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Banks Should Be Ashamed

Written by Briton Ryle
Posted June 13, 2016

What won't U.S. investment banks do for their single-minded pursuit of the almighty dollar?

They already ruined the retirement dreams of millions of Americans when they treated mortgage loans and homeownership like their own personal piggy bank. They lied about Internet stocks, fueling one of the biggest investment bubbles in history. They will launder money and manipulate interest rates.

They've been fined, sued, and investigated. But still no behavior is too outrageous, so long as there's a big payday and a nice bonus. 

So it shouldn't be a surprise that Wall Street investment banks are lining up to enrich a country that is currently waging an economic war on one of America's most important industries. Of course, there's as much as $1 billion in fees awaiting the lucky bank that gets chosen to help out, so I guess that makes it OK. 

I'm talking about the coming IPO of Saudi Arabia's state-run oil company, Aramco

The royal family wants to sell something like 5% of Aramco to international investors in the form of stock. So the Saudis are hiring at least one Wall Street investment bank to help it sell stock to Americans.

It's estimated that Aramco and its 266 billion barrels of oil is worth between $2 and $3 trillion. That's as much as every other oil and gas company in the world combined. At that valuation, an investment bank might make as much as $1 billion. Saudi Arabia wants to take in as much as $150 billion from what will be the biggest IPO ever.

Why the Saudis Need Money

When you take a company public, you sell shares to the investing public. And since it's the first time the shares are offered to the public, it's called an "initial public offering," or IPO.

For an IPO, it is the owner of those shares — whether it's the company or the owners of the company — that makes a lot of cash off the deal.

Usually, when a company goes public, the owners of the company sell some shares along with the company's shares in the offering. That way the owners make some loot, and the company also gets some loot to fund expansion, maybe take care of some debt — whatever is needed to make the company stronger.

Wall Street investment banks get on board the IPO process basically as marketers. Companies like Goldman Sachs, Morgan Stanley, or Bank of America have a bunch of high net worth clients that they can market the new IPO shares to. And they may also buy shares themselves to put in investment funds they offer for sale.

The investment banks are also responsible for ensuring that the IPO price works. In other words, they need to make sure there are plenty of buyers willing to pay the IPO price. And because the Aramco IPO will be the biggest in history, the Saudis have to get the new shares of their oil company listed in the U.S.

The New York Stock Exchange is pretty much the only exchange in the world that can handle such a big listing. And of course, the Saudis need more American money so they can stay in power and keep oppressing women, cutting off thieves' hands, and funding terrorism. 

In case you were wondering, the Saudis need more money because they deliberately crushed oil prices in an all-out assault on U.S. oil companies. Low oil prices have driven over 60 U.S. oil companies out of business. That's American jobs right there. U.S. oil companies have lost 15,700 jobs in the last two years. If you look at jobs that support mining and oil, the number is more like 100,000. 

Even though U.S. oil companies don't really compete with Saudi oil, they don't care. They still want to drive them out of business. 

But hey, that's no problem. No reason we should act to protect a homegrown industry that employs 100,000 Americans...

JP Morgan and Citigroup

Right now, it looks like JP Morgan and Citi are in the lead to get the Aramco IPO. But if you think simply getting American investor money into the Saudis' hands is all it will take to make a billion, think again. Investor's Business Daily reported:

A top banker who went to Aramco’s headquarters to discuss the IPO told the Wall Street Journal that CEO Amin Nasser said any bank wishing to participate should consider financing a major infrastructure project meant to diversify the Saudi economy beyond oil.

Other Saudi officials have told banks they should consider lending money to Saudi Arabia if they haven’t already done so, and that the top underwriters of upcoming bond sales are likely to have an advantage for the IPO, sources also told the Journal, which estimated the IPO could generate $1 billion in fees for banks.

Talk about a deal with the devil. The Saudis are also demanding investment and loans. I'm sure JP Morgan and Citi will be happy to oblige. I'm sure they'll make more fees by underwriting some Saudi bonds to sell to Americans, too. 

U.S. investment banks have proven again and again that they check their morals at the door. Not me — I won't be "investing" in Aramco.

Until next time,

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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