Sino-Forest as Russian love story

Posted by John McDermott on Jun 27 18:23.

FT Alphaville caught up on its Sino-Forest reading over the weekend and enjoyed the latest post by John Hempton of Bronte Capital. It looks at Paulson & Co.’s loss from the perspective of a fellow portfolio manager, offering sympathy and rivalry in equal measure. Hempton recognises that small teams of investors will use “shortcuts” based on received wisdom such as timber being a safe asset.

However, that does not excuse Paulson & Co for not doing their research thoroughly, writes Hempton:

Where I am less sympathetic is to Paulson’s statements that staff went to see the operations (and hence they judged they were real) and also to the line that they did a thorough review of the financial statements.

If you go see Sino Forest’s operations you will see what Sino Forest wants to show you. They will show you trees. You can’t tell whether that is 5 thousand hectares or 500 thousand hectares. Seeing trees does not answer the question. There is no point looking at things that are not going to tell you anything anyway – and so Paulson’s staff member wasted his time looking. That is an amateur-hour mistake.

Sino-Forest homework done for the evening, FT Alphaville returned to some extra-curricular reading. But, flicking to Part Two, Chapter 16 of Leo Tolstoy’s Anna Karenina (as one does), we soon felt confused. Have we picked up the wrong book? I thought this was supposed to be a love story?

For it turns out that Tolstoy foreshadowed Hempton by about 138 years…

We join the story in the Russian countryside. Konstantin Dmitrievich Levin, a reclusive aristocrat, has been rejected by Princess Katerina Alexandrovna Shcherbatskaya; “Kitty” to her friends. Kitty’s brother-in-law, the ebullient Prince Stepan Arkadyevitch Oblonsky, has come to visit Levin to persuade him to give it another try with the increasingly frazzled Kitty, and, to sell some trees.

Perhaps we’ve been following Sino-Forest for too long already, but we could spot our John Paulson, Carson Block and Sino-Forest characters in this passage:

“Have you quite settled about the forest with Ryabinin?” asked Levin.

“Yes, it’s settled. The price is magnificent; thirty-eight thousand. Eight straight away, and the rest in six years. I’ve been bothering about it for ever so long. No one would give more.”

“Then you’ve as good as given away your forest for nothing,” said Levin gloomily.

“How do you mean for nothing?” said Stepan Arkadyevitch with a good-humored smile, knowing that nothing would be right in Levin’s eyes now.

“Because the forest is worth at least a hundred and fifty roubles the acre,” answered Levin.

“Oh, these farmers!” said Stepan Arkadyevitch playfully. “Your tone of contempt for us poor townsfolk!… But when it comes to business, we do it better than anyone. I assure you I have reckoned it all out,” he said, “and the forest is fetching a very good price – so much so that I’m afraid of this fellow’s crying off, in fact. You know it’s not ‘timber,’” said Stepan Arkadyevitch, hoping by this distinction to convince Levin completely of the unfairness of his doubts. “And it won’t run to more than twenty-five yards of fagots per acre, and he’s giving me at the rate of seventy roubles the acre.”

Levin smiled contemptuously. “I know,” he thought, “that fashion not only in him, but in all city people, who, after being twice in ten years in the country, pick up two or three phrases and use them in season and out of season, firmly persuaded that they know all about it. ‘_Timber, run to so many yards the acre._’ He says those words without understanding them himself.”

“I wouldn’t attempt to teach you what you write about in your office,” said he, “and if need arose, I should come to you to ask about it. But you’re so positive you know all the lore of the forest. It’s difficult. Have you counted the trees?”

“How count the trees?” said Stepan Arkadyevitch, laughing, still trying to draw his friend out of his ill-temper. “Count the sands of the sea, number the stars. Some higher power might do it.”

“Oh, well, the higher power of Ryabinin can. Not a single merchant ever buys a forest without counting the trees, unless they get it given them for nothing, as you’re doing now. I know your forest. I go there every year shooting, and your forest’s worth a hundred and fifty roubles an acre paid down, while he’s giving you sixty by installments. So that in fact you’re making him a present of thirty thousand.”

“Come, don’t let your imagination run away with you,” said Stepan Arkadyevitch piteously. “Why was it none would give it, then?”

“Why, because he has an understanding with the merchants; he’s bought them off. I’ve had to do with all of them; I know them. They’re not merchants, you know: they’re speculators. He wouldn’t look at a bargain that gave him ten, fifteen per cent profit, but holds back to buy a rouble’s worth for twenty kopecks.”

“Well, enough of it! You’re out of temper.”

“Not the least,” said Levin gloomily, as they drove up to the house.

With sincerest apologies to Leo, perhaps all happy Chinese reverse mergers resemble one another, while each unhappy Chinese reverse merger is unhappy in its own way.

Related links:
Sino-Forest coverage – FT Tilt
Sino-Forest coverage – FT Alphaville
The Translation Wars – The New Yorker

This entry was posted by John McDermott on Monday, June 27th, 2011 at 18:23 and is filed under Capital markets, Commodities, Hedge funds, People. Tagged with , , , , , , , .

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