Just line them up against the wall (Redux)

Today's rant brought to you courtesy Phibro/Citibank. But first, an analogy

Lets just say, for arguments sake, that your parents are loaded. I mean really, really, loaded, to the point that it doesnt even mean anything to them. You have been indulged pretty thoroughly, and at the point of this telling, have decided that the Thing To Do is to wander over to Vegas and play Blackjack. Your parents - remember - are quite indulgent, and your mom sez. "Sure son, but since you are using our money, we just want 70% of your winnings. I mean, we'll cover your losses and all (since we are really, really loaded), but we want 70% of your winnings". Which is great, since all you want to do is play Blackjack.
Which you do. High stakes blackjack, and you put around $1M of your own (well, your mom's) money on the table. Over and over and over. (And, for the purposes of this story, it doesnt really matter if you are counting cards or not...)
You end up on a lucky streak, and make a bunch-a money - say, around $11 million, of which you keep $3M, and give your mom the other $8M ($7M profit, $1M that you borrowed).

Not being too bright, you think to yourself "Hey, this is brilliant! The only downside is that I have to give my parents 70%. Maybe I can go to somebody else, who'll let me keep more of my profits!".

You see where this is going right? These aren't "profits". Your cost of capital is low, waaay too low. The thing is, you (and your mom!) are not accounting for your risk exposure. If you went to a bank, and wanted to borrow $1M to play blackjack, about the only way you could get it from them is by pledging $1M in collateral. Your parents aren't asking you for collateral, they aren't making you take a share of the losses, the deal they cut with you is ridculously simplistic, and is not at all representative of how the world works.

Or is it?

Citibank just sold Phibro to Occidental Petroleum for the net asset value of the business ($250M). Let me repeat that. The Net Asset Value Of The Business. In case you didn't get it, they sold it for - and only for the current value of its trading positions. And yes, it does seem to have include in its assets the Fabulous Mind Of Andrew Hall The $100 Million Man, which is valued at $0 (as far as I can tell).
This is the same Phibro where Andrew Hall got to keep 30% of all the profits ($100M this year).

Whats the connection? Well, when a business is sold, you would typically value the business at some multiple of its earnings. That multiple would totally depend on the type of business, its financial position, etc (in effect, you are selling it for something in the range of the Net Present Value of All Future Earnings).
In this case, what Occidental seems to have said is "Yeah Yeah. You make a lot of money. But the only reason you make money is because Citibank is playing the part of the Stupid/Loaded parent. We are (emphatically) not that. Given the risks involved in what you are doing, we can't (and won't!) pay you more than the current net asset value of Phibro".

Which is exactly the same as saying "Yup. Phibro and its ilk are basically playing Blackjack. Citibank - and by extension, taxpayers - are picking up the losses, Phibro is getting to keep the profits".

Why, oh *why* can't we get some regulatory reform with some spine in it?

Comments

Anonymous said…
To engineer a significant increase in accuntability, it will be necessary to a) significantly increase accountants, and b) significantly increase their motivation to join the exposers rather than the obfuscators.

What player or group of players are motivated to do this? Potential gains are through betting against the dirty companies, or through winning political points by legally attacking them. US attorneys play the latter game...show me a business model for legally playing the former game, and I'll show you the way out of the crisis!
Anonymous said…
Heh, and do feel free to edit that post to correct the spelling of "accountability", it was not intentional.

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