Off Script24 Jun 2022 19:26
read this recently from the founder of a Financial Modeling company;
When I was a young investment banker back in 2002, I was at a work dinner in Texas with a bunch of big swinging d*ck investment bankers (yes that's what very senior bankers are often called in the industry) and one of them made a comment about rolling up private assets to ensure they were included in major indices when floated.
Being young and naïve, I had no idea what he was talking about, so I asked him to explain in layman's terms.
He explained to me that because a significant proportion of retirement funds are invested in index funds, which are by nature aligned with an index - such as the S&P 500 (United States) or S&P/ASX 200 (Australia) - these funds must effectively buy shares in any publicly listed company that enters their underlying index.
This means, he told me after a few too many expensive bottles of wine, that you can basically "package up a whole lot of sh*t and float it knowing it will get away".
To this day, I still recall this lightbulb moment in my life, as it was the first in a long series of realisations that many of the main corporate and finance sector players are just players, playing the game with little regard for the broader repercussions of their actions.
As Jonathan Shapiro outlines in the article below (apologies for the pay wall), the story of Lake Resources entering the ASX 200 this week before crashing 50% (over $1 billion market cap loss) in days is an incredible example of the same type of "retail hubris and institutional apathy".
For those out of the loop, Lake Resources paid social media influences to hype the company as the next big thing on platforms including Twitter, with the primary purpose of inflating its market cap into the ASX 200.
Then, 5 minutes before the company's debut in the index, their Managing Director Stephen Promnitz quit and sold his entire 10.2 million shareholding, making over $11 million before the stock plummeted in line with predictable heavy short selling.
The outcome of all this madness was an enormous transfer of wealth from the retirement savings of mums and dads via their 'safe' index funds, and foolish retail investors buying into the paid hype, into the hands of short sellers and greedy executives who knew exactly how this was all going to end.
It's been over 20 years since I learned how games like this move wealth from the masses to a select few, and it's only happening more frequently and on a grander scale today. And I'm really not sure how you fix something so fundamentally broken yet not technically illegal.
So for now we continue to live in a world where you'll almost certainly go to jail for stealing your neighbour's $1,000 iPhone, but if you know how to play the game you can take millions off pensioners and not even get charged.
Explain that one to your kids for me... ?????
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