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I can't agree with that:


DXebt finance as the dominant mode of finance is dead.  The future has to be built around much greater equity, bond, and revenue sharing models linked much more directly to productive enterprises where risks and rewards can be measured in a reasonably transparent way.  

We are in a crisis to a arge extent because no riks analysis was performed on underlying assets, and one of the reasons this happened is that those that structured the financial instruments did not hold them - and did not really care if they were sound: they only cared if they were marketable, which is not the same thing.

Bank debt, held for the long term, based on thorough analysis of the borrower by the bank, which keeps the asset on its books, is a lot safer. Less profitable, boring, but certainly safer.

Peer-to-peer finance does not work because nobody can do the requisite risk analysis.

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

by Jerome a Paris (etg@eurotrib.com) on Mon Mar 23rd, 2009 at 05:46:33 PM EST
[ Parent ]
Jerome a Paris:
eer-to-peer finance does not work because nobody can do the requisite risk analysis.

Peer to Peer finance strictly refers to direct investment in a productive asset by an investor without a bank as middleman, and if it works with a bank as middleman it is also capable of working directly. But clearly whether the business model is or is not intermediated is not your point.

So lets forget "Peer to Peer". It's the concept of what I refer to as unitisation which is the issue here, I think.

Are you thinking of financing development of productive assets?

Or are you thinking of long term financing of developed productive assets?

Or are you thinking of a hybrid where long term finance is raised to finance development and stays in place?

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

by ChrisCook (cojockathotmaildotcom) on Mon Mar 23rd, 2009 at 06:52:52 PM EST
[ Parent ]
is that you can't break down an investment into a thousand small bits that can be financed separately. You have to have the whole package in one go. The coordination role of putting that package in place is what banks do.

Whether they keep the risk to themselves, share it with a few similar banks on the syndication market (ie a bank loan), or sell it widely via a securitisation (ie a captial market instrument) is largely irrelevant.

What matters is that critical role of putting all the money on the table in one go at one single time. That's the value of banks. Nothing else.

Your unitisation is a fine way to share out financial assets, but it cannot help to create them. That's the job of bankers. One which will never disappear.

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

by Jerome a Paris (etg@eurotrib.com) on Tue Mar 24th, 2009 at 12:57:49 PM EST
[ Parent ]
I have always said that banking as a service is necessary and creates value. It is credit intermediation that is IMHO not only sub-optimal but also redundant.

Jerome a Paris:

What matters is that critical role of putting all the money on the table in one go at one single time. That's the value of banks. Nothing else.

I agree: but money is a means to an end.

It's not the money churning out electricity and getting it to Joe Sixpack, it's the turbine and infrastructure - and everything which went into it - for which fiat credit = money was created and exchanged over the period of construction and implementation.

If the land is leased for a share of production, then no fiat money is needed - ever - for land purchase or use.

If the turbine is leased for a share of production, then you don't need money to buy the turbine either, and maybe the investors in the turbine-maker might be more interested (the way things are going) in streams of energy rather than streams of fiat money?

ie the turbime maker evolves to a service provider as well.

If - as I believe is possible - we are able to "monetise" energy then your valuable role as an investment banker will still remain the same, except that you will not be looking at projects in terms of the "cost of money" in quite the same way, since the input cost of renewable energy and energy efficiency savings is zero.

You will instead be looking at viability directly in terms of energy invested against energy produced; the likely exchange value of the production over time; and the risks that the project will be concluded on time within its budget, and so on.

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

by ChrisCook (cojockathotmaildotcom) on Tue Mar 24th, 2009 at 01:46:01 PM EST
[ Parent ]
If banks can do risk analysis, so can non-banks.

The difference isn't between analysis and no analysis, it's between being on the hook for the risk directly, which is likely to concentrate the mind somewhat, and attempting to palm it off on to some third party - either by direct insurance, or by spreading out that the risk so thinly that it stops appearing risky.

The irony is that to some extent this is what's been happening already. Wall St has almost been acting in a peer to peer kind of a way, but with the - valid - assumption that risk can always be shared with the government, making it almost risk free.

But there's no certain reason why peer to peer has to be this irresponsible - any more than there's a certain reason why banking can only be done in a boring and safe way.

Obviously it can be done in other ways too, as everyone has discovered.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Mar 23rd, 2009 at 06:56:39 PM EST
[ Parent ]
The banks' primary role is first to create the asset, and then only to seel it or keep it.

Of course, if the model is that they don't keep it (and note that unitisation falls into that category), then they may be incentivised to structure worse assets.

And contrary to what you think, doing proper risk analysis is actually pretty damn expensive and difficult. Bankers' pay (as highly qualified professionals) is justified, to that extent.


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

by Jerome a Paris (etg@eurotrib.com) on Tue Mar 24th, 2009 at 01:00:48 PM EST
[ Parent ]
Jerome a Paris:
Of course, if the model is that they don't keep it (and note that unitisation falls into that category), then they may be incentivised to structure worse assets.

In the model I advocate, there is in fact no transaction or "sale" of an asset. The asset is created in custody, and stays in custody.

Stakeholders will participate only on the basis that any agreed profit margin is invested. It's then up to them what they do with their entitlement to Units once the development is complete.

But I suggest that they will see that their interests lie in doing a good job - whether or not they are capable of doing a good job is another issue.

Jerome a Paris:

Bankers' pay (as highly qualified professionals) is justified, to that extent.

I have no difficulty with that, albeit relative valuations are not easy.

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

by ChrisCook (cojockathotmaildotcom) on Tue Mar 24th, 2009 at 01:58:32 PM EST
[ Parent ]
You're the banker, so you will know a lot more about this, but it appears to the layman that part of the point of developing all these derivative products is partly to spread the risk, but also to render it so complex and opaque that risk analysis becomes virtually impossible.  Bank stopped analysing the actual assets and traded on each others reputations (and credit ratings) instead, in much the same way as people buy brands because they have a good reputation (carefully crafted by the marketing people) but which may actually consist of very crappy product.

It is this dislocation between high finance and the actual productive economy which needs to be addressed because otherwise good businesses fail for lack of finance and bad business which are well marketed to financiers get all the capital.

Risk analysis is a skilled and expensive business and requires an understanding of the real world - if banks have a value, it is that they are good at allocating capital to worthwhile projects.  When they stop doing this they become no better than casino operators.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Mar 23rd, 2009 at 07:54:27 PM EST
[ Parent ]
the point of developing all these derivative products is partly to spread the risk, but also to render it so complex and opaque that risk analysis becomes virtually impossible.

So on the one hand blame would be placed with people who designed the system this way. on the other it could be placed on people who misused the system in this way.

Surely this would be visible and provable by looking at either the amount of risk analysis staff, or the ammount of risk analysis paperwork produced in the derivative departments.  If the apropriate risk analysis wasn't built into the derivative departments as they started then it would show intent.

Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Mon Mar 23rd, 2009 at 08:11:19 PM EST
[ Parent ]
Jerome a Paris:
We are in a crisis to a arge extent because no riks analysis was performed on underlying assets, and one of the reasons this happened is that those that structured the financial instruments did not hold them - and did not really care if they were sound: they only cared if they were marketable, which is not the same thing.

Well Jerome is the banker here - if not a derivatives trader - and so I am taking his word for it - though to be honest, this is exactly what I would expect to have happened.  As I noted above, risk analysis if expensive and skilled, and if a bank wants to cut costs...

Also there is a more general trend in all businesses - the emergent dominance of the marketing department over production/engineering and even R&D.  Business now - and the larger and more complex it is - the more so - is all about managing perceptions - consumer, regulator, investors, bankers - and the actual reality of what is happening on the ground in terms of product quality is almost an irrelevance.  I would be surprised if banking were any different - and particularly the more exotic hedge fund and derivatives end of the business.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Mar 24th, 2009 at 08:14:18 AM EST
[ Parent ]

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