Month: August 2009

A bank in Italy is taking cheese as collateral for its loans. Yes, that’s right: parmesan cheese. Parmesan cheese takes about 24 months to mature, and instead of letting it sit in their warehouses, cheese producers are depositing cheese with a local bank, and taking mid to short term loans against it.

I first read about this story in Bloomberg which reported that a regional bank – Credito Emiliano Spa has 17,000 tons of parmesan cheese stored in its vaults. Thieves broke into their vault in February and stole 570 pieces; luckily for the cheese producers and banks, they were nabbed by the police.

This looks like a novel way of collateralizing debt, but apparently, is happening from the Middle Ages.

The cheese producers come to the bank with wheels of cheese, which gets valued by the bank, and they get as much as 80% of the value of the cheese.

Now, here is one security that is not toxic.

This story prompted me to look for more unusual collaterals that are being used around the world, and I found two more that were quite unusual.

Your Soul

Reuters reported a story recently about a moneylender in Latvia: Kontora Loan Company, which gives out a loan, keeping your soul as collateral.

You have to sign a contract pawning off your immortal soul, and if you don’t pay, you lose your soul. This company loans out small amounts (up to $500), for 1 to 90 days, and if you don’t pay, then you don’t have a soul, that’s it. No debt collectors, no credit agencies, nothing. You just don’t have a soul.

This is a nice little gimmick, and I tried to look up details about the default rate of this company, but couldn’t find much data. If anyone has more info, please share.

Future Rights to Art Work

I found this story in the Guardian, about celebrity photographer: Annie Leibovitz, who collateralized a loan against every photograph that she has ever taken, and every photograph that she will ever take in the future!

The company that did the deal is called “Art Capital”, and specializes in lending money with fine art as collateral. I found it quite intriguing that the deal included every photograph she takes in the future till she pays off the loan because normally, you think of collateral as stuff you already own.

Looking at these examples make me think that there is just no limit to the stuff you can collateralize, it can be edible, spiritual or even something from the future, if you can think it, you can pawn it.

Image by Sbisson

I have been playing an online game on Facebook called Farmville for about a week now. Farmville allows you to own and manage a farm on Facebook, and is quite an interesting game. I won’t call it addictive, but it does make me come back to it every day.

You can grow crops, trees, own animals and decorate your farm with all sorts of buildings on Farmville. As you gain more experience, you jump up levels, and are able to grow a bigger variety of crops, and own more animals, trees, buildings etc.

You can invite your friends to be your neighbors, and having neighbors is one of the keys to unlocking more stuff, and allows you to do more.

There is a market in the game, and you can buy and sell stuff on this market. The game has two currencies, called – coins and cash. You get coins when you harvest crops, and then these coins can be used to buy more seeds, trees and other things.

But, the cash currency is one that interests me the most. There is no way to earn cash within the game, and you have to buy cash with real money.

Why would you do that?

Because there are certain things that can be bought only with cash. For example, a manor in Farmville can be bought only with cash. No matter how many coins you have, if you want to buy a manor, you need to buy it with cash. A manor costs 56 cash.

Farmville sells cash in lots of — 25, 55, 115 and 240. You can buy 55 cash with 10 dollars. They give you 5 cash to start with, so you can spend 10 dollars, and buy yourself a nice manor on Farmville.

Selling virtual goods is a relatively new business model for most companies, but it has been around for a few years now. The market for this is bigger than you might think.

Charles Hudson estimates the virtual goods market to be a whopping 200 million dollars in the United States!

Companies like Gaia online are transacting a million dollars a month in virtual goods. It is my guess that most of this goes to the bottom line because there can’t be much of a difference in cost between selling a thousand or two thousand virtual barns.

WSJ ran a story recently, which said that a lot of internet companies are finding that ad revenue is not enough to support such games, and they are turning to “branded entertainment campaigns”, where an advertiser is incorporated in the game, and also on selling virtual goods.

The industry is experimenting to see if selling virtual goods is a viable business model or not, and it will be really interesting to see how this shapes up a few years from now.

In the meanwhile, I don’t see myself buying any virtual goods, houses or animals with real money, what about you?

You are a blogger who has written a review about a recently launched mobile phone. You write a comprehensive review and present the pros and cons of this phone to your readers. You are trying to present maximum information to help them decide whether this phone is right for them or not.

You are not related to the phone company at all, and are not getting paid to write this review and in fact, you are not even promoting the phone.

This is a new company and its website is not very popular. When people search on the web for the phone, they invariably land on your website and read your review. It makes them think that you are in some way associated with the phone. In some cases, they even think that this is the website of the phone company.

I am one such person. I ordered the phone about a month ago and have the paid full price for it. For some reason the phone has not been delivered to me yet, and not only that, I haven’t received any acknowledgement for my purchase.

I reach your website and write in a comment asking you why my phone wasn’t delivered and when you are going to ship it to me.

The comment is under moderation and you figure that you could help me by pointing me towards the real website of the phone company.

Will you delete my comment and / or respond to me and help me out, or ignore it because you get too many such unrelated requests and don’t have the time?

What will you do?

I was watching Bloomberg news last week, and there was a Hong Kong fund manager, who was discussing the Chinese IPO market.

China has seen a whole host of IPOs recently, and many of those have scorched on listing. In fact, Chinese IPOs are getting so hot, in a period of a couple of weeks; a million trading accounts were opened!

Now, I know that there are a gazillion people in China, but a million trading accounts in two weeks?

All these IPOs have done well on listing, and the host asked the fund manager whether there was any risk of an IPO bubble. His answer was – probably not for another 18 months.

I was struck by the simplicity and honesty of the answer. Most of the time, you see fund managers and analysts defending stocks when they are too high, and coming up with numbers to justify the high prices.

Here is a guy who came out straight and said, this is shaping up like a bubble, but will probably not burst for another 18 months, so you can have fun till then.

The hot IPO market, regardless of which country it is, is the best example of the greater fool theory playing out.

People don’t care about how well the stock is going to do in the long run, if they can get their hands on it on the opening day. After that they just want a greater fool who is willing to buy that stock from them at a higher price.

This kind of  thing works well; till it stops working. The trouble is that no one knows when it will stop working. If you don’t play this lottery, you feel left out when others make money. If you play the lottery, you expose yourself to high priced IPOs.

That’s pretty much the case with all bubbles and why we have them for centuries now. I’ve seen this movie and know how it ends, the trouble is – I don’t know when it ends.