Book-Building and Deregulation

Book-building.

Here's how you sell bonds. You are an investment bank working for a company that wants to sell $1 billion of bonds. You go out and market the bonds, find people who want to buy them, take their orders, and "build a book" of demand. Eventually you get $1 billion worth of orders. But you can't stop there: If people want to buy exactly $1 billion worth of bonds, then their price will be pretty fragile; if even one investor decides to sell them, there'll be no one around to buy. It is not great for your reputation to underwrite deals that drop in price immediately. So you can't consider the deal a success until you have a nice cushion, say $2 billion worth of orders. Once you have that comfortable cushion, you stop, and price the deal, and issue the bonds.