The Silence of the Lambs
October 05, 06A few weeks ago our column started with, “Why the hell should we finance DTC Sight boxes, which we know to be overpriced and are causing losses to our clients?” fumed a diamond banker from his holiday resort somewhere on the Mediterranean coast. “That’s irrational behavior on our part. The time has come to put a stop to it. It is irresponsible from a banking risk perspective to make facilities available for the financing of an over-priced commodity.”
The article generated quite a few of responses by bankers and others – mostly not for attribution or quotation. However, the highly respected Dean of the Diamond Bankers, the Chairman of the Antwerp
Dear Chaim,
It is not part of Antwerp
Although at ADB we do not know what other committed diamond bankers think about your analysis, we can only but profoundly regret your accusing ‘responsible’ diamond bankers – as ADB thinks it is – as adhering to a ‘distorting credit culture’, by ‘bending over backwards for their clients (and seemingly even producers)’, by ‘comprising their credit principles’, by ‘their poor judgment of risks’ and by being, in the end, only ‘anxious over income’.
According to ADB, dear Chaim, your analysis is – somewhat unexpected from a reputed and usually poised industry watcher – somewhat biased and wrong.
First of all, you are somewhat biased because you are only picking on the DTC.
Indeed, how about the increasing number of new diamond producers that have entered the market and only seem to adhere, like meantime DTC too (why shouldn’t it), to a very simple “dig and sell to the preferred customer at the highest possible price” approach? And – here’s the rub – how many diamantaires would ever dare to discuss the price tag of rough offered when knowing that many other preferred buyers ‘elect’ are queuing up?
But, seemingly, those preferred buyers did start to speak up a bit because ‘deferred allocations’ are now seemingly ‘in’. But what, in the end, do these deferrals mean and how long will this new ‘fabrication’ last? Does deferral from producers’ end really means waiting for better times, i.e. rough and polished pipeline stocks being fully absorbed, flooded factories becoming operational again and bank debt being reduced to reasonable levels? From our end, we really do hope so.
Indeed, one of the basic (and unfortunate) misconceptions in our diamond industry is that rough is so scarce but money supply is so abundantly available. This time honoured misconception lead to a situation where diamond companies so much emphasized the importance of access … to rough that they forgot, as usual, to even ever consider the possible limitations of access to … money.
As such, diamond companies now being confronted with a clearly different approach between diamond producers (seemingly just digging and selling to the highest bidder, whatever market circum-stances are) and committed diamond bankers (focussing on price stability, reasonable inventories, sound demand and reasonable credit terms), could possibly witness a tremendous clash between both while, them, sitting in the middle…
Unless, of course, diamond producers would start to realize that (theoretical) credit facilities granted to their preferred buyers do not systematically mean that whatever allocation they present to their preferred customer will automatically be translated in a disbursement by their customer’s committed diamond bankers.
On the other hand, will diamond companies not be confronted with a heart breaking choice between perhaps loosing a preferred source or loosing the time-honoured support of their bankers?
And here we touch upon the second and basic problem where you may perhaps be wrong, dear Chaim.
You are suggesting, in fact, that diamond bankers are some kind of “silent lambs”, almost domesticated by clients and producers, continuously comprising, being poor judges of risk and – foremost – being the ‘Scrooges’ of the industry that are only anxious over their income.
I know that you’re now and then somewhat provocative, but I don’t know whether you realize what your somewhat offensive statements could eventually trigger. Let’s imagine…
The (more responsible) diamond bankers of the industry could, without any problem whatsoever, -and within a most perfect legal framework - almost immediately come up with enforcing a number of restrictive ‘credit principles’ (‘compromised’ as you’ve called them), that could completely block any further rough purchases or manufacturing activity, just because of a clear lack of ‘responsible behaviour’ shown by whatever producer, in case that behaviour would be translated in the slightest lack of collateral at our customers’ level.
At the same time, some bankers could almost immediately install very severe penalty fees for any lack of collateral caused by previous rough purchases (again from whatever producer) that could not have been turned – in time- into proven (profitable) sales of rough and/or polished.
Some bankers could, very easily, crack down on the ever increasing payment delays experienced throughout the entire diamond pipeline. Counterparties that have the intention ‘to ride their suppliers’, and suppliers consenting to this, could very easily be blocked for any further receivables finance as from the very first day of overdue. Whether related to local or international outstanding receivables.
Some responsible bankers could, easily, install a very meticulous import and export tracking system by scrutinizing on carats and values of imported and exported rough and polished, demand constant feedback on goods bought and sold, start to monitor price differences, install severe checks on inter-company imports and exports, and margins as well, etc. etc. Insufficient answers and the slightest lack of collateral may trigger a complete blocking of facilities. And so on, and on, and on.
Consequently, time may have come that the entire diamond industry should start to understand one important thing, as ugly as it may sound.
A diamond producer can very easily make or break a diamond company. But so can bankers - without any doubt and by just strictly adhering to the credit terms agreed upon with their individual customers and within a perfect legal framework.
As such, the entire diamond industry (from producer to jewellery manufacturer) should perhaps start to cherish a bit more the (still) prevailing ‘silence of the lambs’, i.e. the industry’s diamond bankers.
At ADB, we can only but hope that the industry cherishes indeed this ‘temporary’ silence.
Because, whenever the industry’s silent lambs would ever break their silence and start to take up the role of ‘new custodians’, then Dr. [Hannibal] Lecter rising out of Pandora’s Box may just look like an innocent Red Robin. And who will then be our beautiful Clarice?
As such, all of us can only but hope that all responsible players in our beautiful industry are conscientious of the fact that dealing in a luxury product necessitates rational behaviour and casts away any irrational exuberance. And this is the only way to ensure a further ‘silence of the lambs’ and, consequently, avoid a so-called ‘banking revolt’.
By the way, dear Chaim, none of ADB’s managing directors have been spending their 2006 holidays at some beautiful Mediterranean beach… Why, the ’hell’, should they have? It really was a beautiful summer in
Hopefully this will solve one of the (
Antwerp
Chaim’s Comments:
Wow – and you say that I am "now and then somewhat provocative.” It seems that I have finally found my master. I wouldn’t dare to say that “the time may have come that the entire diamond industry should start to understand” that “a bank can very easily make or break a customer” by “just strictly adhering to the credit terms agreed upon with their individual customers and within a perfect legal framework.”
Paul, you really scare me when you suggest that my remarks could trigger banks to “enforce a number of restrictive ‘credit principles’ that could completely block any further rough purchases or manufacturing activity…” or that “insufficient answers [to banks] and the slightest lack of collateral may trigger a complete blocking of facilities.” I cannot comprehend how my writing could bring about such actions – and, surely, if this could be the result, I should have refrained from writing the article. However, it appears that the various theoretical actions you describe certainly warrant my fears about a “banking revolt.”
You charge that I am “somewhat biased because I am only picking on the DTC.” I regret if I gave that impression. You are absolutely right that other major rough producers also insist on cash terms – and in that sense DTC is not an exception. My article wasn’t about suppliers, it was about banks. I cited the DTC as an example because the behavior of some banks is quite inexplicable to me. Maybe I failed to spell out my concerns in greater detail.
When DTC Sightholders are unable to honor their payment obligations to (non-DTC, Rio Tinto or BHP-Billiton) trade suppliers in the market, when they postpone payments to their suppliers in the business for periods of sometimes up to nine months, when they reach payment agreements with their suppliers on financial settlements, such action definitely affect many diamond companies which also are clients of the diamond banks. The banks surely see both sides: the producer clients who get paid immediately - and other trade suppliers (of rough or of polished) who may have to wait for their money – presumably because the client doesn’t have sufficient facilities to pay them. However, these same
Paul, I want to stress (as I did in the article) that I have faith in you and your colleagues in other banks. Therefore, I wouldn’t mind it at all if the banks “break the silence of the lambs” and start to assume a “custodian” position in the industry. However, I honestly fail to comprehend your suggestion that the “breaking of silence” would lead banks to behave like Dr. Lecter. If my memory serves, Dr. Hannibal Lecter is a fictional character appearing in four novels by author Thomas Harris and their film adaptations. Lecter is an ingenious, cultured psychiatrist, and resourceful serial killer, who practices cannibalism upon his victims. He has often been rated amongst the greatest villains in literature and film. I, personally, would never in a life time – even in my worst nightmares – dare to suggest that this could be a diamond banker’s role as custodian…
You ask whether diamond companies will be confronted with a heart breaking choice between perhaps loosing a preferred source [of rough] or loosing the time-honored support of their bankers. It is that time-honored support that I suggested should not be taken for granted – and you, in a very original and maybe quite scary way, seem to confirm that. That is very significant: at the end of the day I am only a writer, you, however, are the leading diamond banker. The significance of my views pale in reference to the weight of yours.
I pray that banking clients will never have to make that heart breaking choice.
Have a nice weekend.