Thursday, November 22, 2007

School of Hard Knocks

Have you checked out the ongoing story about several municipalities/communities in Norway having been screwed by Terra Securities? If you haven't, here's a short summary (the link being to an excellent summary in Norwegian):
  • This summer, Terra Securities and four municipalities in the nothern parts of Norway - Rana, Hemnes, Hattfjelldal and Narvik, made an investment deal for about 451 MNOK in registered Citibank bonds.
  • The investment is mortgaged against future electrical power revenue and has been used as security for loans.
  • Should the value of the bonds drop below 55% of the value at date of purchase, the municipalities need to provide more capital.
  • The bonds have done just that, necessitating capital injection of 84 MNOK in September, and now requiring further investments - it's a black hole, essentially.
  • The broker - Terra Securities - claim that they only acted as "advisors" for the municipalities.
  • The local government in these municipalities only read the documents translated (from English to Norwegian) by Terra Securities, i.e. the seller before signing the contracts.
  • The municipalities only read the original, English documents (which were available to them prior to the signing) after problems emerged on the horizon, because at the time of signing "they saw no need to read the same documents in two languages", even though the translated version was provided by a party with stakes in the deal.
  • Terra Securities conveniently "forgot" to translate the sections detailing that this was a high-risk venture. All Terra Securities told the municipalities was that this was high profit.
  • The municipalities now stand to lose all their investments, and there are obvious legal issues to be taken care of.

This is one of the best examples I've ever seen on why giving more money to local government instead of providing capital from a central source is a bad idea, because in this case, local government obviously consists solely of low-IQ losers who only have a fleeting relationship with reality. To paraphrase a Simpsons episode, a small community with a lot of money is like a giraffe with a computer. Nobody knows how it got it, and damned if it knows how to use it. If a small set of communities can dump more than five hundred MNOK into a high-risk investment deal without even checking the paperwork properly before they sign, then don't you DARE have old school buildings, hospitals, etc., and especially STFU about asking the government for more money. This is a lot of people's tax money they're dealing with also. One small municipality that I know of once spent a lot of money upgrading a very small section of one byroad to ridiculously high standards. The result: They didn't have money for plowing snow that winter.

Calling into play my Powers of Deduction, here's a play-by-play of the situation that took place this summer in four municipalities.

  1. Some Calvin Klein Obsession-drenched dude in a cheap suit and a large-series BMW rolls up to the town hall, hands out some business cards and asks: "Say; would y'all like to make an investment that will yield phantasmogorgical profit for no risk whatsoever?"
  2. The mayor and his or her stooges spit out the straw in the corner of their mouths and drawl "uuuuuuhhhhhhhh...yeah, Mr. Slick Polyester Hugo Boss Suit Man with the Expensive Leased Car sure look like you know what you're talking about."
  3. Slick BMW Douchebag (SBD)says "Super! As soon as you've signed this here deal, this little hick town will now be on the map, I tells ya. All you have to do is mortgage all your future electrical power revenue."
  4. Local Government Losers (LGL): "Uuuhhhhhhhhhhhh...dat sho' nuff wud be swell, boss. 'Cuz dis heah place sho' cud need some puttin' on a map. Now you wudn't be foolin' us dumb local politicians and paper-pushers, now wud'ya?"
  5. SBD: "Why I've NEVER... Tell you what; I'll even let you look at some papers BEFORE you sign them as a sign of good faith."
  6. LGL: "Duuuuuh.....dat be great, Boss. We didn't fall off no turnip truck yesterday, ya know."
  7. SBD: "Sure you didn't. Tell you what. To sweeten the deal, I'll even offer to translate the documents for ya, so you don't have to struggle with them big, English words and stuff. No need to read the same document twice, right?"
  8. LGL: "Uhhhhhhhh.......U da man, Boss. Cuz' it be da same document, and reading it in two different languages audn't make no sense, 'specially seeing as how nobody in dis here local administration speaka da English. Do y'all in charge of finances in dis heah municipal see a problem with signing a document based on a translation of da original terms proposed by da sellah of said investment deal without checking that the translation is in fact correct?"
  9. Community college flunkout loser local finance people in unison: "If the document is translated, it HAS to say the same, just in a different language. We learned dat in school. Oh, and we also did learn something about trojans and gifts, but we never got condoms for presents, so we never figured out what it was. We also learned something about supply and demand, but we've forgotten what, exactly."
  10. LGL: "You slick, larger-than-5000 inhabitant-city bigshot have gotten yerself a deal if y'all can provide us with da document in question. We sho' got no problem mortgaging our future against your risk-free, high profit investment."
  11. SBD: "Sweet. Now just sign this here."
  12. Mayor/LBL: " at da bottom of dis here blank page, ya mean?"

Shortly after the deal is made (approved by the people who have finance educations and whatnot) the investment turns out to be a high-risk loser-trap, and the municipalities go "Uhhhhhhhh da douchebag done screwed us. How cud we have known. Who wud've thought such a thing about someone who had so nice bidness cards."

Imbeciles. No $hit Terra Securities are crooks, but the people in charge should have seen that coming from a mile away...


Anders said...

School of Hard Knock, Class of '07. Welcone to the club!

A couple of comments:
- Love the "translation" that Terra has done, shown in your linked article...

- "Financial experts" are shocked over how bad investmens the communities has done. Yeah, what an expert. After looosing 451 mNOK, even I could say that this was a bad investment. Do you really need to be an expert to figure that out? I would have been much more impressed if those "experts" spoke up before the deal was made...

- This is basically a good idea gone bad. The thing was that these were wealthy communities do the fact that they own large shares in the local power plant. However, do to the fact that the prices of electrisity varies, they should spread their financial risk by investing some of the money generated by the power plant. Good idea, but you're not spreading the risk by transfering some of your money from medium risk to high risk investments.

oh, one error in your post: Some of the local guys must have said "Y'all come back now, y'hear" to the BMW douchbag at some point. At least once! ;-)

Trivia: I used to live in one of those communities in question...

Wilhelm said...

Now I am no longer surprised that I keep getting spammed with "Get yer PhD from prestigious universities such as Harfurd or Oxberg right here." There are obviously people who buy them things.

Yeah; it's basically a good idea. But the way it was carried ut - they even argued that there was no need to read essentially the same document twice, and trusted the translation made by the seller....

You bet your ass that the BMW douchebag had his collar popped. Also, I'm willing to bet that on his way out from the town hall after getting the deal, if asked to turn in his visitor ID, he'd say...

take it away, Anders...

I know which community........

Wilhelm said...

Moreover, RE the "Expert" comment. No freakin' $hit 451 MNOK lost is a bad deal. Ya think?

It's like rolling up to someone who just got run over by the bus and saying "U would've been better off not standing in front of that bus, Chief"

Monster hindsight being 20-20, Monday morning armchair quarterbacking

Anders said...

take it away, Anders...

That's you're line, isn't it? You're the one with the collar popped and point haircut...

Anders said...

Just had to post this comment from Dagbladet blogg, regarding the Terra case:

Kjære Kristin Halvorsen,

I forrige uke satset jeg 3000 kr. på et hesteveddeløp tilrettelagt av Norsk Rikstoto. Jeg mener bestemt at jeg ble forledet til å tro at det ikke fantes noen risiko for å tape pengene. Kommisjonæren, Kjells Tippehjørne, ga uttrykkelig beskjed om at min hest - "Hvite Lyn" - var en sikker investering. Kjell, som har hatt kiosken sin i mitt nabolag, har vært en pålitelig og god rådgiver i mine tippe-disposisjoner i alle år. Dette har vært en trygghet for meg siden jeg har svært liten kunnskap om hester og veddeløp generelt. Faktisk så kan jeg ikke sies å ha noen forutsetninger for å forstå hvordan dette fungerer i det hele tatt. Nå har derimot Kjell gått konkurs og det ser ut til at mine investeringer gikk tapt på lørdag.
Kjell informerte meg aldri om risikoen ved denne penge-plasseringen, og nå føler jeg meg lurt. Da min investering nå er skrevet i null, og Kjell har gått konkurs, vurderer jeg å saksøke Norsk Rikstoto - alternativt gå etter Kjells Svoger som også hadde eierinteresser i Kiosken eller staten som har eierinteresser i Norsk Rikstoto. Jeg har iallefall ikke noe ansvar her - for jeg ser jo i ettertid at jeg ikke forstod hva jeg puttet pengene mine i. Og det burde Kjell selvsagt ha forstått!

Kristin, siden du later til å ha litt peiling på slike situasjoner, så henvender jeg meg til deg. Hva syntes du jeg skal gjøre i denne fortvilte situasjonen?