Securitise the Queen
Brett Scott is a writer and consultant working in alternative finance and financial activism. He blogs at www.suitpossum.blogspot.com and tweets as @suitpossum.
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.
But what if Queen departs this earth within the next 20 years? That’s no problem, because the deal can be structured such that the Princes become collateral too. The entire Royal family can play their part in convincing the ratings agencies to stamp the structure with the highest AAA rating.
Of course, the inevitable bubble would come. We’d make CDOs of monarch-backed securities, and it will all spiral out of control. At some point investors will suddenly stand back and think, wait a moment, what exactly is backing these instruments? Then someone will say “It’s the bloody Queen isn’t it?” At that point the monarch-backed securities market will implode. But that’s many years off. In the meantime, the government will have its cash, the investors will have the Queen, and I’ll have my modest fees that I took in arranging the deal. Hooray, long live the monarchy!
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If monarch-backed securities are like mortgage-backed securities, does that mean we get to chop the royal family up into little bits and sell off the parcels?
Absolutely brilliant suggestions Steve, Brett and Ben. As an American I have often struggled to understand Her Majesty as an entity beyond Freddy Mercury’s master bathroom. I suggest the following adjustments: in exchange for a modest fee, the originator, the Archbishop of Canterbury, shall transfer to Steve the rights to claims on income flows resulting from the social contract between the British Crown and its subjects. This contract is binding in lieu of God’s explicit commitment, witnessed by the Archbishop, to the Windsors as rightful occupants of the British Throne. Steve will then pass these rights to claims on income flows, resulting from commercial activities as well as the financial compensation paid by Parliament to the Windsor’s, on to Brett, again for a modest fee. Brett, working from Guernsey, will then securitize the rights to claims and issue CDO’s in tranches which will be eagerly bought by the investors Ben has rounded up via contacts to Hollywood types and Greek shipping magnates. He’ll also issue CDO squared and do a lot of OTC CDS deals with hedgies. Simultaneously I will short the tripple B and C tranches knowing that the Prince William will get bored with Kate and undertake an extended fishing expedition in Scotland where he will be taken prisoner during a sudden and violent Clan resurgence. He’ll be held prisoner for years in a stinking dungeon below the Castle of Edinborough and obtain release after he promises to pay all aforementioned income flows to the Bank of Scotland, which by that time will be in the control of the Baden-Württemburgische Landesbank, which will with uncharacteristic savagery dismiss all previous claims and/or rights to claims.
Brett – I think we need to give some thought to how the pricing of such Monarch-Backed Securities would work. Obviously it would partly depend on the perceived value of the monarch in question – I’m sure Queen Elizabeth II MBS would trade at a premium over say, King Juan Carlos of Spain MBS.
But then there is the maturity of the monarch to consider as well. And in this, I don’t mean maturity in the sense of what Prince Harry lacks, but in the sense of time to expiry of the underlying asset. With a bond the maturity date is known, yet with a Monarch it’s uncertain. We can take guesses, and we know the date is always getting closer, but every minor health scare or twisted ankle could cause a wave of sell-offs of Monarch-Backed Securities that could threaten the integrity of the financial system.
As you’ve suggested one solution to this is to have the MBS secured not on a named monarch, but on the position. Then, when (heaven forbid) Her Majesty passes on, the security would automatically be backed by Charles instead. However, investors may be outraged by such a practice if they felt that the underlying asset had been swapped for one of lower quality.
Excellent idea Steve, sounds like we should go into business together. We can call it Royal London Asset Management… ah wait, it already exists
Great post! How about securitising the future monarch-related earnings as well? Like Bowie Bonds (which securitised the future royalties of David Bowie’s records) but we can realise the revenue that the royal family will make us over the next hundred years right now through securitisation 🙂