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{{image|Screenshot 2020-11-05 at 18.39.20|png|It’s the Real Thing.}}}}''JC first published this article two years before [[sustainability-linked derivatives]] emerged on the scene. Life imitates art, once again.'' | {{image|Screenshot 2020-11-05 at 18.39.20|png|It’s the Real Thing.}}}}''JC first published this article two years before [[sustainability-linked derivatives]] emerged on the scene. Life imitates art, once again.'' | ||
[[ | {{Drop|I|t is said}} beatnik [[Fi-Fi]] hack and sometime swap pioneer {{author|Hunter Barkley}} came up with the idea of [[discredit derivatives]] at the fag end of an epochal [[synthetic alpha]] bender he went on with some hedge fund buddies in Mallorca in the dog days of 2016. “It was quite the come down.” | ||
The “turpitude swap”, as he termed it, was meant for fund managers like his buddies who rode the eco-wave with lazy public commitments to [[environmental, social, and corporate governance|ESG]] principles. In 2010 that seemed like a fine wheeze: toss out easy, throwaway promises no one would check and watch the [[AUM]]s come rolling in. | |||
When these carefree days collapsed into press Intrusion and cavity searches by freelance ESG consultants, the managers were stuck, so Barkley reasoned, with a problem that must be eminently ''hedgeable''. His product would let11 these funds to “brown-wash” their investment portfolios. | |||
“It’s ESG avoidance, rather than evasion,” said Barkley. | |||
===Early years: single-name [[turpitude put]]s=== | ===Early years: single-name [[turpitude put]]s=== | ||
Barkley’s idea was simple: if it was okay to extract the crappy credit profile from a [[CDO squared|portfolio]] of [[mortgage|mortgages]] | Barkley’s idea was simple: if it was okay to extract the crappy credit profile from a [[CDO squared|portfolio]] of [[mortgage|mortgages]] | ||
and lay ''that'' off on someone with “sufficiently deep market expertise and advanced models to bear the risk indefinitely”<ref>Yes, I know what you are thinking: a sleepy Landesbanken from Lower Saxony would be ''exactly'' such a someone, right?</ref> why not do the same thing with the unwanted ignominy of politically awkward, but still hugely profitable, investments? If only there were away to strip out the ''shame'' from the ''yield''. | |||
Barkley began to construct instruments — at first, simple [[put option]]s — laying off the embarrassment on those who could most easily absorb it; namely — and this was Barkley’s real genius — ''the very badly-run, environment-wrecking corporates that were polluting the social | |||
credibility of the hedge fund portfolios in the first place''. | |||
The [[hedge fund]] would write an [[at-the-money]] [[stigma put]] to, for example, the Golden Crown Palm Oil Company of Sudan Pty. Ltd. (and for which it would ask little by way of premium; after all, really, what did Golden Crown care? It was ripping up the Bandingilo national park already, so what is a little more remorse?), thus getting rid of the fund’s disgrace for investing in ''that very company''. | |||
Objections came soon enough that this was obviously circular, but Barkley swiftly pointed out that, well, so too was [[debt value adjustment]] hedging, and everyone seemed cool with ''that'' for a good few years, didn’t they?<ref>Indeed, it kept a phalanx of banks out of [[technical insolvency]] — and their [[DVA]] traders handsomely [[Compensation|remunerated]] — for a good three or four years after the worst excesses of the [[Global financial crisis|credit crunch]].</ref> Did it present any more moral hazard than in D&O liability insurance? | Objections came soon enough that this was obviously circular, but Barkley swiftly pointed out that, well, so too was [[debt value adjustment]] hedging, and everyone seemed cool with ''that'' for a good few years, didn’t they?<ref>Indeed, it kept a phalanx of banks out of [[technical insolvency]] — and their [[DVA]] traders handsomely [[Compensation|remunerated]] — for a good three or four years after the worst excesses of the [[Global financial crisis|credit crunch]].</ref> Did it present any more moral hazard than in D&O liability insurance? |