How to keep on financing wind farms when banks have no money left. | 31 comments (31 topical, editorial, 0 hidden)

Banks do have a role

We still take the risk on the transaction, and do put our balance sheet at risk in it, just in an indirect way
another banks was required to provide the funds, just on different terms
the place to put the longer chain of funding/guarantees/risk still needs to be a bank, for it to be credible - you need to have "skin in the game"

In fact, one of the reasons why I dont think Chris Cook's model will work is that it has been proven by reality not to work: Mortgage-Backed Securities, repackaged and resliced and resold to other investors, with the initial dealers not taking any of the risk is exactly what his model is about. And the result is what you would expect when the people that cook up the paper and those that hold it are so separated.

You need banks to assess risk - and to put their good name on the risk by holding it themselves.

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

by Jerome a Paris (etg@eurotrib.com) on Thu Dec 25th, 2008 at 06:43:16 PM EST
[ Parent ]

Re: Nope (none / 1)

Jerome a Paris:

In fact, one of the reasons why I dont think Chris Cook's model will work is that it has been proven by reality not to work: Mortgage-Backed Securities, repackaged and resliced and resold to other investors, with the initial dealers not taking any of the risk is exactly what his model is about. And the result is what you would expect when the people that cook up the paper and those that hold it are so separated.
You need banks to assess risk - and to put their good name on the risk by holding it themselves.

Eh? I'm absolutely gob-smacked. Where on earth do you get that from?

I see the future role of banks as service providers within partnership frameworks, and one of the key elements of this model is that at least part of their remuneration will be related to the outcome of the work that they do. This does not involve putting capital at risk (other than reputation) but it does involve putting future income at risk.

There are two types of work I see banks in.

(a) "Peer to peer" credit - managing the bilateral creation of "trade" credit necessary for the creation of productive assets, including the bringing together of risk-friendly investors with risky development;

b) "Peer to Peer investment" - post-development, refinancing through "Peer to Peer" investment by risk averse investors in the "unitised" production streams - essentially monetisation through the creation of redeemable units.

When have I ever said I don't see banks as having any stake in the outcome of what I have always described as a partnership-based model?

I have had excellent feedback in respect of this recent lecture in Ireland

Unitisation: solving the Credit crunch - Quicktime file

Please take the time to view it, or if not, then take ten minutes to look the slides.

here

Then explain to me firstly, what is impracticable about what I am suggesting, and secondly, in what respect this service provider model bears any resemblance whatever to the structural faults of the MBS "originate and distribute" transactional model to which you refer.

How many times have I said that I think that intermediaries and the related "for profit" transactions have no future in a directly connected "peer to peer" economy?

And when have you ever addressed that point, whether to agree or disagree with it?

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

by ChrisCook (cojockathotmaildotcom) on Thu Dec 25th, 2008 at 07:54:51 PM EST
[ Parent ]

I fail to see (none / 0)

how this

(a) "Peer to peer" credit - managing the bilateral creation of "trade" credit necessary for the creation of productive assets, including the bringing together of risk-friendly investors with risky development;

does not describe exactly what was done by investment banks when they put together groups of mortgages (risky development) with bond buyers (risk-friendly investors) - by setting up various tranches with different risk profiles, they allowed buyers to take exactly the risk they cared to; by making the market in MBS highly liquid, more house buyers were able to find funding for their projects.

It's conceptually substantially the same thing.

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

by Jerome a Paris (etg@eurotrib.com) on Fri Dec 26th, 2008 at 05:28:31 AM EST
[ Parent ]

Re: I fail to see (none / 0)

It is a question of bringing together investors in the project with investment in the project.

I am proposing a new form of investment, consisting of units redeemable in the production of the turbine as and when built. The proposition is simply to sell for value now Units which are redeemable in (say) Kilo Watt Hours. The proceeds pay for the development and construction of the turbine.

Part (proportional "Equity Shares") of the unsold stream or "Pool" of production would go to continuing "stakeholders", probably a land owner (but this could be the Community); part to an Operator; and the balance should IMHO accrue to the Community.

Once a turbine is built and operating, the risk is lower than when it is yet to be built, and investment in it is attractive to an entirely different constituency of risk averse investors to whom risk friendly development investors may "exit".

The art (your art) is to work out what price these units are "worth" pre-development, and this price reflects the development risk with which you are familiar.

The economic calculation in an economy where energy has been monetised in the way I advocate is entirely different to one in a deficit-based economy. Any energy project which is expected to create or save more energy than has been used in its construction and/or operation will be viable.

I believe that the way in which we can achieve the massive investment we need is initially to re-finance the existing secured debt through "unitisation". This will then "free up" the development capital needed to build new renewables and finance energy savings (the cheapest energy of all).

The key to successful development IMHO is a legal and financial structure whereby the interests of the stakeholders are aligned so everyone has the same interests - including the developer and financier, of course.

This is where partnerships come in, and I believe that such structures minimise development risk. They don't remove it altogether, and I have already come across a couple of transactions which did not stack up using any enterprise model. eg shipping biomass into an urban location for power generation, where the consultant recommended an LLP model over an ESCO but concluded that nothing worked at current prices.

And you still haven't said why credit intermediaries are necessary... :-)

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

by ChrisCook (cojockathotmaildotcom) on Fri Dec 26th, 2008 at 06:20:40 AM EST
[ Parent ]

Credit intermediaries are the people that do (none / 0)

the 'structuring' and 'risk minimization' and manage the 'investment' and 'exit' by investors.

Sure, this can be done by advisors that don't have a balance sheet behind them, but their credibility hinges on attracting players with the money and having a track record of successful structures. Putting up your own money usually helps in that respect; when you start doing this consistently enough, hey, presto, you become a "bank."

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

by Jerome a Paris (etg@eurotrib.com) on Fri Dec 26th, 2008 at 06:31:17 AM EST
[ Parent ]

Re: Credit intermediaries are the people that do (none / 0)

Jerome a Paris:

Putting up your own money usually helps in that respect;

Putting up your own money makes you an investor, alonsgside other investors, and not an intermediary.

That's fine.

It's when you start creating credit on the basis of your capital that the problem starts.

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

by ChrisCook (cojockathotmaildotcom) on Fri Dec 26th, 2008 at 07:45:03 AM EST
[ Parent ]

Re: Credit intermediaries are the people that do (none / 0)

Just to be clear, I have no objection to the form of banking/"credit intermediation" that you describe and aim to practise, since I see that as "service provision".

The credit intermediation I see as unsustainable mathematically - and I am not commenting on any moral issues - is the Basel I/II style creation of interest-bearing credit.

I am talking about banking reinventing itself as service provision, and I do not see that as inconsistent with your description of your profession of banking.

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

by ChrisCook (cojockathotmaildotcom) on Fri Dec 26th, 2008 at 07:56:40 AM EST
[ Parent ]

Re: Credit intermediaries are the people that do (none / 0)

Well, to the outside observer, you often seem to be in violent agreement.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Fri Dec 26th, 2008 at 09:03:05 AM EST
[ Parent ]

Re: Nope (none / 0)

You told us a story about doing battle to secure unorthodox financing for a project-doing battle with your own bank. I applauded your victory, and suggested a possible reason why there might have been so much resistance from your own institution--a reason I did not invent. There is a reaction that is, at the moment, rather common in the world of banking-- a fear of the consequences of a major loss of credibility as a result of foolish and often corrupt behavior. Across the world, suggestions are being made as to how to reduce reliance on and restrain the behavior of banks.
My comment was in the nature of a question, and I would still like an answer. Why do you think they resisted your apparently very reasonable plan?

Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Fri Dec 26th, 2008 at 04:37:18 AM EST
[ Parent ]

Sorry (none / 1)

did not mean not to answer that. But this is not it. There is little credibility loss involved in supporting a sound deal in a"good-looking" sector like renewables. The problem really is today that the banks are completely out of funds and are allocating whatever spare cash they can find very sparingly.

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

by Jerome a Paris (etg@eurotrib.com) on Fri Dec 26th, 2008 at 05:23:26 AM EST
[ Parent ]

How to keep on financing wind farms when banks have no money left. | 31 comments (31 topical, 0 editorial, 0 hidden)

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