3T stimulus package. Build back better. This is the narrative another stimulus package is thrown at US citizens. Increased debt that has to be repayed by these same individuals. This investment is a mal-investment in my opinion, because the lack of transparancy about the percentage of the stimulus package actually going into road construction. Also aside of the lack of transparancy what percentage goes where, the majority of it is a loan from future generations which might be paid back.
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In Belgium, the National Railway Company is owned by the federal government. For many years the company had incurred serious losses, while trying to keep the ticket prices ‘low’. Paying lower prices is being facilitated by the tax payer, who pay for the tickets indirectly. Meanwhile they increased the ticket prices and the taxes remain the same, all while not allowing any competition in the public railway system. This gives them a monopoly with no incentive to operate efficiently.
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Here in Chile the Goverment has student loans backed by banks as the legal rep the Goverment - The interest rates are astronomical…yes it is an option for someone who cannot afford college but it puts you in a very bad position - If you do not pay you get put in a blacklist and they can seize your personal patrimony.
- Good deal for the banks and the goverment
- Malinvestment as a person in which you sacrifice for a long term ROI - Which has a ton of set backs both legally and financially
Two days ago congress past a law that holders of this loan with delays in payment will not be put on this black list and have their patrimony taken
Sorry for the spelling mistakes*
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Interesting I was also like Ondrej first thinking of Deutsche Bank. If Deutsche Bank is in trouble going forward we are looking at the collapse of the whole banking system, as French, Greek or Italian banks would be in even more trouble. The whole Bitcoin story started after the bank bailout with taxpayer money. This is no accident as the bailout clearly showed, that the whole game is heavily rigged for the players currently in power. Some banks were “too big to fail”. This is not capitalism. While I am not an advocate of pure unchecked capitalism, the system has to reward people acting prudent and put people like the banks out of business, who fail. NO MATTER WHAT! Otherwise the system is broken. Fortunately one taxpayer was angry enough to come up with Bitcoin. For Deutsche Bank it is currently trading at 11,64 EUR but the book value 29,34 EUR. That indicates for me, that in a generally highly inflated stock market investors still see fit to trade it at 40% of its book value. Considering the recent history of banks that would not show a buying opportunity for me but a big red flag.
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Here in Spain we have this example (I only found a link in spanish): https://es.wikipedia.org/wiki/Caso_de_las_preferentes_en_Bankia
Bankia, lunches some products call “preferentes”. They offered preferred stocks like that product have fixed income. But that was not true at all. There was flexible income products with a very high risk. Many inexperience investors lose a lot of money here.
But that not the end… Spain goverment rescue Bankia between 2012 and 2013 with 21.000.000.000 € (Invest 24.000.000.000€ and recover only 3.000.000.000€)
And at this time Bankia merge with another bank (CaixaBank) and has finally desappeared. 8.300 people that work in one bank or another are going to lose their jobs…
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A very good examples of Malinvestments are taking place as we speak in the crypto era bubble, just like the .com bubbles in the past with every new technology, there comes the masses of people that are gathering to be the first to adopt it. There is still a lot of uncertainty and lack of regulatory clarity from the government, thus lending to a lot of risk investments and fake promises and those can create chaos for the investors and in many cases it lowers the credibility for the technology.
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A hotel chain CEO borrows thousands of dollars for investment and expansion in the business, then diverts the money to personal pleasure and branding, The grace period for loan repayment ends, He hasnt invested the money to generate more from the business but has diverted the funds He cant pay the loans. Cant pay salaries, cant pay suppliers yet continues to buy hiimself cars and lives in luxurious rented houses by the beach.
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A huge malinvestment that the whole world must be aware of by now is the new Berlin airport, which was to cost 2 Billion Euro and open in 2011, but ended up costing 7 Billion and opening in 2020. The costs incurred are all footed by the german tax payers and both the delay and extra costs are due to mismanagement and trickle-down subcontracting. All in all it was an exemplary showcase for Murphy’s Law, i.e. what can go wrong, will go wrong. All possible mishaps were there, from plans changing and regulations not being met, to bribary.
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A malinvestment currently making headlines in the Netherlands and France is the propping up of airline Air France-KLM(it’s a Franco-Dutch company). Due to Covid-19 and the subsequent lockdowns, Air France-KLM experienced some turbulence(understatement).
To keep the company from crashing down, the two governments had to step in. I’ll stick to the Dutch government, because I’m from the Netherlands. Our government, together with a few banks, loaned subsidiary KLM €3.4 billion. KLM is supposed to pay it back within 5,5 years. The interest rate KLM has to pay the banks is extremely low, because of a government guarantee(distorted market price discovery).
I believe this is a misallocation of capital, because KLM won’t ever be able to pay it back. In 2019, which was an exceptionally good year, net profit was €300 million. Aditionally, 2020 and (probably) 2021 are basically ‘‘lost’’ years. It doesn’t take a mathematical genius to figure out that KLM will default on these loans. To make matters worse, the taxpayers are coughing up the bill.
I guess we can say…this won’t be a smooth landing.
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Interesting, is it fully operational now?
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In the case of bailing out Air France - KLM, the likely landing would be a nationalisation of the company by the French and the Dutch government. This will be a way to write off the loan and give a second life to the company and managing the status quo for a bit longer.
Where I guess the hard landing will be is for the countless number of companies that benefited from government loans, that will not recover and do not fall into a potential “nationalization” asset class…
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Great question that makes me ponder the integrity of DeFi “banking” equivalent services Vs traditional banking… should I DeFi my saving account ?
In any case to answer to the question:
In the PE world of value creation with the “zero to one” concept championed by Peter Thiel (great book by the way) and the ambition to become the next unicorn I have seen a lot of malinvestments.
Great ideas attracting a lot of capital used to under price services in order to gain market share. When the monopoly is not created the domino effect fall into place.
A great example is in China with the rise and fall of the bicycle sharing apps with companies like Ofo that went out of business in 2020 and Mobike still surviving in China but defunct in most of its international expansion.
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Apparently it opened on 31 October 2020, whereby I haven’t used it myself.
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4. government money:
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 (3-5 sentences).
- wirecard, it was a good investment over years. nobody thought about risks. more profits year by year. most investors did not listen to warnings (financial times, etc.) - it was possible to gain massive profit in a short term, but a long term malinvestment, of course.
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Dogecoin. It is a meme coin made as a joke but gaining hype since the gamestop crazy. People are putting money into it because they hear about it from Musk and other people in the social media world. The price has gone up like crazy today. How many people are fomo-ing in? I don’t see it ending well for all but a select few.
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One that comes to mind is the company Western Union. This company mainly works in money wires. They work off of legacy systems that are slow and expensive. There main service is provided in brick and mortar retail stores. I find the company to be outdated and irrelevant in the modern internet era. Particularly with crypto being adopted more and more, it makes these wires ineffective.
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Central banks giving out low interest rates. Malinvestment occurs due to misleading relative price signals, and it necessitates a corrective contraction - and an unsustainable increase in money supply from the banks
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The UK has been investing in and building the HS2 rail network for many years. It’s cost is already 10 times greater than originally planned. It has been constantly underpinned by government loans and financing. It has reached a point where no one can afford to let it fail, so more money is being poured in. The situation is exasperated by the fact that it is FIAT money, which has no ‘real’ value. It is a massive exercise in malinvestment which will produce little in terms of real benefits when it is eventually completed.
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Look no further than the GFC and Lehmann Brothers. They used shareholders and depositors money to build a business that simply took crazy risk and ultimately filed for bankruptcy. The allocation of resources by way of salaries and bonuses to the employees who operated these scams is evidence of malinvestment at the highest level. They also then used the banks funds to lend to people who should never have had loans in the first place purely for profit and personal gain.
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An example of malinvestment is the housing bubble of 2008 where banks were approving home loans that were way too risky. This created a false sense of home value in the market. This event was also set on many levels by banks, real-estate firms and property management companies all had a hand in this manipulation of the market due to incompetence or lack of responsibility. Loans would be approved to borrowers with little due diligence and income manipulation. This event also caused other events such as bankruptcy and foreclosure numbers to grow and the decline of home values over time.
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