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Luckin Coffee, an interesting little tale

Not sure if I’m right here but I think I am:

The problem with any and every scam is how do you collect? It’s trivially easy to create fake letters of credit, for example, but getting a bank to pay out on one is more difficult. Fake stock certificates the same, kiting checks and all the rest.

Someone, somewhere, has to be convinced to give you real money for there to be a profit in it.

At which point, stock which is quoted on an exchange can be used as security for a loan. Depends upon the market the quote is on but an OTC stock might be good for a 50% of market valuation loan, the stock being the security. Nasdaq stock for maybe 80, or 90%, no hard and fast rule here.

It’s very difficult to gain permission from your investors to use stock in a VC funded company as security for a loan. Sure, for a small amount, to buy a house and a car maybe. Who would want the wunderkind building the next world beater to be sleeping in the park and coming to work on a skateboard?

Flotation on an exchange opens the floodgates
Once the stock’s on a recognized exchange, then it can be used as security for a loan. And that loan can be much greater than any amount of stock anyone will let you cash in.

And that’s what my opinion is. Sure, there are stores across China. By the company’s own admission they’ve near no daily revenue. But through that flotation the management team was able to borrow that half billion using the stock as security. Security which said management team had a good idea – in my opinion of course – was worth rather little and could be happily left in the hands of the banks in return for the half a billion being cashed out.

14 thoughts on “Luckin Coffee, an interesting little tale”

  1. This is called Lombard lending. And it’s a huge business for Asian Private Banking. Extend and Pretend being a big issue for (some, no names) banks who were keen to gain market share. No one else will refinance the loans secured on shares in companies majority owned by a single family or by a small group. My wife used to do try to do the risk management of the loans. She left and we’ve sold all our bank shares. Phew.

    Not just listed shares, securities in unlisted companies can be used as collateral too.

    Imagine all the money,
    It isn’t hard to do,
    Nothing of value pledged for,
    Loan security, too

    Imagine no collateral,
    I wonder if you can,
    That’s what banks are facing,
    They are in a jam

  2. Lots of this going on in China. A lawyer mate of mine had a case a few years ago for a US private equity company, which was suing the owner of Chinese restaurant chain. The PE firm had rather unwisely invested on the basis of fake and exaggerated sales.

    When the forensic accountants started investigating the restaurants they found things like receipts for a party of 10 who entered a restaurant at 12.30pm, spent RMB500 each and then left at 12.32pm.

  3. When was it that Japanese banks nearly collapsed because all their advances were secured on quoted shares? Sometime in the late 90s?

    Nice to hear that other people “took away the learnings”, as they say in HR.

    Also, UK banks, despite the BoE dumping money on them to lend to SMEs, still insist on personal guarantees and a charge on property

  4. TD – I don’t know the details I’m afraid; my anecdote is based on a conversation from 2-3 years ago. But either they didn’t or the restaurant company had some way round it.

  5. Caveat emptor, fool and his money are soon parted, never give a sucker an even break, it’s morally wrong to allow a sucker to keep his money, etc etc.

  6. Diogenes, on the contrary, the supermarkets have quit the usual 4 for £6, it’s all regular £1.79 a bottle what have you. And I am supporting my local brewery.

    For most (95%) people getting scammed in the financial markets despite all this regulation I have no sympathy.

  7. Could Rocco comment on this?

    “Richard Murphy says:

    April 9 2020 at 8:40 pm

    I know Cum-Ex very well…..”

  8. I much prefer Julian Lennon’s version of Imagine

    Imagine I’m my father
    It isn’t hard to do
    I look exactly like him
    And sing just like him too

    Imagine all my records
    Selling by the ton
    For one single reason
    I’m john Lennon’s son

  9. Murph’s exes never did cum. If only we’d listened to them before having to fire him from the two-on-one production with Abbott and Toynbee.

  10. Well, all right you sanctimonious curtain-twitchers, I do like my ales on Fridays and Saturdays, usually have a few too many but then again I’ve built my tolerance over the years…wasn’t cheap and no welfare states were involved.

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