Wednesday, October 29, 2008

The least risky deal in the world?

Imagine, if you will, a corporation- a very large corporation, mind you, that was earnestly seeking investments in the fixed income markets.

This corporation currently has a total debt load of 4 times annual revenue, which is roughly 60%financed through sale of mainly short term paper, and roughly 40% financed through internal pension and related programs.

This corporation has almost never produced a profit and, in the last year alone, increased its debt load by 40% of revenue, again, mainly through sales of short term paper.

For the past few decades, this corporation has consistently worked to reduce its borrowing costs, thus reducing profits for investors. Meanwhile, the currency in which interest income is paid (that's right, this corporation controls the value of the currency in which its loans are repaid) has fallen substantially against most goods and services, often more than erasing the ever lower interest payments. Over the past few years, loans to said corporation have produced negative returns.

Would you loan money to such a corporation?

If not, do you own any US Treasury Bonds, Bills or Notes? If you do, you are loaning money to that corporation.

To be fair, there are, to my mind, good reasons (for some) to loan money to this corporation- patriotism, fear of collapse, etc.- but those reasons have very little to do with profit seeking.