UPS

There’s a lot of The Future Of Banking in the news today and we should talk about it but first a proposition. Where are you more likely to lose money on a mark-to-market basis: buying 5-year PIK-toggle holdco Petco bonds at 8.6%, or buying 30-year UPS bonds at 3.625%? I say your odds of losing on UPS are higher; if you disagree, you take Petco, and we’ll meet here in 30 years to settle up.

Here is a grab-bag of other numbers related to UPS:

Things to think here include:

  • lending money to UPS is not profitable for banks2;
  • underwriting UPS’s 30-year bonds isn’t exactly a bonanza either; and
  • UPS would be nuts to borrow from its banks – so it doesn’t, and borrows more cheaply in the market.3

Bank lending to high-investment-grade companies is (1) a loss leader, (2) used to attract not especially profitable business, and (3) not competitively priced. I feel like other industries do loss leaders better.

While you ponder that, also ponder this IMF working paper on banks and trading. A quick takeaway is “banks shouldn’t trade, urgh, trading bad,” and Mark Gongloff and Felix Salmon take that takeaway away, but as far as I can tell the more interesting bit is this: Read more »