Goldman Sachs Group Inc., JPMorgan Chase & Co. and the rest of Wall Street have at least $11 billion of loans and bonds they can’t readily sell Bloomberg reports.
Bankers, who just a few months ago boasted that demand for high-yield assets was so great that they would have no problem raising debt for a $100 billion LBO, are now paying for their overconfidence. The cost of tying up their own capital may curb earnings and stem the flood of LBOs, which generated a record $8.4 billion in fees during the first half of 2007, according to Brad Hintz, the former chief financial officer at New York-based Lehman Brothers Holdings Inc.
“The private equity firms, being very tough negotiators, are unlikely to let the banks off the hook,” says Martin Fridson, chief executive officer of high-yield research firm FridsonVision LLC in New York. “They’ll say that’s your problem and that’s why we’re paying you: To take risk.”
The market for high-yield bonds and junk-rated, or leveraged loans began to crack in June as concerns that LBOs were becoming too risky coincided with a slump in the market for subprime mortgages that caused the near-collapse of two Bear Stearns hedge funds.
Investors refused to buy bonds to finance purchases of companies including Dollar General and ServiceMaster Co., forcing bankers to either buy the bonds themselves or extend a loan to make up for the securities that weren’t sold.
“The underwriters are going to be forced to provide bridge loans, but Wall Street deserves to get smacked around a little,” says William Featherston, managing director in high-yield at J. Giordano Securities LLC in Stamford, Connecticut. “It’s been easy for so long.