How Financiers Can Save Libya (and Make Money Doing It)

The Libyan problem isn’t a problem to be solved by policymakers. It’s a problem to be solved by financiers. Bankers stand a far better chance of helping the Libyan rebels than diplomats. Let me explain why.

The real problem facing the rebels in Libya is a liquidity problem. No, let me repeat that: what you’re seeing when you see BBC footage of rebels fighting in Libya is evidence of a liquidity problem.

Let’s say there is, for ease of calculation, three hundred billion dollars’ worth of oil beneath the sands of Libya. I’m including in that number as-yet-undiscovered oil, contested oil rights, and so on – it might be off by an order of magnitude in either direction when all is said and done, but let’s say it’s a firm number for now. Let’s further say that the rebels have at least a one-third chance at this point of toppling the outgoing government and returning to a somewhat normal state of affairs on a reasonable timeline. This means that, as the leaders of the transitional council in Libya, you have a hundred billion dollars to play with. Let’s say that for a billion dollars you could hire, rent, coerce, or obtain the participation of enough mercenaries and equipment to disable, if not completely destroy, the outgoing regime – that’s only one percent of your budget.

But the problem is that mercenaries won’t work for contracts granting them minority interests in oil that may not be accessible in the future and that may be guaranteed by contracts that may be unenforceable in Libya’s future court system. The men who run top mercenary outfits in Africa didn’t make their money by taking speculative contracts as payment – not even when dealing with the Belgians – they made their money the old-fashioned way, as cash on the barrelhead (or perhaps, more accurately, in the boot of an SUV).

The rebels have some probability (we can argue what this probability is) of controlling a very large asset (Libya) that has some price (again, we can argue about what the value of control of Libya is in financial terms). Only a fraction of this value is needed to hire enough mercenaries and equipment to overwhelm the outgoing government. There seems to be a reasonable probability that the transitional council in Libya will develop into a new government and could be an obligated counterparty in any contracts concerning Libya's natural resources.

There is a type of person whose job it is to solve situations where people need to put large, illiquid assets to use.

They are called investment bankers.

If the rebels were a bit more financially sophisticated, they could do the following before the end of this weekend: 1) build a short pitch on the case for investing in a mercenary force in Libya or, alternatively, lending the rebels enough money to build their own force, 2) build a business plan that includes giving outside investors an equity stake in the oil interests that will be created once the rebels control the country, 3) fly someone to New York or London to give the pitch to an assortment of investment bankers and be ready to negotiate a high rate of return on this investment. The investment could be structured as a high-interest bridge loan or some sort of balloon debt instrument, either being payable with equity in future oil interests or a share of interim net revenue from the post-revolution oil industry.

To me, it’s an obvious decision. The next week or two or three will be the turning point in this conflict. If you are the rebels and want to get more personnel and matériel on your side, it needs to be done now. And it’s going to be expensive. You have a multi-billion-dollar asset at stake (Libya and its constituent oil wealth) and there are people who will deal with you on these terms. If you make a deal today, you will have cash on hand and will be in a position to hire the best mercenaries and equipment, hire top attorneys and other consultants to build the structures the new Libya will need, and offer large cash bounties on top commanders still loyal to Qaddafi. Most of all, you get to come out the other side saying that you had to make hard choices but you were able to win this war on your terms rather than appearing disorganized, underprepared, and subordinate to the bureaucratic deliberations of the United Nations.

So, rebels, now that Qaddafi’s assets are frozen, you’ve got all the money.

It’s time to call the bankers and put some of it to use.