Monday, October 17, 2011

Farmer Stanley

If you you thought that Wall Street's pre-crash gambling binge couldn't get any kookier, you should read Bloomberg's story on Morgan Stanley's investments in Ukrainian farm land.
Iowa native Justin Bruch marveled at the opportunity when Morgan Stanley (MS) called in late 2007 to recruit him for an unusual assignment.

The New York bank, flush with $7.5 billion in fiscal 2006 profit -- the biggest in its history -- was going to be farming 11 parcels on the steppes of Ukraine. The commodities team wanted Bruch, a redhead with meaty hands who’d been farming all his life, to manage one of them.

...Morgan Stanley gave up on farming in Ukraine in July 2009, abandoning the initiative in the middle of a harvest. It bought out its local partner, Aleksandr Mamontenko, then sold Enselco to an investment firm based in Jersey in the Channel Islands, at what people familiar with the situation say was a loss. All told, Morgan Stanley put about $30 million into Enselco through loans, according to Igor Bobrov, who was hired in 2008 to be Enselco’s chief financial officer and later became its CEO. Hugh Fraser, a London-based Morgan Stanley spokesman, says bank officials declined to comment for this story.

Morgan Stanley’s failed gamble in Ukraine shows how Wall Street firms, in the last gasp of a debt-fueled bull market, strayed further from their traditional business of advising companies and underwriting stock sales to embrace diverse projects with unfamiliar risks.
The story is a great example of how Wall Street, enabled by its own creative debt instruments, pursued ever more speculative returns towards the end of the financial bubble. While conservatives continue to blame the Community Reinvestment Act, Fannie Mae and Freddie Mac for these types of shenanigans, Morgan Stanley's foray into Ukrainian farming shows that none of these were necessary. An under-regulated and over-leveraged Wall Street was quite capable of causing a financial disaster on its own, thank you.

3 comments:

Roch101 said...

Hello Dave,

I'm sorry to post an off topic question, I could not find an email address.

I have been wondering, when the Federal Reserve buys U.S Treasury bills and bonds, where does the interest paid on those bonds go? The Fed is not a for profit, so I imagine their would be no distribution, yet there is a "return" on their purchase. Where does it go? Are we paying ourselves interest and isn't that kind of absurd if that's the case?

Thanks in advance if you have the time to answer.

Roch

Dave Ribar said...

Roch:

Hi. The funds first go to pay for expenses of the entire Federal Reserve System (the Board of Governors and the system banks). Any excess money is returned to the U.S. Treasury.

Roch101 said...

Thanks, Dave. That sure makes one ask though, "What's the point." I must be missing something.