Last time on the Hanover think tank we had a little jaunt into Tampa's woes in the sporting world. So naturally we will continue our progression with the natural jump to private equity philandering in Abu Dhabi and a possible international incident. It's as natural as Sunny Delight Orange Substance. Delicious too.
Sheikh Seif Bin Zayed Al Nahyan, deputy prime minister of the United Arab Emirates and a member of the royal house of Abu Dhabi owns Emirates International Investments and has been working with Emerging Capital Partners, a Washington DC based trading company (sort of but it's technical and dull to write what they get into. If it's boring to write for me imagine how boring it will be for you to read. You can thank me by clicking on some links to the side right there. Go on, you're so close. It's probably something that you've been thinking about...) Anyway, shameless self-promotion aside, the American company had been investing the Sheikh's money in a fund that has just been pounded over the last year, losing 50%. So there was some disgruntled members of the fund and this caused some major fall out.
So basically it works like this. If I'm wealthy I pay into a fund and promise to invest "X" amount of dollars for the management company to invest. Then I have to make payments (like a salary) to the management company on time. I can then take the dividends from the investment to make money or pull my investment out with enough notice to the management. If I don't make those salary payments on time the company that manages the fund can penalize me up to the total amount that I invested.
ECB, the Washington DC company says that the Sheikh and his investment partners were late on payments 5 out of the 6 times. The Sheikh says this isn't exactly true. So the two companies got together in Paris last year to resolve some issues. The Sheikh was unhappy that his $40 million dollar investment was now worth only $20 million. ECB was unhappy that they weren't getting paid on time (roughly $1 million dollars ever 2 months or so). Some sort of agreement was reached in Paris though both sides tell different versions of the story. The Sheikh says he agreed to pay the last fee but that he and the other investors would be taking their money out and thus winding down the fund. ECB says that they only emphasized how important it was to pay on time. When the Sheikh (and other investors) discovered that their money was reinvested rather than paid out to them they cried foul. Then ECB came down with a hammer on the Sheikh and took the entirety of the Sheikh's investment because the payments were late. Technically that's legal. Basically ECB said you get nothing, good day sir.
Two things. The Abu Dhabi has more money than Solomon so losing $40 million isn't going to cause them too much financial strain. That said, it's irrelevant. Ok, now my two things.
1) That this is legal tells you some of the reason why people are upset with companies like ECB. I understand that these companies have to ensure timely payments in order to have the best staff to manage this amount of money but come on. You can't really morally justify taking $20 million dollars from anyone for being late on a payment.
2) That ECB would go to this route beggars all belief. The payments to these guys are astronomical. $1 million dollars to manage $40 million is 2.5% of the investment - not a huge number but not small either. And while this isn't sympathy these traders do take on high risk, high stress jobs and have gone through extensive training and education. They deserve good salaries. But when you are paid that amount of money to steal $20 million dollars, albeit legally. You're not engendering yourself very well to an already hostile public and political environment. Plus, you're wealthiest investors over the twenty years are going to be Middle Eastern, Russian, and Chinese moguls. You've just lost that market.
The solution here is simple. The financial markets have to be told that you can't steal people's money. Cap the amount on penalties to a percentage not approaching the better side of 10% for penalties. Repeat offenders can feel the heat by penalizing them slowly. However, don't choke the investment business with undo regulations because the free market will do a good enough job snuffing out the crooks like this.
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