Wind Turbines Kill Babies | 6 comments (6 topical, editorial, 0 hidden)

The argument may be generalised... (4.00 / 5)

... to all cases in which investment trusts are operated by officers of another, closely related institution, financial or otherwise.

In fact, it may be generalised to all similar revolving door situations: The problem is that the widows and orphans entrust their money to money managers (or industrial policy to industry insiders, or regulatory power to lobbyists) whose institutional loyalty (and institutional incentive structure) is to their fellow Villagers first, and the widows and orphans second.

Actually, the wind farm is probably a poor example, because 6 % real return on investment is not a bad gilt-edged return (and it is gilt-edged if you invest in a well-managed wind project in a country where the regulatory regime is reasonably stable).

A better example would be investment banks sponsoring investment trusts staffed with the banks' own officers, who then turn around and purchase the banks' own structured products. In that case, not only can the banks and fund managers over-price the products, they can also under-assess the risks. And for widows and orphans, undeclared risk is a bigger problem than low returns.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Jan 1st, 2010 at 02:02:44 AM EST

Re: The argument may be generalised... (4.00 / 4)

good points Jake, thanks! Sometimes you develop tunnel vision and only think about your "problems", when in fact, when seen in a far broader view, it's not that much of a problem. In fact, when compared to your example of buying the banks own structured products, my evil fund is almost saintly ;-) And it actually invests in "real stuff" as opposed to some weird structured products. I used to work at a bank (on the sales side) and there was really a lot of structured product crap (which I never sold but had in my incentives/goals to sell) which was a LOT worse than overpaying for a wind farm.

Thanks again for putting that in perspective!

PS one of the reasons I left the bank was the pressure to sell BS like most of the structured products.

by crankykarsten (cranky (where?) gmx dot organisation) on Fri Jan 1st, 2010 at 04:04:14 AM EST
[ Parent ]

The question of whether it is an evil fund ... (none / 1)

... is what the alternative is.

I can't see any baby killing going on - indeed, quite the reverse. The charity / church / endowment is spending the money that it can spend on whatever its vision or charter of a good deed is.

And then the charity / church / endowment has funds it has for investment to ensure a stable flow of income over the future to be able to keep doing that spending.

And of course it would certainly prefer its investments to not be making things worse faster than the revenue those investment provide can be used to make things better, since in that case it would be doing more good burning up the money in a bonfire (in a chamber with exhaust treated, of course).

Now BigBadBank steps in to squeeze a little bit extra out of the transaction - but if a fund is available that has similar positive externalities and offers better return (say, MediumSizedSlightlyLessBadBank does the same trick but squeezes less off the top), then they can invest in that fund instead.

Provided BigBadBank cannot monopolize the process - and as described they enter too late into the process to be able to monopolize it - then the amount they can squeeze of the top is due to the baby killing effect of other available investments, and the "evil" is that baby killing could be reduced by still more if less was sliced off the top.

But that is a general ill of the system itself, and not increased because the wind farm was developed.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Jan 1st, 2010 at 03:54:03 PM EST
[ Parent ]

Re: The question of whether it is an evil fund ... (none / 0)

indeed, I meant that the charity could have MORE money if BigBank wouldn't sell the wind farm overpriced but for a fair price and could thus save more children like you said tat the end. Like I said in the intro, it is a very indirect link and mainly to get your attention...

And as you also state at then end, it is a general ill of the system (which many "normal" investors were not aware of in the past, though now the media does every so often direct attention to such topics such as here in Germany where there were quite some stories on the bad advice that banks were giving their clients (as they are selling products and not advice)) and money invested in a wind farm is pretty clearly one of the "better" investments that one can make for the good of the earth and mankind...

by crankykarsten (cranky (where?) gmx dot organisation) on Sun Jan 3rd, 2010 at 07:55:06 AM EST
[ Parent ]

well, (4.00 / 2)

if the charity only needs an appropriate return to invest in such projects, and the bank provided that, it's a good transaction for the charity, which fulfills all its goals, and a good one for the bank which can make money in the process.

Presumably the charity can consult several banks to see which one offers the best overall package?

What is trickier is if the proposed structures end up putting other risks on the charity than what it expected to bear, or that the structure is sold as something it isn't (as happened with whole classes of the "structured products" of recent years).

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Jan 3rd, 2010 at 09:02:31 AM EST
[ Parent ]

Re: The question of whether it is an evil fund ... (none / 1)

indeed, I meant that the charity could have MORE money if BigBank wouldn't sell the wind farm overpriced but for a fair price and could thus save more children like you said tat the end.

But that's comparing to a hypothetical bank which is not a commercial corporation. Indeed, on that standard, people who give money to the charity are not baby killers because they "could have given a little bit more" ... so its not a pragma that stands up to scrutiny.

The standard is, are those children better off if the BigBadBank does the action - in the way that it does actions - or if the BigBadBank does not do the action. Clearly, provided the BigBadBank is not granted a monopoly, they are better off if the BigBadBank does engage in the financing then if it does not.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu Jan 7th, 2010 at 10:31:48 PM EST
[ Parent ]

Wind Turbines Kill Babies | 6 comments (6 topical, 0 editorial, 0 hidden)

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