Monday, June 4, 2012

Financial Engineering: Is it Time for The Exchequer to Securitise the Queen?

From Bright Green:

Times of economic stress call for creative solutions, and on this Diamond Jubilee I think it’s fitting to celebrate the Queen by using her for some first-rate financial engineering. I think it’s time the UK government started issuing MBS. Yes, Monarch-Backed Securities.

Monarch-backed securities are innovative new financial instruments that will securitise the Queen, using her as collateral against which the government can borrow money. Traditionally, government debt was thought to be so safe that it was considered risk free, but we don’t really believe that any more – Queenie would be doing the UK a great favour if she was put up as collateral, extending the Royal favour of lowering the UK’s cost of borrowing. Property is normally the thing people use for loan collateral, because it’s big and solid, but Queenie is infinitely more solid than property (Indeed, her predecessors basically invented the concept of private property back in the enclosure movement).

Although it sounds extreme, the idea of using the Queen as collateral to secure debt makes perfect sense. After all, government debt is often called sovereign debt, and isn’t she the sovereign? Imagine how easy it would be for the treasury to market monarch-backed securities to institutional investors: Gentlemen, not only are our Sovereign Bonds truly sovereign, but they’re backed by divine decree and the hand of God. It seems to me that Her Majesty is an under-utilised asset, being used right now for the lowly task of drawing tourists. Release her full potential. Issue debt against her majestic power.

The technicalities of the monarch-backed sovereign debt could be ironed out fairly quickly. We put the Queen into an SPV (a special purpose vehicle, of financial crisis fame), which issues 20-year bonds to investors. The SPV is bankruptcy remote, which means that if the entity defaults, the investors can claim the Queen, but no government assets. Of course we tranche the returns: Risk-averse investors take the upper tranches, backed by the stable cash flows of the Queen’s ordinary tourist revenue. Hedge funds take the risky lower tranches, betting on the volatile residual returns from Royal event licensing rights, such as a wedding or funeral....MORE