Bonds on one hand, on the other hand hyped up stocks that don’t have any sales, or even a product at the time of being listed
1 Like
My bank ING invested in dubious wapen trade, well this says enough right? Probably the list of banks can grow easy as well as the bad things they invest in. (palm oil another good example)
1 Like
An example of a malinvestment that comes to mind relates to Lehman Brothers Holdings Inc. In 2008, Lehman Brothers had $639 billion in assets, more than enough to cover its $613 billion in debt. However, the assets were illiquid. As a result, Lehman Brothers couldn’t sell them to raise sufficient funds. The cash flow issue is what led to its bankruptcy and was the climax of the subprime mortgage crisis.
2 Likes
Banks have shown throughout history that they are willing to take on malinvestments with no hesitation. From the Real Estate housing crash of 2008 in the United States to the Big Short with Michael Burry when they thought they were on the better of the deal.
1 Like
bonds hahaha or in 2021 - GICs as interest rates a near to zero, even almost any “savings account”, the phrase “save your money” doesn’t mean what it used to, me “high interest e-savings” account is more like a “not-exactly-zero” interest savings right now.
1 Like
One classic example of malinvestment could be the Spanish housing bubble peaked in 2008. Retail banks gave customers mortgages that were against the national bank policies. In addition, the price estimations were manipulated with false return expectations for borrowers’ investments. In a short period of time this led to families being not able to pay their mortgages, which resulted in a catastrophic outcome for both sides, lenders and the borrowers.
2 Likes
Theres a company called Rappi of food delivery in México that started to get many investments to their company valued in a higher price than their sales, it made their stocks go very high and very difficult to make more investments on it. While sales are still going down.
1 Like
The housing bubble in the 2000´s when house prices went down and was the starting of the subprime mortgage crisis, people took out loans that they couldn´t pay using their house as colateral since it was over-valued and when prices started going down and people could not pay their loans, they lost their house - ergo their investment, and banks lost a ton in purchasing bad debt.
2 Likes
Being that I have a background in Real Estate Investing I would have to go with the artificially lowered US interest rates, that were used to create a housing bubble, which led the world financial crash. Then stack on the continued suppression of interest rates to “boost” the economy, it was and is only kicking the can down the road, making it bigger problem when we do have to face the music.
1 Like
The Dot Com bubble was a large series of malinvestments. During the mass adoption of the internet in the early 2000s many were eager to invest in anything with ‘.com’ in it’s name. Investment banks, who were making significant money from IPO availed of lowered interest rates caused by the 1997 tax relief act. After a plan to aggressively raise interest rates was announced in 2000, and following a series of events that affected consumer confidence, internet stocks as a whole fell 75% wiping out 1.775 trillion dollars in collective value.
This was a very clearly a misallocation of capital as can be seen from the aftermath, these companies were floated and invested in on the basis of hype surrounding the internet. These companies and the technologies they claimed to create were poorly understood by investors who availed of low interest rates to invest massively. There was no reflection of the companies actual ability to operate or generate their own capital. Less than half of those companies survived the crash and all had much lower valuations.
In short, capital for the ‘dot com’ was allocated on the basis of hype and acquired by virtue of low interest rates, leading to a crash caused by rising interest rates and a loss of confidence.
2 Likes
I’m going to cheat here and use Theranos (cheating because I’m using a magazine cover used on the slide). Elizabeth Holmes engaged in an elaborate, years-long fraud where Theranos "deceived investors into believing their product could conduct blood test with only about 1/100 to 1/1,000 of the amount of blood that would ordinarily be needed and cost far less than existing tests.
Investors like the Walton family, Rupert Murdoch, and Tim Draper lost millions of dollars, and of course some government backing with no oversight.
1 Like
2 years ago the government purchased 8 F16 jets from US for over $1B in a form of sanctions connected to an energy supplement project from Russia. However we still haven’t received the jets as the deal was with not fixed time execution and as the jets already lost their initial value with the time of purchasing, the government spent tax money with increasing devaluation of a product that we don’t even have… sounds like METAmalinvestment to me.
1 Like
The housing bubble in China. Seeing the magnitude and government loans that are put into this. It’s just amazing.
1 Like
The bailout of euro governments that can’t pay their debts.
All it does is delay and enlarge the problem. It’s a misallocation of funds because it perpetuates the cycle of banks lowering interest rates to encourage investments during hard economic times. Debt just accumulate and the next crisis is always worse.
1 Like
to me, today’s entire Stockmarket is malinvestment. how is it possible the market is up when the country went through the lockdown and significant reduction in GDP? how is it possible the market is breaking records when people aren’t spending money and living off the unemployment and subsidies. with new money creating exceeding GFC by huge margin, and ridiculous P/E ratio of the stock, I think current stock market is malinvestment based on speculation and perceived wealth with inflated money.
1 Like
I think this is a harder question than most realize. Hindsight about a bad investment is easy. That stock went down. What currently is overvalued because of free money is the question? I’d have to say almost everything out there currently. Most stocks do not show a value worth their stock prices. The number P/E can be looked at for this. Why are people willing to pay 50X P/E for something? … because they don’t have to pay any real interest on the money they are using to purchase it. What I mean to say is … this isn’t going to end well. I just don’t know how long the money printing and lending at close to zero can extend the ultimate collapse of this system.
1 Like
stimulus checks, bonds, govt bail outs. e’re it not for the ease of access to this capital for the government at a particularly low interest rate repayable to the central bank and also the ease for the governments to inflate away the cost of repayment for the bond + interest by increasing the monetary supply, the government would not have chosen to make these investments into ‘zombie companies’ which did not have a sustainable business model or enough cash reserves to survive a black swan event.
1 Like
I was working at US Foods when this scandal broke.
Simply put the company was putting vendor rebates on their books before the product was ordered, produced, let alone received. In order to inflate the bottom line for the stockholders. It was a Ponzi scheme of sorts. The snowball got so big and out of control that it wiped many out. I witnessed some crazy activities during and preceding this time.
https://www.baltimoresun.com/news/bs-xpm-2005-01-14-0501140139-story.html
2 Likes
In the mid-2000s, the U.S. Federal Reserve cut interest rates and held them down. Over the next few years, strict lending regulations were thrown out the window as home loans were offered to anyone that could breathe, regardless of their ability to repay. When interest rates inched up again and home values fell, millions of loan defaults led to foreclosures. If the Federal Reserve had not artificially manipulated the interest rates, then millions of people would not have taken out unnecessary loans on houses that they did not need—classically consuming more than they could afford, leading to a bust and millions of ruined lives.
2 Likes
Research an investment (could be a public company, private company, government agency, infrastructure project, etc) that you believe meets the definition of a malinvestment (past or present) and argue why you think it’s a misallocation of capital
Ans: I would use an investment from Savings and Credit Cooperative Ltd at my workplace as an example. They have invested in airline corporation. The business was good until the spread of covid-19 last year. The airline corporation is now reported to go bankruptcy. This result in lower the interest for the member of Savings and Credit Cooperative Ltd this year because of this malinvestment.
1 Like