Doing business is not always easy for H.M. Pharma Consultancy, and in some respects this is especially true for our home turf, Austria. It’s a small country, and one not globally notable for its pharma or biotech industry. So its quite a rare event if a domestic potential new customer approaches us with an inquiry that is substantial enough to require a bit of due diligence from their side. Inevitably then, there comes the question about our bank connection — meaning, of course, our credit line. H.M. Pharma Consultancy happens not to have a credit line.
Now you need to know that Austria is a country whose small and medium enterprises are in debt to their ears and noses. Since there is hardly any venture capital worth speaking of, their debt is with the banks. It is automatically assumed that a company has a credit line with the bank where it maintains its accounts, and probably with others as well. The dependent automatic assumption is that if there is no credit line, that can only be because the company has failed to get one.
As far as H.M. Pharma Consultancy is concerned that’s about as wrong as you can get. Since I started it in 2000 I always financed everything — including of course, investments — from the cash flow, or else I put my own money into the company if it passed over a rough spot on the business road. But wrong or not, that’s the point where our potential Austrian customer will ponderously tilt his head, and morph his mouth to an inverted U-shape; for how should you get your bearings on a potential business partner unless he demonstrates that he never defaulted on his debt?
And that’s also the moment where I sometimes ask myself: what if I had founded not a life science consultancy, but a bank? Or what if I had not abandoned my nascent political career in the late 1970s to take my biochemistry degrees, and to become a scientist-cum-entrepreneur? Or perhaps even a little bit of both, just for synergy?
A few days ago one of my people asked me about Basel III — the new set of regulations that will soon require banks to underpin their risk-weighted assets with 6% of Tier 1 capital (which is, essentially, the core capital which the bank actually owns) instead of 4% –, and why the financial industry invokes all but the end of the world in its anticipation. Here is how I explained it, in a somewhat downscaled fashion — but I hope you get the gist of it.
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Let us assume for the moment that you are Mr. (or of course, Mrs.) Bank; for the sake of gender neutrality, just lets abbreviate it to “B.” You have got it in your head that you need a new auto, one that exudes pure power and luxury and style, because you are sure that this will impress your potential customers enough to multiply your business. So you don your business attire, and march to a car dealer, carrying a suitcase.
B.: “I’ll take this car.”
Cardealer: “An excellent choice. That would be 100,000 Euros then.”
B.: “I want to leveragethis. I am prepared to give you 4,000 Euros as a collateral.”
Cardealer: “What!!? I am running a serious trading business. Youare supposed to be the capital provider! And offering me 4% collateral is plainly ridiculous.”
B.: Ah well, but lending me 96% of the deal volume should not be a problem. (Opens the suitcase, which is packed full with 500 Euro notes.)
Cardealer (round-eyed): “But you are carrying millions here! Why don’t you just pull out 200 of these nice violet notes, and pay cash?”
B.: “Well, because technically this is not my money – although I can play with it a bit on short notice. It’s the average amount of what I am clearing for my customers on a daily basis. I’m showing you this only to demonstrate my liquidity.”
Cardealer: “And why would your customers put that much trust in you?”
B.: “To be honest, its not trust alone. Everyone who works in our huge public sector, who draws a pension or other subsidy, or needs a credit line, is legally required to maintain an account with me.”
Cardealer: “And why would that be?”
B.: “Ah, this is why my partner comes in — Mr. State by name. He has a monopoly on lawmaking. It is not always an easy partnership, but a very solid and mutual one.”
Cardealer (with even more suspicion): “Mutual? Why would he need you?”
B.: “We are both more or less in the same business – trading anticipated future profits for present debt -, but Mr. State can’t do it commercially — he’s politico, see? So all I need to do is make sure that I remain systemically necessary for him — Too Big To Fail, if you heard that one. However horribly wrong any of my deals might go, he just has to bail me out.”
Cardealer: “Hm. And where from would Mr. State get the money to bail you out?”
B. (sounding amazed): “Taxes of course. Paid by the populace and profitable businesses. You of all people should know. Mr. State also has an extortion monopoly which, along with the lawmaker monopoly, makes him invincible. Actually, he uses part of what he extorts to pay a large cadre of dedicated thugs — a self-sustaining business, don’t you think so? – Speaking of it, did you file your tax declarations?”
Cardealer: “You never mind that. — Tell me something else: what if the people and the businesses are sucked dry so that Mr. State cannot extort sufficient money even by threatening to fine them into bankruptcy, or to jail them? That’s where your pyramid game breaks down. I am on its bottom level, and if things go wrong I might not even be able to retrieve your 4,000 Euros collateral — let alone the remaining 96,000 plus interest.”
B.: “No chance of that happening. Mr. State can always approach the European Central Bank, which has the power to create Euros in its computers. Of course the ECB is — again, technically — totally independent; but the guys and gals there are reasonable, and will respond to the obvious necessities. Its not as perfect a backup as it used to be in pre-milennium times when Mr. State himself could print the money, but it’s a working solution.”
Cardealer (now grinning): “OK, so the best guess is that we will both win either way, and even in a bottom-out worst-case scenario neither of us can really loose, right? – Done deal. – So just excuse me a minute while I set up the contract.” (Disappears into his office while B. lovingly strokes the 100,000 Euro car.)
Cardealer (scratching head while coming back from the office): “Ehem — well –“
B.: “What? Haven’t I made the deal clear enough or attractive enough to you?”
Cardealer: “All clear enough, but it’s not my call. I’ve just checked the new regulations. I’m sorry, but you have to give me 6,000 Euro as a collateral. You can leverage only 94,000 Euros instead of 96,000. Everything else is fine; just sign here and you take the car.”
B.: “WHAT!!??? That requires me to set aside 50% more collateral than I had calculated! My entire business model is ruined!! Next thing, these regulations will push me into bankruptcy! Even global economic growth will suffer if such things are implemented! Waaaiiiiil!!“