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16 May 2018

Vodka for breakfast and a yellow Ferrari



The granting of credit, or the acquisition of security, can be a bit of a minefield in a business where transactions take place which may not be settled for many months or years into the future, against a constantly moving valuation which gives rise to potential margin requirements. Theoretically - and as it’s reported to shareholders - the decision follows a clear, unambiguous process of analysis, undertaken by those well removed from the trading decisions. In practice, in my experience, things are far more nuanced than that; large corporations, whose financial stability is unquestioned, often actually produce limited returns for the trader, whereas those riskier entities at the edges of respectability can be big profit-earners. But they need careful oversight.

I well remember, shortly after the implosion of the Soviet Union, that a metal producer in far-away Siberia came into our focus. It was clear that they had no money and that they eked out a precarious living as a toll smelter for a couple of western traders. It was equally clear, from conversations with the Russian who brought them to us in the first place, that the volume of trade - should we be able to accommodate it - would be huge. It was a tempting target. So we gave them a modest facility, well below the level that needed any formal board approval, and sat back. Sure enough, the trading business was substantial. They made some money, lost some money and paid their margins with just about tolerable delay. (Incidentally, they also decided that they wanted to sell options - it looked like easy money; why do they always sell options? I think that’s one of the most unanswerable questions of my career….). 

But they decided this LME stuff was a great game, and wanted more; so, frankly, did we. So we worked out that if they would pledge us a discrete tonnage of finished metal at their plant, we could substantially increase their credit facility. One of the General Managers came to London, and we met him with a fairly simple document that guaranteed us ownership of a tonnage of material, which we could call off from the smelter at any time. So there we sat, over breakfast at the Park Lane Hilton, me, our FD, our Russian intermediary and his British sidekick, and the Siberian. The only one who spoke both English and Russian was the intermediary, and I have to confess I kind of switched off as a long debate went on. Anyway, finally, with a few words crossed out and replaced, the paper met with everybody’s approval, and it was signed. We may have been in Park Lane, but there was a strong Russian influence; such a signing had to be celebrated. 

So, breakfast time or not, the vodka was ordered, to toast the next stage in our relationship. The FD was pretty much a non-drinker, by the way; the only other time I saw him with alcohol in his hand was on  very, very, very long evening in Taipei, at a different time; but that’s another story. 

Anyway, did that document do us any good? Not really; the next morning, the FD called in me and one of the credit officers and told us to find a Russian lawyer in a London partnership and show him our document. We did that, and our man took one look at the paper. “This is useless,” he said. “This kind of commitment from a Russian Joint Stock Company needs at least a full Board approval, and probably a shareholders’ meeting as well. You’ll never be able to enforce this.” That was a bit disappointing; we kept the paper in the file, but slowly and carefully made sure that we kept hold of enough cash to cover the exposures. It was sometimes touch and go, but in the end it was a good enough business for a couple of years. You could probably hear echoes of Dr Pangloss, I suppose. 

The arbitrary decisions, though, do not always go in the favour of the customer and the trader who wants the business (whatever his - or her - credit officers may think). At a different time, I was working at an extremely prestigious merchant bank. The credit committee was something of a moveable feast - some weeks you would be sitting at the table in the middle of the room, participating in decisions, and other weeks you would be a supplicant, around the periphery of the room, making the case for your own business. 

On one occasion, one of the bankers was arguing to increase our loan commitments to a Manchester (I think) property developer and manager; we already had a good, satisfactory relationship with them, so it should really have been a simple decision. I think we all thought that, so we were all very surprised when, after the banker had made his case, the Chairman of the committee - main board director, very respectable City figure - said: “No, I don’t think we should do this.” You should know that this particular bank had a small parking area in front of the building, reserved for very important people and the occasional visitor. “Last week,” the Chairman went on, “this man came down to visit, and parked a yellow Ferrari outside. We can’t have that; he’s clearly not the right sort of person for a loan of this size.” If he had had a red, or a blue, or a black Ferrari, would he have got his loan? I don’t know, but the yellow one was clearly too far beyond the pale. Were there other considerations? Probably, but it’s the yellow Ferrari that sticks in my mind.      

The moral of these stories? However much we may claim the credit process is scientific and strictly objective, in reality - at least a fair amount of the time - subjective considerations come into the equation; and in the end, managing the balance between the objective and the subjective is probably the most useful skill in the credit area. 

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