On the Anglo Saxon financing of business

Our Willy Hutton keeps telling us that we\’re screwed because the banks just won\’t lend money to business for investment in long term projects.

And as I keep trying to point out that\’s because we have a different system of financing investment. The markets.

But, we are told, markets only seem to be willing to finance short term profit seeking adventures. They\’ll not back anyone trying to do something that will take years to come through.

Oh yeah?

The Falklands explorer\’s shareholders have had a nail-biting year, after Desire claimed to have made an oil \”discovery\” at its Rachel North well earlier this month. Less than two weeks later, the company admitted the well held only water, causing its shares to crash 50pc in one day.

On Wednesday, Desire again found no evidence of oil in the Jacinta well, which analysts had claimed had just a one in 20 chance of success. It will now drill down further to a depth of 1,670 metres in the hope of finding oil deeper under the sea.

Desire has been funded for the last 12 years purely by the proceeds of share issues on AIM.

It may be a good investment, it may be a bad one, that\’s an irrelevance to the point here. You can fund long term, risky, business ideas through the public markets.

And can you imagine Willy\’s fury if he\’d heard that a bank had financed a company which, as it looks like it might, manages to piss away £100 million?

8 comments on “On the Anglo Saxon financing of business

  1. “And can you imagine Willy’s fury if he’d heard that a bank had financed a company which, as it looks like it might, manages to piss away £100 million?”

    At least it hasn’t gone bust, taking down employee pensions with it. Unlike Willy’s last venture.

  2. Quite right. In my opinion, banks started to extend far too much credit to businesses which should have been funded through retained profits or more shareholder capital.

    The attraction to business owners was leverage. Provided everything went right, they could pay off the bank loan and enjoy a massive capital gain.

    When I started my small business thirty years ago, I showed my first year’s accounts to the bank manager, as I was rather pleased. He was very offhand. “You’re not using any of our money to do it. are you?” he said in a sniffy way.

  3. “You’re not using any of our money to do it. are you?”

    At least the call centrification of banks has an upside: we don’t get exposed to wankers like this any more.

  4. “And can you imagine Willy’s fury if he’d heard that a bank had financed a company which, as it looks like it might, manages to piss away £100 million?”

    If the wasted money had been spent on something he agreed with there would be no fury at all. Probably even a grinning, gurning pride at the money down the drain. It’s all wealth redistribution innit.

  5. In support of Edward Spalton, banks should not really be lending money to very risky ventures anyway as it creates moral hazard. The shareholders gain big if all goes well, but the bank loses big if it collapses.

    Markets like AIM and Nasdaq are perfectly suited to high risk ventures.

  6. A basic question of what constitutes the Anglo-Saxon model of investment.Since so much post-war industrial investment in the UK involved the predatory take-over of “mittelschaft” companies,if not straight forward asset stripping especially of property assets (cue blocking by Land Value Tax ) all well illustrated by the leveraged “buy out ” of Manchester United with the borrowed money appearing as a charge on the club’s balance sheet, I should have thought this example of risk investment in the Falklands is neither typical nor definitive.
    Most small family-run businesses that did n’t make it in post-war UK were destroyed by true-blue Anglo-Saxon investment fads or scams.

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