Richard Sandor: “Junk bonds to carbon cop-out”

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Richard Sandor: Junk bonds to carbon cop-out

In the 1970s, Richard Sandor was one of the originators of interest rate derivatives. In the 1980s, he made a fortune at Drexel Burnham Lambert, where he developed “collateral mortgage obligations”. In the 1980s and 1990s he helped develop pollution trading. And as founder of the Chicago Climate Exchange, he’s been described as the “father of carbon trading”.

In 2007, he was named as a hero of the environment by Time magazine. “Sandor is an innovator and a great booster of new markets, and he had the vision to create something out of nothing,” writes James Cameron in Time. Creating something (money) out of nothing (carbon offsets) is a good description of the carbon market. “And he’s always been phenomenal at making money,” Cameron writes. Last year, Sandor earned US$1 million.

Since 2000, Sandor has been a director of American Electric Power, the biggest coal burner in the USA. AEP has teamed up with The Nature Conservancy for two controversial REDD-type projects: the Noel Kempff project in Bolivia and the Guaraqueçaba project in Brazil. And where does AEP plan to sell its carbon credits from the Noel Kempff project? The Chicago Climate Exchange. Cozy.

In February 2009, in a discussion on Al Jazeera, Sandor explained that “The mess in the financial markets is related to opaqueness, which doesn’t exist on exchanges.” But an article in the current issue of Private Eye reveals that Sandor’s operations in the climate business seem to be pretty murky.

Of course, this isn’t only about Sandor. As Larry Lohmann, of the UK-based organisation The Corner House, points out, “There are close parallels between the rampant financial innovations behind the current financial crisis and the innovations feeding carbon trading.” A Corner House Briefing, from September 2009, “When Markets are Poison: Learning about Climate Policy from the Financial Crisis” is available here (pdf file, 568 KB).

Here’s the Al Jazeera debate, where Patrick Bond, Director of the Centre for Civil Society, University of KwaZulu-Natal, corrects some of Sandor’s myths, followed by the article in Private Eye. “I think in fact that many of these emissions markets are full of chancers”, Bond notes on Al Jazeera.

JUNK BONDS TO CARBON COP-OUT

Private Eye, No. 1258, 19 March – 1 April 2010

CARBON emissions trading might be useless at tackling climate change but it is proving to be highly profitable for the financial engineers behind it – men like the godfather of pollution trading, an American called Richard Sandor, who was one of the founders of financial derivatives in the 1980s at junk bond trader Drexel Burnham Lambert.

It was at Drexel Burnham Lambert that Sandor pioneered the “collateral mortgage obligations” that eventually brought the financial markets to their knees. He was also architect of the first pollution permit trading scheme (in sulphur emissions) in the US in the 1990s.

Today he chairs the company controlling more than 80 percent of EU carbon emissions trading, Climate Exchange plc, which regularly launches “innovative” carbon products such as daily futures contracts and has set up trading exchanges in China, Canada and Australia. Sandor meanwhile has been a big mover behind plans for a mandatory trading system in the US that would see his company’s income multiply.

‘Significant long-term growth potential’

Under Sandor and chief executive and offshore insurance specialist Neil Eckert, Climate Exchange plc owns the European Climate Exchange based in London’s Bishopsgate, as well as the Chicago Climate Exchange and the Chicago Climate Futures Exchange. Business is especially booming in London, as Eckert boasted in a results announcement last week: “ECX had a wonderful year and with the continuing EU discussion of an anticipated 30 percent cut [in emissions] by 2020 and particularly the move to 100 percent auctioning [of allowances] in 2011, shows significant long-term growth potential.”

Last year Sandor earned $1m and Eckert £575,000. Sandor’s shares in the company are worth more that £40m, and Eckert’s around £5m on top of £7m worth of options. These riches came on the back of operating profits last year of £11.5m, made almost entirely in London where trading in £70bn worth of emissions allowances by the European exchange’s 100 members, including such renowned environmentalists as Shell, Barclays and RBS, earned the exchange £11.4m.

Not that any of this finds its way into the government’s coffers in the form of tax that might be invested in slightly more useful environmental measures. Climate Exchange plc is registered in the tax haven of the Isle of Man, where, according to its accounts, “it is subject to tax at zero percent” having been set up there when it was simply a fund company in order to avoid capital gains tax. But the company also claims that its operating subsidiaries “are resident in various jurisdictions where they are subject to local rates of taxation”.

Same name, different company

In Britain this might be thought to refer to the company ostensibly running the exchange in Bishopsgate, European Climate Exchange Ltd. But its accounts, filed quietly at Companies House, show that it is owned by an Irish company with, er, exactly same the same name: European Climate Exchange Ltd. It is this Irish company, registered at its lawyer’s office at 70 Sir John Rogerson’s Quay in Dublin (without a trading exchange in sight and only a company secretary to be found there), that earns the commissions.

The synonymous British company is reimbursed for its costs of running the exchange while the profits that accumulate in Dublin are then returned to its ultimate parent company, Climate Exchange plc, in the Isle of Man in the form of tax-free interest payments on the substantial loans from Douglas that fund the operation.

This kind of tax planning requires plenty of carbon-intensive jetting off to board meetings in whichever countries the directors want their companies to be tax resident. As a Climate Exchange plc spokesman told the Eye: “They’re always travelling.” This might not do much for the planet but it’ll be good for business when airlines are forced into the trading scheme from 2012.

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