Posted by: Financial Sith Lord | December 9, 2009

Experience: The down-fall of banking bureaucracies

In 2001, I was heavily into structured finance. There was one deal in particular, that has a mark in my mind. I shall refrain from revealing my client’s identities as I’m still under non-disclosure agreement. The deal was about a CEO of an Investment Banking outfit in the USA trying to raise their equity-to-portfolio ratio, thus requiring them to deposit or have cash / guarantees as collateral. The CEO communicated directly with my client in London, and was directed to go to me instead.

Before I go on, let me tell you a bit about my client in London. He is a successful business owner and an Executive Council member of an international religious venture capital-like movement. The movement has approximately 27 million members world-wide and what they do is very interesting. Say a person has got no capital, experience or knowledge suddenly decides to venture into the diamond business, and approaches the movement for financial assistance. The movement then sends this person for professional training in trading diamonds, and upon completion, the Movement gives him the required capital as well as the start-up stock!!. The catch is that, that person is obligated for life to do these 2 things:-

1) 20% of the profits derived from the diamond business is to be channeled to the movement every month until the day he dies,
2) If there’s anyone that came to him like how he came to the movement, he was to assist that person like how he was assisted by the movement.

If any of these terms are violated, the movement would classify that person as a fraud and liar, thus punishable under the religious order.. by way of death through execution.

The movement has 27 million members and approximately 800,000 corporations registered under them, and these corporations are contributing approximately US$ 5 billion every month (20% of their profits). With these kind of returns, the movement invests in real-estates, acquiring shares in international PLCs (taking passive roles!), setting up schools and educational institutions world-wide etc.

Now, back to the story. The CEO is a well-known banker, and before he designated the CEO post, he was a part owner and CEO of an international investment bank outfit, which was subsidiary of a large German-based banking corporation. When my London client instructed him to see me, I was in Singapore, trying to strike up a deal with that particular german-based investment bank’s Singapore branch.

On the meeting day, I had an overlapping meeting times, the earlier being a lunch appointment with the German-based investment bank’s Branch Managing Director, who happened to be an American gentlemen. The other appointment was with this CEO who had flown all the way from New York to Singapore just to meet me. Throughout my 1 hour lunch meeting with the Singapore Branch Managing Director, he kept belittling my propositions and had a funny look when I proposed something smart. The lunch meeting was at Fullerton Hotel in Singapore. While talking to him, I saw the Hotel’s staff carrying a sign bearing my name, and there was a Caucasian elderly gentlemen trailing him closely. Seeing my name, I quickly raised my hand and call out to the Hotel staff. They both approached me and immediately the Caucasian gentlemen introduced himself to me, saying that he had an appointment to meet me (my next scheduled appointment). I told him to proceed to the Hotel’s lounge as I was finishing with this appointment. He agreed and proceeded there. As I returned to the table with the Singapore Branch Managing Director, he had a jaw-dropped face. I ask him why, and told me that gentlemen was his former No. 1 boss!!.. I just smiled and ended our meeting. From then on, the Singapore Branch Managing Director was very accommodating and promised that he’ll fix another appointment the soonest possible.. (What a jerk!!. I declined any further appointments with him and took my business else where.)

The CEO told me of his predicament and mentioned that he was referred to me by my  client in London. I agreed to assist him and this is what we did:-

1) The movement agreed to charge a portfolio of properties (that was generating 8-9% yield annually) to a friendly bank for a Guaranteeing facility.
2) The New York Investment Bank takes the Guarantee, discounted it with an associate commercial bank in London, and placed the proceeds into their depository, which resulted in the raising of their equity-portfolio ratio to their desired rate.
3) In return, the New York Investment Bank issued debentures with a rate of 13% p.a. with a 10-year maturity date.
4) With their raised equity-portfolio ratio, the New York based Investment Bank secured businesses that generated approximately 38 – 45% returns of their portfolio.

Both parties enjoyed substantial returns of their investments, where the movement gained 4% in their annual yield, whilst the New York based Investment Bank got a lot more. From structuring that deal, I received US$ 2 million, peanuts in comparison to their figures..

The moral of the story: In most cases, structured finance involves a greater deal of human judgement and trust, and this could not be achieved if it was handled by another policy guided banking institution. Red-tapes, policies and procedures are meant as guidelines in executing business. When an officer or a Manager strictly follows such guidelines, the bank’s objectives of implementing their tag lines are often discounted. Banks nowadays are too dependent on track-records and financial backgrounds. In today’s world, no corporation has a clean track record. No person has never made any faults. If the banks continues this legacy, I will not be surprised that these corporations may seek assistance from movements as I mentioned earlier. When that happens, cooperative movements and institutions would more effectively serve the world with their financial needs in comparison to banks, and banks would be out of business.. What would happen then?

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