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the sad tale of a boring banker in exuberant times... and after

by Jerome a Paris Mon Oct 6th, 2008 at 06:35:17 PM EST

Note: you can find the name of my employer in a few seconds of basic googling, but I never mention it explicitly in my theads and I hope you can extend the same courtesy

In 12 years of investment banking, I've already gone through 4 boom-and-bust cycles, with the same behaviors repeating themselves (that's why it's called a cycle, duh). My job hasn't changed throughout, but how it's been seen by management and markets has swung wildly, in the same predictable way. This time is a bit different, though.


My job is project finance. You can find a basic definition here, or go look some of my old diaries like here, but suffice it to say that it's a job where your goal is to understand all that could possibly go wrong with a project,  find ways to mitigate each, and then make sure that legal contracts are in place that reflect the solutions found and the allocation of responsibility.

It's old-fashioned banking, where the banks actually lend the money and hold the risk for the long term (ie no securitisation to cycle money), and where your core competence is analysing risk - understand it, allocating it, and pricing it.

As such, it's not a very attractive job for high-flyers. It pays well, but not extravagantly more than you'd get in industry for a similarly high qualification expert/consultant position. It's very specialised, and thus not really a useful step in a fast-track career. More inconveniently, it's hard to bullshit one's way forward.

And so it happens that it enjoys regular periods of disgrace, as bankers find more interesting things to do. "Real" investment banking, ie mergers and acquisitions or bond origination and distribution is seen as a lot more prestigious, especially when it can become "structured" like project finance is - and not just by the bankers that do these jobs, but by top management, who suddenly find it more exciting to brag about their mastery of the "noble" investment banking markets - and can enjoy the bonuses that come along.

Emerging market bonds were all the rage in the mid 90s. Dotcoms were the big thing at the turn of the century. Merchant power plants were it in the early 2000s. And of course, securitization was the place to be in recent years. You could say that commodities are the new new thing today. Each time, project finance was dismissed as stodgy, uninteresting and has-been (and as much less attractive, financially, for participants).

Until, of course, the new activity blew up. They inevitably blow up because there is no free lunch. Any activity that generates lots of easy money does so because it carries bigger risks. These are always obvious in retrospect to all, and usually are visible from the start, but they are easy to ignore when the profits are so tempting, and the prestige from participating to the activity so obvious (the Masters of the Universe thing).

And stodgy project finance comes back to the fore. Boring it may be, but at least it it reliable and consistently profitable.

Except that this time, the Masters of the Universe have blown up so spectacularly that they are taking down not just their own mindless activities, but also the whole banks with them, leaving no money for normal lending activity.

And here I am, the sorry worker of a bank that has already benefitted form one bailout and is going to get a second one (likely including outright nationalization and/or dismantling), having been told that I should tell my clients that there is no money for them for the rest of the year. No money for wind farms. No money for lending - in a commercial bank!

I won't tell that to my clients, of course - after all, the management that is now desperately trying to scrounge cash by preventing its staff from making loans is unlikely to be around in the near future, and who knows what the new management will say. But in the meantime, I'm severely limited in what I can do, and it's not really a  consolation to have predicted that this would happen, to have told colleagues that all the fancy capital allocation systems put in place by banks were extraordinarily expensive and sophisticated, but obviously useless Cover-Your-Ass machines that distracted from the real job of assessing risk.

So I blog.

Display:
Also in orange: http://www.dailykos.com/storyonly/2008/10/6/174655/343/426/621988

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Oct 6th, 2008 at 06:42:58 PM EST
A well written post.

I think we all respond to the frustration you feel.

One of the truths rarely spoken is that foresight is only valuable if you have the power to act on it.

by Metatone (metatone [a|t] gmail (dot) com) on Mon Oct 6th, 2008 at 06:44:37 PM EST
Kind of been there before.  In my business it was the Brewers, then the Engineers, then the Accountants and then the Marketeers who were the top dogs as the corporate focus shifted from production to automation, to finance and then to Brand development. The further we moved from the core products, the less those core products seemed to matter and the more we became interchangeable with any other fast globalising business.

ICT never quite got a look in because it was always over-promising and under delivering.  HR became PR as Unions were disemboweled. But the people who mattered less and less in the corporate hierarchy were the people who actual made things or motivated others to do so.  They were the worker/manager drones who were seen as yellowpack inter-changeables who could be outsourced at will.  Only the Strategists were essential.

So practice doing some fancy Powerpoint Presentations showing that Renewable Energy is the banking Nirvana of the next decade - machines just spewing out money with very little need for management or fresh input.  The worse things get in the oil/commodity/real world - the more valuable they get.  The ideal hedge against more or less everything.

Practice your acting and theatrical skills.  The grand visions, the unsupported assumptions.  Practice being an illusionist, conjurer, and snake oil salesman - if you want to get ahead.  Only boring worker drones want to do real things for real people. Sell Solar to the Irish and wind to the Arabs.

Otherwise use your project finance skills to develop ET.  Its an ill wind...

Vote McCain for war without gain

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Oct 6th, 2008 at 07:31:26 PM EST
... excellent offshore wind resources in the Straits of Hormuz (except for those pesky oil tankers getting in the way)?

Obviously if Arabia is going to maximize its potential as a Sustainable Energy Exporter to Europe, it needs more than solar alone ...

picture of average solar resource by TOD and average combined solar and wind resource by TOD

 it must develop its wind resources if it wants to maximize the capital return of the HVDC lines from the Arabian Peninsula to Europe via Turkey and from North Africa to Europe from Morocco to Spain.

picture of idealized HVDC line routing


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 Tue Oct 7th, 2008 at 10:23:20 AM EST
[ Parent ]
Well, the good news is more Jerome blogging. Maybe the additional blogging will lead to more wind than the suppressed banking...

Un roi sans divertissement est un homme plein de misŤres
by linca (antonin POINT lucas AROBASE gmail.com) on Mon Oct 6th, 2008 at 07:34:35 PM EST
I first became involved with system design of electronic systems for public schools in the mid '70 as my day job.  My evening and weekend job was designing a recording studio and a "from scratch" audio console for that studio.  From that adventure I learned that it is not a good thing to work in an industry where the primary function is so enjoyable, (engineering a session with new talent in the studio,) that your competition would do it for free.  

I ended up with one of the best electronic system contractors in Los Angeles.  I was the most recently hired project engineer on staff so I learned to make a virtue of taking on anything anyone else was not familiar with or not interested in, or of assisting others on large projects, such as the base wide sound system for a major airport in a major oil exporting mid east country, where I performed all required written design analysis and prepared a step-by-step operating manual for a public address system distributed over 17 facilities on a 25 square mile air base/airport.  Re-cycle them petro-dollars.

Then it was designing board room projection and display systems and training systems in the mid '80s, until all the boardrooms went away via M&A activity.  At that point it was back to schools, where I learned to design and install telephone PABXs and data network wiring systems in addition to Public Address, Intrusion Detection and Cable TV Distribution.  I thoroughly enjoyed being involved in the construction of public infrastructure that would last for at least 50 years.  

The company considered it to be "bread and butter" low profit work that insured that they could carry experienced union installers, without which it would have been far less profitable to do the high margin jobs, (sports books in Vegas, PA and video surveillance at Los Angeles International, etc.) when they came along.  I was somewhat suspect at the company as I had difficulty maintaining with a straight face that 2+2=5 for a sufficiently long period of time and was prone to inopportune outbursts of candor.

Interestingly, in school work, these characteristics turned out to be advantages.  We developed a reputation for honesty and quality, and found ourselves numerous times the recipient of change orders adding many times the amount of work in the original bid because job authorities had confidence that we would get the job done, not overcharge grotesquely and not embarrass them.  There is much to be said for stodgy, boring work.  It can be very rewarding to have a job where you believe in what you are doing, enjoy and take pride in what you do and can feel that, in a small way, you are making the world a better place.  We all like to think well of ourselves.  It is best when so doing does not require massive self deception.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Oct 6th, 2008 at 11:00:08 PM EST
It can be very rewarding to have a job where you believe in what you are doing, enjoy and take pride in what you do and can feel that, in a small way, you are making the world a better place.

Well said.

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Tue Oct 7th, 2008 at 01:25:05 AM EST
[ Parent ]
I'm happy you will be able to blog.  And don't under-rate the "I told you so" factor.  It doesn't change anything but makes you feel better.

But I understand the frustration.  I have talked to a number of commercial bankers in the last couple of weeks who say the same thing with with the same exclamation point that you do.  No money to lend!  In a commercial bank!

And of course I have clients (many with pristine balance sheets) who are realizing that their projects are not going to get financed.  

I suspect my time available to read your blogging will increase.  So your supply and my demand are going to balance out.  

by Maryb2004 on Mon Oct 6th, 2008 at 11:42:42 PM EST
It also greatly enhances your credibility until you are wrong the next time.  Use this window of time wisely.
by paving on Tue Oct 7th, 2008 at 07:20:18 PM EST
[ Parent ]
We shall go on to the end, we shall blog in France,
we shall blog on the seas and oceans,
we shall blog with growing confidence and growing strength in the air, we shall defend our site, whatever the cost may be,
we shall blog on the beaches,
we shall blog on the landing grounds,
we shall blog in the fields and in the streets,
we shall blog in the hills;
we shall never surrender.
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Oct 7th, 2008 at 01:22:18 AM EST
Yes! Give that man a cigar!

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman
by dvx (dvx.clt št gmail dotcom) on Tue Oct 7th, 2008 at 03:14:13 AM EST
[ Parent ]
THERE IS A GOD !!!!!

That's right!  And GOD wants YOU, Jerome, to take your new spare time to develop ET into a powerhouse.

The good news ... it's only a life sentence. You eventually leave this planet of idiots.

by THE Twank (yatta blah blah @ blah.com) on Tue Oct 7th, 2008 at 07:59:38 AM EST
He hasn't lost his job.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Oct 7th, 2008 at 08:04:45 AM EST
[ Parent ]
But his tools are missing....

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Tue Oct 7th, 2008 at 08:06:13 AM EST
[ Parent ]
But it does sound like he's got more spare time.  Or am I wrong?

The good news ... it's only a life sentence. You eventually leave this planet of idiots.
by THE Twank (yatta blah blah @ blah.com) on Tue Oct 7th, 2008 at 08:12:11 AM EST
[ Parent ]
given your understanding in the social good that your job creates, I sympathise with your frustrations. I hope that this will be a temporary blip.

How's the industry in Russia ? Despite their stock market blip, they've got plenty of money.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Tue Oct 7th, 2008 at 09:27:10 AM EST
Actually slack periods are a good time to pursue things that one can't do when busier. In this case cultivate business contacts.

This means spending more time talking to existing accounts - listening to their current concerns and discussing what they would like to do in the future when conditions improve.

It also means meeting with those who are only early in their development cycle or haven't even given wind power a serious thought (yet). You don't have to promote your services, all you do is listen to their stories about how their existing businesses are run and what difficulties they are facing.

When things improve they will remember your interest and your business card will be in their Rolodex.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Tue Oct 7th, 2008 at 10:18:12 AM EST
If the end result of this is to have more blogs and analyses on European Tribune then I say we're all better off in the short-term.  

Alternately, in terms of risk, would funding a project with 100% capital be considered more risky than using debt-financing?

by paving on Tue Oct 7th, 2008 at 12:20:06 PM EST
It's not riskier, it's just that the expected return on the investment will be lower, because debt is usually cheaper than equity (thanks to leverage...)

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Oct 7th, 2008 at 03:21:05 PM EST
[ Parent ]
what is this leverage you refer to...
by paving on Tue Oct 7th, 2008 at 07:22:31 PM EST
[ Parent ]
If you loan half of the investment you are not only using your own (or the shareholders) capital, but loaned capital too.

And as the interest you pay on the loan is very likely lower than your required rate of return on your own capital, you will make more money the more money you loan.

That is, if the business works out. If it doesn't you're in deep shit. Which is kinda what risk means.

Let me give you an example. You buy shares for one million euros. The share price goes up by 10 %. You make 100,000 euros. If the shares fall by 10 % you lose 100,000 and still have 900,000 left.

Let's say you instead invest your own million and loan nine more millions and buy shares for all of it. If the share price goes up by 10 % you have made a million, you've doubled you investment! But if the share is down by 10 % you lose one million and have no money left. If the share is down 20 % you not only lose all your money but you are one million euros in debt.

Leverage is dangerous. Of course, this is why the limited liability corporation is so important. Even if the business goes to Hell, you can't lose more money than you've invested, there's no going into debt.

Though in the real world, if you're an entrepeneur, the banks will only lend money to your project if you've invested a lot of your own money into the project, and you've often gotten this money from stuff like mortaging your house.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Oct 7th, 2008 at 08:06:06 PM EST
[ Parent ]
My post was sarcastic, implying that such leverage no longer exists.  But thanks for the nice write-up anyhow.
by paving on Tue Oct 7th, 2008 at 08:18:19 PM EST
[ Parent ]
Oh, Jerome, I had to login for the first time in a very long time just to tip you on this very touching diary.  Wishing you well.
by jjellin on Tue Oct 7th, 2008 at 07:33:52 PM EST
Another wording...

Good luck until things start again.

Economist's View: Skill-Based or Bubble-Based Wage Differentials?

Arindrajit Dube says there's a paper he wishes to write once the data become available:

Does Mispricing of Financial Assets lead to Mispricing of Human Capital?

Over the late twentieth century, the financial sector grew rapidly, and attracted higher skilled workers at an increasing rate. Existing work attributes this to growth in financial sector productivity, which raised the marginal product of higher skilled workers. In this paper, we investigate the role of mispricing of financial assets (from asset bubbles) in artificially increasing returns to skill in the economy in the context of a two sector general equilibrium model. A speculative bubble arises from heterogeneous beliefs due to overconfidence and short-sales constraints, and investors perceive an option to resell the stock to others with even greater valuations. If the financial sector is relatively more intensive in the use of skilled workers, this can lead to an inefficiently large portion of these workers going to finance, and an inefficiently high skill-wage differential. Using data from the United States over the 1980 to 2012 period, we show that (1) the growth in asset bubbles were particularly important in increasing the perceived marginal product of higher-skilled workers; and (2) with the sharp retrenchment of the financial sector following the 2008 financial crisis, perceived marginal products and wages of higher skilled workers fell substantially. Our evidence shows that a large part of the "skill biased technical change" identified by earlier researchers actually represents a mispricing of human capital due to inefficiencies in the financial market.



Rien n'est gratuit en ce bas monde. Tout s'expie, le bien comme le mal, se paie tot ou tard. Le bien c'est beaucoup plus cher, forcement. Celine
by UnEstranAvecVueSurMer (holopherne ahem gmail) on Tue Oct 7th, 2008 at 10:49:27 PM EST
It seems to me alternative energy projects have been either of a mega-size, such as offshore wind farms, or microscopic, such as backyard or rooftop windmills.

I have been wondering about middle size projects. Say some individuals get together to try to find an intelligent way to save money for their retirement, or want to make an investment contributing to the well being of this planet, or a mix of the two.

Between them , say they can contribute up to the order of half a million euros, plus they can probably borrow more, plus they may be able to contribute monthly to some kind of fund.

My question is : is it totally far fetched to think they could setup some kind of wind turbine on some private property ? What kind of regulation they would run against ? How would they be able to sell the energy ? Do machines of the right size actually exist, and who makes them ?

If things just don't work out at this scale, then what should they aim for ?

by balbuz on Wed Oct 8th, 2008 at 10:45:54 AM EST
I'll crosspost a comment from another thread.

A swedish kind of death:

I recently came across O2, a swedish wind-coop. They offer a membership share for 6200 SEK (~650 euro) which entitles you to use 1000 kWh/year for the production cost of 0,13 SEK/kWh (~0,015 euro/kWh) which translates to 10% of retail price. If you use less the rest can be sold. If you leave you can sell back your share.

You cut out the middle man in the investment-chain and invest in what you are going to consume. That way you decrease uncertainty for both seller and consumer/investor.

Is this basically what you are proposing but on a national scale? (If so, I understood correctly.)

Oh, and a link to o2 Energi.

They have 2000 members and own 3 wind power plants. This is apperently a working scale.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Wed Oct 8th, 2008 at 01:14:01 PM EST
[ Parent ]
to start with.

Most projects were fairly small (1-5 turbines) and the investment was made by local cooperatives, or individual investors using the tax breaks initially proided by government.

It only fairly recently in Europe that projects have become larger (in the 20-100MEUR range) and mostly a business for professional developers, financial investors or utilities. (The US, with lots more room, has been mostly a large-scale industry all along).

But small projects are still happening, and are being financed by smaller banks which may be less sensitive to the global credit turmoil.

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

by Jerome a Paris (etg@eurotrib.com) on Wed Oct 8th, 2008 at 02:49:27 PM EST
[ Parent ]
But small projects are still happening, and are being financed by smaller banks which may be less sensitive to the global credit turmoil.

Any links, info, Google search words ?

by balbuz on Wed Oct 8th, 2008 at 03:10:55 PM EST
[ Parent ]
In France, here

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Oct 8th, 2008 at 03:35:07 PM EST
[ Parent ]
There is a strong movement for community-based ownership of small utility scale windparks in the US, first developed by Dan Juhl in Minnesota.  There is now a whole movement.

Check out this reference paper for some ideas.  There's lot's more on the web.

"Life shrinks or expands in proportion to one's courage." - AnaÔs Nin

by Crazy Horse on Wed Oct 8th, 2008 at 05:16:33 PM EST
[ Parent ]
I had missed that, thanks. Their site being in swedish, I can't really tell if there is any kind of 'hard' info there.
by balbuz on Wed Oct 8th, 2008 at 03:08:52 PM EST
[ Parent ]
The hard info you are looking for is not there, no.

I just wanted to point them out as a working example of what you are proposing.

Since most of the questions regard regulations I would guess that it is different from country to country, so the swedish information would hardly be useful anyway.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Thu Oct 9th, 2008 at 08:28:56 AM EST
[ Parent ]
Some projects were done like this in France... by EDF. They would put say 5%, shares would be sold to individuals for another 5% of the total, and they would borrow the rest. EDF liked it because it only had to pay a little more than usual savings accounts rates to the shareholders, and thus made a nifty amount, with even less equity than usual.

But you still required 90% of the investment from other banks... with today don't lend that much, apparently.

This was the nicer kind of securitization...

Rien n'est gratuit en ce bas monde. Tout s'expie, le bien comme le mal, se paie tot ou tard. Le bien c'est beaucoup plus cher, forcement. Celine

by UnEstranAvecVueSurMer (holopherne ahem gmail) on Wed Oct 8th, 2008 at 03:56:49 PM EST
[ Parent ]
in countries with feed-in tariffs. The risk is understood and acceptable.

The problem today is lack of liquidity.

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

by Jerome a Paris (etg@eurotrib.com) on Wed Oct 8th, 2008 at 04:24:16 PM EST
[ Parent ]
Lack of liquidity?

Aren't the banks insolvent until further rescue?

On a side-note, I will be in Paris this week-end. With all the pictures posted from the Paris Meet-Up, I may just recognize you in the street. Stardom is at hand.

Rien n'est gratuit en ce bas monde. Tout s'expie, le bien comme le mal, se paie tot ou tard. Le bien c'est beaucoup plus cher, forcement. Celine

by UnEstranAvecVueSurMer (holopherne ahem gmail) on Wed Oct 8th, 2008 at 05:13:22 PM EST
[ Parent ]
good luck J! maybe blogging will lead to a new career as (well-paid) financial pundit, you'd certainly deserve it...

"We can all be prosperous but we can't all be rich." Ian Welsh
by melo (melometa4(at)gmail.com) on Wed Oct 8th, 2008 at 06:07:29 PM EST
[ Parent ]
... fiscal policy can provide ... for a country with a serious structural trade deficit problem, like the US, a Renewable Energy Development Bank with up-front funding to take a large share ... the National Highway Trust Fund funding breakdown is 80:20, so that might be the break to aim at ... with roll-over funding of income into additional funding, would then be able to reduce the stake it takes in projects if we can work through the Panic of 2008.

Of course, Feed-in tariffs would be needed to make the thing go, but with the electric utility regulatory hodge-podge, and in an environment where states would be desperate to get capital investment employment, requiring an appropriate feed-in tariff in order to be eligible for REDB participation could well be enough to get a substantial slate of feed-in tariffs in place.


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 Oct 9th, 2008 at 07:05:35 PM EST
[ Parent ]
I have to ask why it is you think that a Bank is necessary, as opposed to an investment institution?

Why is secured debt necessary at all?

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Oct 10th, 2008 at 06:55:58 AM EST
[ Parent ]
Because without the requirement for collateral there is no limit to how much bad debt can be issued.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Oct 10th, 2008 at 07:07:30 AM EST
[ Parent ]
... necessary, or why outlawing private depository banking entails such a massive change to the institutional framework that the scope for unintended consequences is mind-boggling?

After all, secured debt is not an instrument created in order to permit the existence of banks. Secured debt is an instrument that historically precedes commercial banking as we now understand it.

Abolition of secured debt in favor of all-equity liabilities would of course lead to a large reliance on Preferred equity with various heavy strings attached for non-performance that would press up against whatever boundary line was drawn for which strings were so heavy that the Preferred Share was secured debt in disguise. However, it would not eliminate private depository institutions.

And, indeed, we have learned how to regulate a commercial banking system so that it is not prone to periodic panics through asset value melt-downs. We have just not learned how to keep those regulations in force for more than half of a Kondratiev long-cycle.


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 Oct 10th, 2008 at 10:17:18 AM EST
[ Parent ]
from the other Belgian bank that was rescued recently on the internet.
I know that this is not the bank, where you are, but I'm wondering, why some banks, like yours are unwilling to give low risk loans, while a different bank, that recently was even rescued, is trying to make new business even with consumer loans, that are likely more risky?

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Wed Oct 8th, 2008 at 07:15:11 PM EST
That's actually a good question. I get regular advertisements for mortgages as well, and I don't even have a house, much less a desire to take out any semi-NINJA mortgage...

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Oct 9th, 2008 at 12:28:32 AM EST
[ Parent ]
... does not mean that the majority of applications made are accepted. Indeed, fishing is a good analogy ... if suddenly a fishing fleet was unable to sell trash fish and had to throw them back, and there was a scarcity of fish of the size they could bring to market, some boats would fish longer, trying to catch enough of the marketable fish to keep the income flowing.

Especially now, when in so many countries central banks are taking higher grade mortgages as the instrument for repo lending, and when lending to fellow banks is seen to create a much riskier credit than in normal times, a bank with liquidity looking to rebuild its book could well be fishing for those potential customers out there who are still good credit risks for whom they can create a high quality mortgage to hold for the income, and as a repo asset in case their current liquid position moves against them.

The key problem in a bank solvency crisis, after all, is that the ordinary flow of liquidity around the banking system, which is ordinarily matched up against needs for bank liquidity by inter-bank lending, is getting bottled up at the matching up against needs for bank liquidity step in the process, because of the true uncertainty regarding the solvency of the bank that is taking out the short term loan.

That is going to be hitting project lending hard, as the credit assets created lack a liquid market with a price maker. Reserve banks in a number of countries have stepped in to act as price maker in markets for short term lending collatoralised by mortgages ... the Fed has been doing this for a year now.

A Works Public Administration for big, nationally (or for the EU regionally) strategic, project construction would get around the project lending credit crunch, but of course would do so by sidestepping project banking rather than by removing the bind.


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 Oct 10th, 2008 at 10:35:12 AM EST
[ Parent ]
Maybe this is the time one should start a bank of ones own?

"Industrial Bank of Uppsala" has quite a ring to it. ;)

Slogan: "We're boring, boring people who only invest in things we understand really, really, well. Your money is SAFE."

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Oct 9th, 2008 at 10:09:31 AM EST
That actually already exists. A small Danish provincial bank only lends out 90 % of deposits, full stop. The manager's comment: "I don't do banking that I can't understand myself."

'Course, that doesn't guarantee that it won't go belly-up, but at least it makes it less likely to fall for dodgy opportunities.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Oct 9th, 2008 at 10:52:18 AM EST
[ Parent ]
Well, Botin, the boss of Santander, summarized his philosophy quite simply in 3 rules:


  1. if you don't fully understand a product, don't buy it
  2. if you wouldn't buy a product for yourself, don't sell it
  3. if you don't know your customers very well, don't lend them any money



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Oct 9th, 2008 at 11:10:22 AM EST
[ Parent ]
Sounds like excellent rules.

Says something of how mad finance has become that he must even say those things.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Oct 9th, 2008 at 11:21:45 AM EST
[ Parent ]
"Banking is about borrowing money from rich people, lending it to suitable counterparties and paying the original rich people as little as possible in return. A suitable counterparty is someone who can prove that he definitely doesn't need the money."

Paraphrased from Terry Pratchett

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Oct 9th, 2008 at 07:20:21 PM EST
[ Parent ]
Well, nothing wrong with leverage as long as you know what you are doing.

Jerome mentioned that wind projects are often only 10 % equity financed.

I guess you could well run a bank by loaning five or ten times your deposits to different projects, as long as you understand the risks inherent in the projects.

But there are some problems, like how are you going to attract capital?

  1. Issue bonds. Not in this market, and not easy or cheap to do that as a small start up bank. We have also seen how vulnerable banks who rely on bond financing have proved to be.

  2. Take deposits from ordinary people. Then you need lots of offices all over the country to get depositors. Or at least some offices in the local area. Further, you have to be better than the mega banks so the depositors will choose your bank. Hard to do for a start up, to say the least. But if you have a few hundred millions maybe you could buy the offices and staff of some failed bank for bargain basement prices?

  3. List on the stock exchange. A bank? In this market?! Nuf' said. Further, then you'll have to deal with stupid short termist profit-crazy institutional shareholders who have no understanding of your business model (if they had, they would be working for you).

  4. Bank loans. Right. Which bank feels like loaning money to another start-up bank, especially now when they won't even dare do overnight lending to each other?

  5. Contrarian venture capitalists or wealthy locals. Yep. I think this might be an idea.

Comments or ideas? :)

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Oct 9th, 2008 at 11:20:44 AM EST
[ Parent ]
Take deposits from ordinary people. Then you need lots of offices all over the country to get depositors. Or at least some offices in the local area. Further, you have to be better than the mega banks so the depositors will choose your bank. Hard to do for a start up, to say the least. But if you have a few hundred millions maybe you could buy the offices and staff of some failed bank for bargain basement prices?

Internet banking.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Thu Oct 9th, 2008 at 11:22:49 AM EST
[ Parent ]
Or hire a bank with depositors to sell your shares to them. With a 90/10 structure, and the interests rates that come with such leverage, that shouldn't be too hard.

Rien n'est gratuit en ce bas monde. Tout s'expie, le bien comme le mal, se paie tot ou tard. Le bien c'est beaucoup plus cher, forcement. Celine
by UnEstranAvecVueSurMer (holopherne ahem gmail) on Thu Oct 9th, 2008 at 11:40:33 AM EST
[ Parent ]
I don't get it. </stupid>

Could you please explain again? :)

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Oct 9th, 2008 at 11:42:53 AM EST
[ Parent ]
I don't know if you're joking... so I will just develop.

Local banks usually seek to attract big depositors by promising higher interest rates for their savings accounts. Those depositors may have significant savings and yet be risk-averse and therefore only put their money on savings accounts. The goal of your company could be to provide those banks with the kind of investments that suit their risk-averse depositors. Afterall, what isn't a government guarantee worth these days? they should be easily convinced.


Rien n'est gratuit en ce bas monde. Tout s'expie, le bien comme le mal, se paie tot ou tard. Le bien c'est beaucoup plus cher, forcement. Celine

by UnEstranAvecVueSurMer (holopherne ahem gmail) on Thu Oct 9th, 2008 at 11:52:51 AM EST
[ Parent ]
Well, I really didn't understand what you meant, no joke, so thanks for your explanation.

So if I got it right my bank would find projects these local "private banking" banks would supply capital in the form of customer deposits for? And I would essentially use the deposits which really belong to the other bank to get (loaned?) capital with which I would then issue loans and keep my bank at a solidity of maybe 10-20 %...

Did I get it right?

By the way, would I pay the other bank a fee for using its depositors, or would the other bank pay me a fee for me finding investment opportunities for its customers?

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Oct 9th, 2008 at 12:16:46 PM EST
[ Parent ]
Hey Starvid,

What I have been describing comes from a friend of mine who used to work at EDF in the securitization department from renewable energy projects. He gave me one of those files to take a look at, but I didn't take too close a look at it from the point of view of the bank.

I'm assuming the bank will have to get some money in the process, as what happens from its point of view is clients "leaving", as their money gets spent right away and therefore do not contribute toward their capital base and can't be invested somewhere else.

I will see this friend this week-end I think, so I will ask him some more questions and i will get back to you. Sorry for the cryptic writing, this is not my area really...

Rien n'est gratuit en ce bas monde. Tout s'expie, le bien comme le mal, se paie tot ou tard. Le bien c'est beaucoup plus cher, forcement. Celine

by UnEstranAvecVueSurMer (holopherne ahem gmail) on Thu Oct 9th, 2008 at 06:33:46 PM EST
[ Parent ]
... if the finance is in illiquid income vehicles?

That is, even if the savings are certificates of deposit, the commercial bank is going to be gaining funding short term and handing money over long term. For a bank with ready access to liquidity, its an income proposition, but for a bank who is nervous about its solvency going ahead and nervous about gaining liquidity when needed ... where is the liquidity?

Obviously if the relevant Government Reserve bank accepted units from one of these private infrastructure development banks as a repo lending asset, with no frown cost, and stopped accepting structured claims to structured claims to structured claims to rapidly dissolving piles of mortgages, or imposed a heavy frown cost on offering those types of assets for repo lending, there could well be a big push by commercial banks that happen to be liquid ... but other than that, I'm wondering.


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 Oct 9th, 2008 at 07:48:02 PM EST
[ Parent ]
Good idea. I should have thought of it myself as my own bank is an internet bank with just a single office, the head office in a Stockholm suburb.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Oct 9th, 2008 at 11:40:43 AM EST
[ Parent ]
Your first point is not correct. Bond funding is the good kind of funding, ie long term, when set up in normal times. What killed banks is that those that relied too much on short term funding (commercial paper, asset backed notes, and the like) had no good source of funding when these dried up - long term funding takes time to put in place and gets very expensive in troubled times.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Oct 9th, 2008 at 11:49:12 AM EST
[ Parent ]
Why did banks like Northern Rock prefer short term paper to long term paper?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Oct 9th, 2008 at 12:20:19 PM EST
[ Parent ]
long term rates are driven by the bond market; short term rates were driven, until the recent collapse, by the Central Bank rates.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Oct 9th, 2008 at 12:48:03 PM EST
[ Parent ]
... have a much longer term to maturity for many of the assets that they are funding when they take the Money Market short-cut. With a substantial portion of their finance maturing in any given quarter, a Finance Company can downsize its balance sheet much more rapidly than any bank, if times get rocky in Money Markets.

Of course, that downsizing of the balance sheets of Finance Companies is a substantial economic destabilizer ... there goes all those car loans for 100%+ the value of the car so that people that are over their head in their current car can get a zero-down-payment loan that buys them out of the loan on their current car.

Without access to those loans, a substantial part of the US new car market shifts to used cars ... where it is taking the place of the substantial part of the used car market that has vanished for lack of credit to allow it to be an effective demand.


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 Oct 9th, 2008 at 07:13:23 PM EST
[ Parent ]
This guy didn't seem to have trouble getting ordinary people to lend him money. As he put it, he got customers all the way from Roskilde so he didn't have cause to complain :-P

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Oct 9th, 2008 at 07:22:56 PM EST
[ Parent ]


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