Friday, 11 June 2010

It ain’t rocket science

The government is to appoint a Black Hole Tsar to find out what happened to all of those missing billions. This comes at the end of a week when it was revealed that the interest payment alone on Britain’s debt mountain will top 70BN within five years.

For a while now people have been asking whether Black Holes defy the laws of physics. Most of us know that market activity is supposed to be a zero sum gain. We also know that matter can neither be created nor destroyed. And if that is the case, where did all that lovely lolly go?

There is one obvious answer: speculative investments made in depreciating assets such as sub-prime housing equals money lost (pretty well) forever. But what of the commissions, dividends etc paid out to MDs, VPs, CEOs, shareholders resulting from those deals before they went sour? That is clearly money that is not lost forever. Or is it? It is all a question of attitude, of principle, it seems.

There is a well-known phenomenon that scientists label “Mind over Matter”. What happens is that large amounts of wonga mysteriously travel from one part of the globe to a region called the off-shore bank account. This loot then becomes “ring-fenced” – that is to say, it cannot be touched.

It appears that in recent years a number of speculators / managers etc have “ring-fenced” the money they’ve made on somewhat questionable deals in such off-shore vehicles. The deals then go bad and in certain cases end up destroying or almost destroying the banks or other investment vehicles that originally serviced them

What happens next is one of the most fascinating phenomena known to man. We have all heard the phrase “nature abhors a vacuum.” Well, in this case “the taxpayer abhors a vacuum.” Quite literally, huge wads of cash belonging to the taxpayer flood in to fill the vacuum, in a manoeuvre known by the government of the day as “too big to fail.”

The clever part is that even after the taxpayer has filled the vacuum, the originator of the deal gets to keep his or her “ring-fenced” money. Here are a couple of examples:

- The head of a large American bank that tanked who got to keep around 100 million USD

- The boss of a multinational firm who shifted a billion to the bank account of a relative. The bank that serviced his company subsequently had to be bailed out. His cash was last seen hanging out in Monte Carlo

There are many other such examples where yields / dividends / bonuses paid out to speculators / deal originators have stayed firmly in their bank accounts long after the deals turned sour. In certain "investment" banks it is known to happen on a yearly basis, in a ritual known as "bonus time".

Finally, there is only one known scientific method that stands a hope in hell of redressing this unholy balance. It is called claw back. But it is as yet untried and untested, so no one knows whether it could actually work in practice. And what does the future hold? Will any of the world's governments give this claw back a try? Perhaps that should be the role – and the goal – of a Black Hole Tsar.