say that lending is just one of the many services they offer companies.

At Facebook, the credit line played a role in the batting order for underwriters, said a banker who worked on an underwriting pitch to the company.

When I was young and naive and pitching for underwriting business against banks that did lots of lending, I always thought that banks “aren’t allowed to make loans on the condition that they receive other business, but borrowers can use the loans as a factor in choosing underwriters” thing was ripe for a scandal. I still sort of think that: I just do not believe that no client coverage banker has ever said “we’ll be in your credit facility but only if you promise us underwriting or M&A business.” (Some people agree with me!) And, as the Journal notes, that would be a criminal violation of the antitrust laws, which is unspeakably weird but there you go.

But if you ask a banker who has been carefully and recently briefed on anti-tying regulations, he will probably tell you something like “we don’t demand underwriting business to provide a loan. Companies demand loans to get underwriting business.” And, as the Journal says, that’s not illegal. Read more »