by Michael Weiner
Raising funds for a given project is usually at the top of the to-do-list when a company, foundation or nation has a need. Conventional financing avenues can be quite disappointing in today’s environment, as banks and other financial institutions are strapped for cash, or lending requirements are too unforgiving. However, there is an answer if one gains a historical perspective on an entirely different financing mechanism that extends back to the late 1940s.
Many people working in finance today do not have the institutional memory to avail themselves of the mechanisms which were created to provide non-recourse, non-repayable funding from the activities of a specialised system emitting from the top-levels within the banks, the IMF, and other authorities’ oversight.
Decades ago, at the end of World War II, the economies of most of the affected countries around the world were devastated by the cost of fighting, as well as rebuilding infrastructure networks and other critical projects needed for reviving and sustaining humanity. Gathering in New Hampshire at Bretton Woods, the political basis for the Bretton Woods system was in the confluence of two key conditions: the shared experiences of two World Wars, with the sense that failure to deal with economic problems after the first war had led to the second and the concentration of power in a small number of states.
A plan was devised that encompassed various strategies to create funding for these projects which, by their nature, were not (necessarily) meant to create business ventures that would be profitable in the purest sense of the capitalist world. Reconstructed roads, bridges, hospitals and other infrastructure needs may not be the best investment when a capitalist is seeking a return on his or her investment.
To help entice private money to create funding for desperately needed projects, the financial and political engineers of this plan created a way for wealthy families and corporations holding enormous sums of cash and certain other assets to invest and achieve profits from buying and selling bank paper, profiting handsomely, and dedicating the majority of the profits into needed projects while leaving a tidy profit to the investor.
In creating an environment for dollars to be generated in large sums, the evolving system allowed for the issuance of a line of credit from a central bank to a trading bank platform, with the underlying collateral for the issuance coming from a third-party investor who holds the requisite assets. While the third-party assets are shown, they remain under the ownership of the investor with an agreement to leave them in place for the duration of a contract. This is just one step in risk mitigation to the client. There are others.
The advent of the internet has resulted in some investors getting a negative impression, however, this confusion is often allayed once an investor has been properly educated and informed. Nonetheless, the system operates continuously, and rewards the investor with the significant returns required to fund the projects. This system is used to fund recovery and reconstruction efforts in various countries such as Haiti, Africa, India and others. It is also used to create housing, medical facilities, roads, railways, schools, public safety and healthcare projects. These programmes operate at a very high level in the banking industry, a level where very few bank executives, outside of the CEO and head of trading, have knowledge. Asking a branch manager about these, or even at the senior vice president level, will generally result in blank stares, or “we don’t do that” answers. This confusion can be attributed to bank secrecy, or an executive not being ‘in the loop’. Furthermore, given that this type of funding is a private operation, employees further down the corporate ladder will not be privy to details.
Arbitrage transactions utilise discounted bank instruments in order to complete a transaction. For example, assume you are offered the chance to buy a car for $30,000 and at the same time you also find another buyer willing to buy it from you for $35,000. If the transactions are completed at the same time, then you will not be required to ‘spend’ your own money and wait to receive the $35,000. Performing the transactions at the same time nets you an immediate profit of $5000. However, you must still have that $30,000 and prove it is under your control. Arbitrage transactions are done in a similar way. The traders involved never actually spend the money, but they must be in control of it. The client’s principal is reserved for the trader to leverage a non-recourse line of credit. The trader is responsible for the unlikely need for repayment.
Confusion is common, however, because most seem to believe that the money must be spent in order to complete the transaction. Even though this is the traditional way of trading and is also a common way of trading on the open market for securities and other instruments, it is possible to set up legal arbitrage transactions if there is a secondary buyer in place, and the trader can show that they had the money in hand (the credit line) before they executed the first round purchase.
When dealing in hundreds of millions of dollars in face value, obtaining the credit line first is where your funds come into play, and you are rewarded handsomely for allowing them to support acquisition of the line.
It is important to reiterate, that the reason why client funds blocked for use in project funding trade programmes are always safe without any trading risk is that the trader is using the client funds to obtain a credit line, which is what is used in his or her trading activities. The responsibility for repayment of the line falls to the trader, not the investor.
A qualified investor must be a corporation or other entity, they must have cash assets in a top western bank or gold bullion equivalent to at least €140m or more, and they must follow specific instructions to make such a contract possible. Funding projects using free-cash money from these profits, along with protection of the investor principal, allows the investor to build debt-free projects, which can be profitable in their own right.
Michael Weiner is president and CEO of PreConstruction Catalysts, Inc. He can be contacted on +1 (202) 657 6960 or by email: firstname.lastname@example.org.