Huge bundles of money, and reportage about same, are zipping around the globe so fast it is making our heads spin. Today's reports bring news about firm or near-firm commitments of $6.6 billion to Merrill Lynch, and mucho additional billions supposedly headed toward Citigroup.
Now, this raises one teeny, tiny question from little 'ol us. The question is this: since these capital infusions seem to be structured in the form of the issuance of special classes of stock by the needy firm, with said stock to pay a 9% dividend, or thereabouts, and since the recipient firms seem to be recording losses which maybe, just maybe, astronomers can comprehend ($10 billion by Citigroup alone in ONE QUARTER), we wazz just a'wonderin -- How are these firms going to be paying a 9% dividend when, as lenders (in the case of Citigroup) in a low and declining interest rate environment they will be lucky to earn 2 or 3 or more points LESS THAN THAT -- unless, of course, they decide it's time to buy some high yielding investments, like, mmmm....some mortgage-backeds? Or maybe, just maybe, the recipient firms are going to use LEVERAGE to enhance the return on the new capital, so that they can pay the rich dividends their foreign benefactors are requiring.
There is such a thing as a healthy appetite for risk. Such appetite is driven by the "animal spirits" or, to put it a tad more bluntly, by good, old-fashioned GREED. Of course, when the inevitable collapse occurs, and greed is supplanted by FEAR, the question then arises -- if a keen appetite for risk is being manifested by those who have just gotten creamed by incurring such risk, we would wonder if it is not perhaps being generated by DESPERATION? As for the new financiers of a fresh round of risk-taking by imploding corporations, what can one say except that: "There are none so blind as those who will not see."
