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The Forum > Article Comments > Rise of the vulture investing class > Comments

Rise of the vulture investing class : Comments

By Nicholas Cunningham, published 6/2/2015

During the last oil crash in the 1980ís, around 700 banks failed after oil prices crashed.

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I don't see why the pejorative "vulture" is appropriate. They're not tearing the flesh of dead carrion. They're investing money.

Investing in producing the oil that drives our lives is both risky and expensive. Of course the investors want to be able to get their money back with interest. Otherwise they wouldn't do it. There's nothing wrong with that, and no reason why they should be abused for it. And of course they should be able to participate in the distribution of the assets of a bankrupt debtor. That is as it should be.

The only alternative is to devote scarce capital to less urgent and important human wants as decided by the seven billion people who use money, because it their evaluations that give rise to the prices make borrowers bankrupt or not.

The idea that there's something deeply immoral about lending money at interest is a throwback to the dark ages of economic thought and the church's prohibition of usury. It was the attempt to discover any rational criterion for that prohibition, which eventually led, after many centuries,
a) to the conclusion that no rational criterion for it can be discovered; and
b) to modern economics itself, which attempts to understand the facts and logic of economic phenomena, in contrast to the mediaeval approach, which was to understand economic phenomena in moral terms, often abusive, as in this article.
Posted by Jardine K. Jardine, Friday, 6 February 2015 8:16:51 AM
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A staggeringly under-informed article. One has to wonder at the writer's motives; the only one I can think of is a narcissistic desire to see ones name in print.

The writer assumes that the folk who run these businesses are universally moronically stupid:

>>Hedge funds and private equity are stepping into the fray, providing credit to distressed oil companies at exorbitant rates. Shut out of traditional debt markets, oil companies drowning in debt have few other options. Particularly for smaller drillers, these emergency loans provide a lifeline to pay off other debt.<<

Another way of describing this activity is:

"Hedge funds and private equity are stepping into the fray, providing higher-risk credit to distressed oil companies, providing a lifeline they would not otherwise have. Shut out of the debt markets that only give out "sure thing" loans, oil companies have had to reassess their debt portfolio in the light of their increased exposure. Particularly for smaller drillers, these emergency loans provide a lifeline to pay off other debt, which gives them time to financially rebalance their businesses, and offers a chance of survival."

All along the chain of activity, there is this thing called "choice". Second- or third-tier financiers have to determine whether their gamble - on a distressed business - has a chance of making a return for them. Including the opportunity, if the financing fails, of later selling distressed assets into a buyer's market.

The business owner has to determine whether the increased interest load will cripple their business before it has a chance to get back on its feet. Including, of course, the option to sell distressed assets into a buyer's market, and liquidate the business immediately.

These are all business people. To classify them as either vultures or terminally stupid is to misunderstand business at its most fundamental level.
Posted by Pericles, Friday, 6 February 2015 8:56:19 AM
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JKJ:

All the past is not yet buried though is it.

http://www.islamic-banking.com/prohibition_of_interest.aspx
Posted by diver dan, Friday, 6 February 2015 9:23:58 AM
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An interesting [no pun intended] example, diver dan.

If you had read further, you would have found:

"While Islam employs various practices that do not involve charging or paying interest, the Islamic financial system promotes the concept of participation in a transaction backed by real assets, utilising the funds at risk on a profit-and- loss-sharing basis... The concept of profit-and-loss sharing in an enterprise, as a basis of financial transactions is a progressive one as it distinguishes good performance from the bad and the mediocre. This concept therefore encourages better resource management."

When you work through the details, with the sole exception of the use of interest payments this process has all the hallmarks of "vulture investing" that the writer of the article excoriates.

The lender puts money into the venture (the oil company) in exchange for a share in any profits that might accrue. The actual share required by the investor being, of course, the analogue of interest payments. The lender here has claim to the underlying assets in the same way that the "vulture investor" has, and has an equal concern that the business is successful - a bankrupt business can no longer meet interest payments, after all.

It is clear that both systems have the concept of "better resource management" at heart. And each has its place in competent financial management of a business.

However, I think you can reasonable deduce that your troubled oil company is likely to have a greater inclination to get an investment based on interest payments, where the business is able to continue to make the key business decisions, than to take on what is in effect an equity partner, with all the management overhead and potential interference that entails.
Posted by Pericles, Friday, 6 February 2015 10:26:21 AM
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The true vultures here are the loan sharks, tying to carve off their pound of flesh, from drillers who have exhausted their credit worthiness with the traditional banking fraternity.

Yes drilling for oil is expensive, and a sometimes risky business, albeit, many a fortune has been made from new discoveries.

We for our part may have hydrocarbon resources to our "immediate north" to rival or perhaps eclipse the entire known reserves of the M.E!?

At least that's what the sheer number of mystery oil slicks are telling us; as well as the fact, that such oil as they may prove, is at comparatively shallow and easily recovered depth?

At least that seems to be the traditional experience?

It simply beggars belief, we haven't investigated these mystery oil slicks to see where they lead and or the possible size of the reserve that may be there!?

If you never look you'll never know!

And making endless excuses for just not looking is the most illogical obfuscation, that only serves the big players' ultimate interests?

Of course we should embrace the alternatives, but particularly if they quite massively lower our energy/transport costs!

i.e., quickly refuelable CNG> ceramic fuel cell> electric drive?

And who in their right mind would countenance expensive overhead wires, when this vastly less costly option beckons?

Copper miners/aluminum smelters/shareholding pollies perhaps?

And as a CNG> ceramic fuel cell combination for less than a quarter of what we currently shell out for most of our current transport options! Moreover, the exhaust product of the combination is mostly pristine water vapor!

And given the tyranny of distance here, one would have thought our erstwhile leaders would have been in the forefront, enabling these pragmatic changes; rather than in the vanguard, seemingly digging their heels in against them?

Investing vultures may well be a real worry, but pale into insignificance when measured against the investing hyena class who not only want to replace them at the carcass of a former economic entity, but allow nothing to stand in their way!?
Rhrosty.
Posted by Rhrosty, Friday, 6 February 2015 12:20:22 PM
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Diver dan
"All the past is not yet buried though is it."

Certainly it isn't, however the prohibition of interest in Islam properly belongs under the heading of "Religion", not "Economics". It is anti-economics.

That website does give an accurate portrayal of the rationale of the prohibition of interest, both in Islam and mediaeval Christianity:
"The prohibition on paying or receiving fixed interest is based on the Islamic tenet that money is only a medium of exchange, a way of defining the value of a thing; it has no value in itself, and therefore should not be allowed to give rise to more money, via fixed interest payments, simply by being put in a bank or lent to someone else."

The mistake is that the rationale given fails to take account of *time*. Human action takes place in time; human life is limited in time. If we wait long enough, all our wants will be unsatisfiable. Time affects our ability to satisfy our wants which is the purpose of all action. This justly affects valuation over time. Interest is the value that man attaches to having to wait through time, and risk the vicissitudes of time, in order to satisfy a given want that could be solved a) sooner, or b) later. Therefore interest is not unjust.

Interest is not charged because money has value "in itself", or because money is "simply lent to someone else". That's not the reason for interest. If it was re-paid in the same instant - i.e. "simply lent" without any time factor - no interest would be payable.

But no-one would do that because it wouldn't make sense. The purpose is to deal with an uncertain future, i.e. with life-vitiating time.

And that is why even Islamic banking countenances interest in one form or another. We can no more make the reason for interest go away, than we can make time or human action go away. The protestations of the pious are merely erroneous. Mohammed is not someone whose intellectual standard I would care to emulate.
Posted by Jardine K. Jardine, Friday, 6 February 2015 4:27:13 PM
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