Banking on the Jolly Roger

My older son, a naval officer aboard the destroyer USS Mahan, returned recently from the Horn of Africa where his ship monitored pirates and assisted in the capture of a group of Somali freebooters. This event may account for my picking up and reading Michael Crichton’s posthumously published novel, Pirate Latitudes. Unlike Crichton’s science-based novels, Pirate is a rollicking, bawdy tale about Captain Charles Hunter, an English “privateer” who preys on Spanish galleons in the Caribbean. Hunter operates during the early 17th century out of the English outpost of Port Royal, Jamaica a town peopled by frisky convict women exiles, lecherous and usually inebriated seamen who provide livelihoods for many of the women, and a number of treacherous opportunists eager to profit from Hunter’s activities.

A privateer is of course a government-sanctioned pirate who pledges, in exchange for his license, to share the bounty from his predations. The privateer’s warrant is an example of the maritime sector’s many financial innovations such as casualty insurance and market risk bearing arrangements. Even unsanctioned pirates had a sophisticated risk sharing system that sometimes involved so-called law-abiding officials who accepted shares of plunder in exchange for safe passage and anchorage. In return for providing legal cover to Hunter and other privateers, England’s King Charles I received ten percent of the gross value of the prize. The remainder, after paying off the investors, was distributed among the officers and crew.  The Spanish of course regarded the privateers as common pirates and executed those that they captured.

We usually tell our students that equity-financed business arose in the 17th century with the founding of the joint stock Dutch East India Company in 1602 and the English East India Company by royal charter from Elizabeth in 1660 but there were equity-like instruments used to finance and share maritime risk long before then. Meir Kohn, a Dartmouth economics professor, reminds us that the sea loan was mentioned in the Code of Hammurabi in 2250BC. The sea loan was usually payable only when the goods arrived or were sold and thus served to share the risk, one of which of course was piracy, between the lender and the trader.

I was alerted to the continuing financial sophistication of pirates when my son sent me a link to a Military Times article http://militarytimes.com/blogs/scoopdeck/ that describes the new stock exchange set up in Haradheere, Somalia to finance 72 (up from 15 four months ago) listed  “maritime companies” ten of which have already successfully hijacked vessels and will pay dividends upon receipt of the ransoms. Reuters quotes Mohammed, an official of the exchange:

The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials … we’ve made piracy a community activity.

Jim and I don’t condone or romanticize piracy but it is fascinating to see an example of entrepreneurial activity financed both by the well-to-do and the ordinary citizen looking for an above-average return. Sahra Ibrahim, a 22-year-old Somali divorcee and one of the investors interviewed by Reuters noted,

I am waiting for my share after I contributed a rocket-propelled grenade for the operation,” she said, adding that she got the weapon from her ex-husband in alimony. “I am really happy and lucky. I have made $75,000 in only 38 days since I joined the ‘company’.”

I am not sure which part of Sahra’s story I find more intriguing, her enviable investment record or the fact that Somalia somehow maintains a functioning divorce court able to set and enforce an alimony judgment which of course is just another form of equity instrument for risk and reward sharing.

Posted by Bob

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