Lemming investment funding strategy
I thought we would see the end of suicidal “lemming” investment funding strategies after the Global Financial Crisis in 2008. Investors piled into sub-prime junk mortgage investments, because everyone else was doing it. It fulfilled the text-book risk management strategy of “reducing” risk. De-risk by spreading ownership of any
creative investment vehicles contagious junk as widely as possible. But too much such junk, too widely spread, nearly took a slew of major banks down. It had the global financial system on the brink.
Impact on investment funding
It perhaps should have, but this is not my area of expertise. Was the cure better than the disease? What I do know is that a $20m investment agreement funding my own project was canned two days before signature. This was Hydragas Energy. Indeed, the date was August 2, 2008. The US investor, a renowned environmentalist and huge fan of the project, suffered his own triple whammy of financial setbacks. His hits included the cancellation of major contracts with California State Government and two cancelled sales of mining and energy investments. He had to bail out of the opportunity.
For years afterwards, risk aversion ruled and investment funding tanked. So I placed the project on the back burner for a while. Because of that, I was busying myself advising governments on regulation for safe use of the lake. This was an essential task for community safety for millions of people.
Where that money really goes
As a result, global crisis management included some
critical interventions hugely expensive bail-outs. This process saw taxpayer (and other newly created) money injected to save the skins of most banks. That is, those other than Lehmann Brothers and Icelandic banks. The “too-big-to-fail” US financial institutions and many global entities were on a knife’s edge.
Trillions of dollars were printed for “global easing”. Where are these trillions now? This was surely a recipe for inflation. That is, unless yours is the ultimate reserve currency, thus able to
avert postpone the problem onto other generations. Taxpayers will pay the interest on the debt and that’s pending. It works out at $50 billion per annum per 0.25% interest on $18 trillion. No wonder the US Executive branch has pushed for rate cuts.
Was it criminal?
Arguably it was criminal behaviour that led to the crisis. But at so many levels, that behaviour remained unpunished. No bankers were jailed. So bankers were soon back into business as usual. Their current exercise is to be creative with this mountain of new money printed. To the casual eye, the situation’s almost back to normal, really a “SNAFU” kind of normal. By then, banker’s fees were back to the
respectable unconscionable levels. Fees were earned for moving money around, but where to?
Goldman Sachs admitted, as an example among the fraternity of bankers, that they are spending tens of billions of dollars on legal fees and provisions to reduce their risk profile and provide for claims or contingencies. Somebody else is paying for that as an added banking fee.
Is this how you teach investment risk management?
I discussed this risk management problem with a colleague, Larisa, busy studying for her CFA. So I decided to read her text book’s financial risk chapter. I suggested that the risk management method was utterly flawed. This chapter needed a wholesale re-write. But so far it seems that the only editing was to add the investment destination qualifier, “except for sub-prime mortgages…”. One door closes, many remain open.
So why should I be concerned? Is it because there is more of the same going on, just under different labels?
How to fund real projects?
Actually no. My first concern is at the other end of the investing funding spectrum. It lies with the ongoing difficulty of funding real, productive, wealth-generating projects. The ones that give real returns and real benefits. These same projects benefit needy communities and climate change. Commodity prices hinder investment, with some exceptions. Incredibly, it’s the good investments that suffer from a credibility problem with bankers. How is this category ignored in favor of a widely abused spread of “junk” risk?
In old-style Economics 101, it was primary and secondary industry that was the keystone investment. They provided the base on which all economic activity was built. The service industries, such as banking, earned their fees by facilitating the transactions. These kept the wheels of mining and industry turning. Bankers became incredibly adept at generating new fees for new services. Along the way they created a service industry of advisers to interpret complexity. The process became the means and the end. Who needs a project when the mere movement of the funds generates as much?
What can we learn from Catch 22?
This new school of finance and economics, post GFC, has terminally displaced the older economic construct. This transition was foreseen by Joseph Heller’s character in his post-war novel, Catch 22. Milo Minderbinder is the unconstrained wheeler-dealer that thrives on wars.
Milo, in a most intriguing Catch 22 sub-plot, was the mess sergeant at an air force bomber base in Italy in WWII. He started by trading army rations for fresh food and eggs from local farmers. This was for the benefit of his clientele – the troops. His deal skills and transactions escalated hugely in size and scope. Enter the global entrepreneur and arbitrageur. He graduated to grand enterprise and insane plans. He figured that it was cheaper for American bombers to bomb American lines and German bombers to bomb their own lines and negotiated the deal!
He offset the cost of bombers travelling the extra distance to bomb each other’s lines. He arranged the arbitrage, among many grand but unheard-of deals, becoming the ultimate and invisible war-time deal-maker and trader. Perhaps it’s Heller’s commentary on the Yalta conference between Roosevelt and Stalin, 10 million Russian lives for US armaments and gold.
Conscience was no barrier to such schemes, nor is it evident in today’s politics. Heller was ahead of his time, sixty years at least, but the practice is alive and thriving in 2019. Catch 22 applies in ways Heller may not have imagined in global finance, but with global politics such hegemony is alive and thriving more than ever.
COP 21 and all that climate change distraction
So where will one see evidence of the newly printed trillions funding something tangible and worthwhile like fixing climate change? COP21 in Paris in December 2015 saw many pledges of investment to save the environment. The over-arching aim was to trim back to at most 1.5 degrees on global warming. That might otherwise rise by 2-4 degrees. Tech billionaires are in the vanguard of those getting podium time in Paris and face time with politicians at Davos. I don’t doubt their wish to succeed and their ability to influence. They’re good.
But I do have doubts on whether the financial system will carry out their express wishes. A multiplicity of Milo Minderbinders out there learnt to be in the mix as the intermediaries. Will they earn their margins and redirect investment funding into pseudo-environmental investments, with virtual enviro-social benefits? Will they sink any form of respectability that these pledges were built on?
How to dress-up a project to get climate funding?
I wonder, for example, will someone in this mix ever look at our project?
In this case we need a paltry $30m initial investment into innovative climate-change technology. We can look deeper. A $3 B eventual, staged capital spend with its 40% real returns. What might one say of its $10bn NPV10 and its ability to avert 2 gigatons of carbon emissions? Because it also stops a pending, one-day methane eruption, by later this century. But then, what might we think of the project preventing the same-day deaths of 2-4 million people in the zone?
How do we assess a value of the lives saved? These are the millions that could suffocate under the toxic gas cloud released if we don’t do the project? Oh yes, it also cuts the cost of imported energy to several countries by 50% into the bargain. And gosh, it reduces greenhouse gas emissions from the imported oil that still provides that energy. It seems so good, almost too good. It must have a hidden risk. No. Can’t touch it. For deal-makers there are easier ways to make a buck and they don’t have to make sense.
Decision-makers and gate-keepers
As one company corporate lawyer said this to me, when we discussed this project as a hedge investment several years ago. “There is no chance that we’ll consider this, there’s a genocide going on there!” My protest was that Rwanda was 20 years past this event, and now peaceful. It didn’t move him. I showed him a Gallup poll. It listed it as amongst the three safest countries on the planet. But he was unbending. “No I’ve never been there, but this is my information. It’s my decision.” Perhaps I should tell him that WWII is also over. Japan’s actually quite safe too from American nukes. Why bother, there are none so deaf…
But of course there’s hope. What if Elon Musk had to go to the same gate-keeping lawyer? Would he succeed in his plan to put supply rockets into space? What of his plan to re-use the vehicle? Would that have got past that gatekeeper? No, but he didn’t have to either.
Just thinking. So what would Milo Minderbinder do? He’d figure out a way.