Okay, so the big financial news story this week is that over the last few
years investors have been diversifying into bonds backed by the crime proceeds
of Italy's most powerful mafia according to the Financial Times. It even turns out
that some of the bonds were bought by Banca Generali, one of Europe's largest
private banks. All in about a billion dollars worth of these bonds were sold
to investors between 2015 and 2019. Investors included pension funds, hedge
funds and family offices - all looking for exotic ways of earning high returns at a
time of record low interest rates. Back in 2008 the Occupy Wall Street movement
started calling investment bankers "banksters" and I guess this possibly
inspired the idea of actual bonds from actual gangsters. So how did it work? how
can a mobster issue a bond? and does it make sense for you to have some mafia
bonds in your retirement account? are these bonds a yield you can't refuse?
Okay so under EU law, overdue invoices owed by state connected entities incur a
guaranteed penalty interest rate. This means that these debts are well suited
for packaging into asset backed securities. I have a video in fact
explaining what asset backed securities are and that is linked to that above.
Basically an asset-backed security gathers a large pool of assets, things
like home mortgages, credit card receivables - or in this case - the proceeds
of organized crime and issues bonds backed by their expected cash flows. So
how do the Italian mafia fit in here? Calabria is not only the poorest region
in Italy but it's actually one of the most deprived regions in the EU. It's GDP
per capita is around 20 thousand US dollars a year - which is about half of
the European average. A US diplomatic cable back in 2008 noted, that if it were
not part of Italy, Calabria would be a failed state. The Calabrian mafia
is known as the Ndrangheta - the name originates from the Greek word for
courage. They control a large part of cocaine importation into Europe along
with arms dealing, extortion and cross-border money-laundering. Even with
such lucrative criminal activities, the opportunity to plunder the Italian
public health system stood out as a golden opportunity. By bribing local
government officials, organized criminals made huge profits from contracts given
to their own front companies - building monopolies on everything from delivering
patients in unsafe ambulances to transporting blood and organs to taking
away the dead from the hospitals. The Mafia's grip was apparently so tight the
doctors reported to having to wait outside
a hospital ward for mobsters to come along and unlock the door and let them in.
So all of these mafia provided medical services were billed to the
Italian taxpayer through the country's Health Service with its multi billion
dollar budget. From 2015 through to 2018 hundreds of millions of euros of
invoices signed off by officials in Calabria municipal health system were
purchased by intermediaries. These middlemen bought the unpaid invoices
from suppliers at a discount because they were in effect guaranteed by the
Italian state. They were then sold on to specialist financial companies who
pooled them and sold bonds backed by the unpaid bills. Now while many legitimate
companies in Italy used this process to offload legitimate debts owed to them by
the healthcare system, the complex chain of intermediaries left it vulnerable to
exploitation by organized criminals. Front companies for the Calabrian mafia
managed to offload invoices owed to them to unwitting intermediaries who then
sold them on to financial companies. They then packaged them up into specialized
debt products marketed them to investors hungry for exotic higher-yielding bonds
at a time of record low interest rates. That's how you get to having mobster
bonds in your retirement account. The FT reports that as different crime families
grew wealthy, their younger generations have started to look very different from
the rural bandits of their grandfathers era. A new class of mobster emerged that
can apply Business School analysis to the challenges of running an
international criminal conspiracy the Graham Stefan channel here on YouTube
promotes itself as teaching finance to Millennials and I thought that maybe my
niche could be teaching quantitative finance to millennial maceió see if you
do happen to speak Italian and you watch these videos do feel free to upload
Italian subtitles to my YouTube videos so that I can grow my mafia following
Anna Sergey a Calabrian born criminologist at the University of Essex
told the FT that this new generation of mobsters live outside of Calabria and
appear to be respectable businesspeople not directly involved in street-level
illegality but instead they offer technical expertise when it's needed I'm
going to guess that they claim when they talk to their friends that they work for
their families olive oil export business none of the bonds in question were rated
or assessed by major credit rating agencies or even traded on financial
markets instead they were privately placed by boutique investment banks
several of which have offices in Mayfair the City of London and so on. Ernst &
Young ended up providing consulting services for the structuring of one of
the vehicles which was then purchased by Banca Generali according to the FT.
they were however not required to do any due diligence on the assets making up
the portfolio apparently.
The human cost of years of looting Calabrese Healthcare
System has been devastating for Italy Italy is one of the highest life
expectations in the world but Calabria stealth statistics are amongst the worst
in you Calabria ends up having the highest rate
of infant mortality in Italy and many collaborations are forced to leave the
region to get treatment in better hospitals in the north of Italy. Local
doctors describe some of Calabrese hospitals as on a par with the
developing world. Maybe this expose from the Financial
Times will bring about an end to mafia asset-backed securities, but equally
maybe my YouTube channel will become huge as I educate quant mobsters who can
optimize the ABS portfolios and game rating agencies. If you are a quant
mobster don't forget to hit the like button and subscribe, but equally be
careful to say nothing in the comment section below. In the long run I worry
that quant mobsters will end up spending all of their time creating financial
products and no longer care about the underlying extortion. If that becomes the
case and there's no one left to break - say a hospital administrators legs
if they are late with a payment, we could end up seeing widespread default on
these products which might bring about another financial crisis. Who knows?