The Treasury Department may be playing undertaker to the underwriter.
Talk to any investment banker and they will tell you how banks are barely making any money selling Treasury's shares in bailed-out companies like General Motors Co
Underwriting fees on recent deals as the U.S. government sells out of companies it rescued during the financial crisis have reached an all-time low.
As the Treasury thinks about selling the billions worth of shares that remain, Wall Street bankers worry that they make even less on those deals than they did before.
It gets to the point for some of these Wall Street firms where the equities divisions may say, 'Do I really care about this business? Because I'm not going to make any money, one banker said.
The standard formula for fees in a secondary offering is about half of what's paid in an initial public offering. But the base is already low in government deals.
AIG set the fees at 0.5 percent for its $8.7 billion offering in May. GM paid 0.75 percent for the common stock portion of its record-setting $23.1 billion IPO in November -- far below a typical fee of 2 percent to 3 percent for an offering of that size, according to Thomson Reuters data.
The fee on the planned IPO of Ally Financial, another bailed out firm, is 0.875 percent.
At 0.75 percent, underwriters earned $136 million in fees from the common stock portion of GM's IPO. Out of these proceeds, banks pay attorneys and internal staff, as well as roughly half of investor roadshow expenses such as hotels, meals and jets. That would likely still leave money on the table but not as much as bankers are used to.
Government fees were going to be lower no matter what; the question was how much lower, said another investment banker who asked not to be identified.
The GM IPO at 75 basis points was essentially uneconomic for the firms that spent all the time doing it, given how many man-hours went into it, the banker said. But you do it because it's the government, and it's high-profile.
Deals of such magnitude don't come by often, the average size of U.S. IPOs is just over $310 million this year, so being on them also means a bump up in league tables, the adviser rankings that give banks marketing ammunition to court clients.
It's a reality not lost on the Treasury Department.
As much as they hate to do deals for 50 basis points, they need league tables, said a person familiar with the Treasury's thinking.
There are no signs that large private issuers have taken the cue from the government in seeking lower fees.
U.S. IPO fees have remained stable at 5 percent to 7 percent in the last 10 years, compared to 2.5 percent to 4 percent in Europe and 2.5 percent to 6 percent in China, according to Freeman & Co. Jumbo equity deals pay a lower fee than average.
When Treasury interviewed bankers to lead GM's IPO in May of last year, Goldman Sachs Group Inc
Treasury officials, who picked Morgan Stanley
There have been lots of big deals throughout history and no one has pulled the low fee card, the second banker said. Yes, Goldman Sachs pushed fee down (in GM's IPO), but they didn't get the lead role for doing that.
One factor that may go in the favor of banks this time could be the challenges facing GM and AIG, which makes both companies a harder sell to investors.
GM's shares, which have mostly traded below the IPO price of $33, are trading at less than $25 amid global market upheaval. AIG has fared no better, with the stock around $23 after being stuck in the $29 per share range for months.
Before the IPO, GM was touted as a restructured company, but nine months later, the automaker faces various problems.
AIG has had a tough year too, boosting its reserves for asbestos and environmental claims. Its property-casualty insurance unit Chartis has been stung by natural disasters around the world.
Treasury will use all of the pressure to bring the fee down, but you know it depends on how difficult the offering is, a third investment banker said.
(Additional reporting by Clare Baldwin. Editing by Paritosh Bansal and Robert MacMillan)