Tommy had advised clients in his PR business about buying carbon credits to offset or reduce their carbon footprint as part of a larger environmental image strategy. He hadn’t participated in these markets directly, but he knew that there were regional carbon exchanges in which customers could buy credits, allowing them to offset their carbon output or just buy and hold the credits to “retire” the carbon pollution altogether. Secondary markets to buy and sell these originally issued credits were also developing.
“I’m listening,” Tommy said.
“So, you verify energy savings from projects and create the carbon credits on these regional exchanges. We buy them up. The people doing the project get some extra cash for helping to create the savings, which creates the credit. Then, we have an asset to resell into the carbon exchange markets.”
“And we eventually sell them to power plants and other polluters so they can cover their system allowances and go on polluting?” Tommy cynically questioned.
“First of all, I find it funny that you’re getting a little judgmental, since that’s exactly what you advised your clients to do to clean up their images. But, yes, we would sell some of them. Those firms are putting carbon dioxide into the air, polluting as you call it, either way. It’s a voluntary system, and at least these buyers are stepping up and paying someone else not to pollute so they can. No one is holding a gun to their heads to do it at this point.”
“I guess,” Tommy admitted.
“There will be other buyers, too. Environmental groups and socially responsible, self-absorbed businesses that want to buy up the credits to make themselves feel better.”
“More than feel better,” Tommy argued.
“Whatever. You get my point. So, we help push the popularity and
accessibility and eventually sell the carbon credits for more than we paid.”
“If the market goes up,” Tommy said.
“We will help drive the popularity and the demand. Prices are bound to go up, and if the President or Congress or the EPA or whomever puts a carbon cap-and-trade system in place, voluntary becomes mandatory, and we go from making millions to billions,” John explained.
“Billions? Really?” Tommy questioned sarcastically.
“Think big, Tommy,” John crooned with arms open wide.
“So, what do we each need to do to make this happen?” Unknowingly, Tommy had asked the exact question that John wanted to hear.
“Rumor has it you made around twenty million selling your PR consultancy. Not bad for a bunch of guys sitting around not making anything. I want you to put it all into the new company, or whatever amount it was after taxes.”
“You’ve got to be kidding,” Tommy scoffed. “I worked for a long time to make that happen! I’m not betting the whole thing!”
“If we are going to do this together, you are absolutely going to put it all in, and you’ll reap the benefits. You will be running the main business, and I need to know that if things get tough you won’t bail. You put in twenty million and I put in forty million. We each own fifty percent. You would make ten million on the first day without doing a damn thing.”
Tommy was listening, but not looking at John. He didn’t want to give him the satisfaction of seeing the fear and uncertainty in his eyes, so he just stared at the building across the street. John loved this scenario . . . a guy’s future hanging in the balance, forty million of his own money that might turn into much more, or be gone forever. The adrenaline rush of doing deals was pretty much all he had in his life anymore. His wife had died and they didn’t have any children. No hobbies, just work and money. John’s social life had revolved around his wife’s family and friends. Now that she was gone, he simply didn’t know how to connect with people outside of work anymore. He was lonely and filled the void with competition. There was never enough money; there was always someone richer to try and catch.
Finally making eye contact, Tommy spoke. “You have my attention, but how do I know that I would really run the business? How do I know that you’ll actually put our future in my hands?”
John was prepared for this response, so he smoothly added, “What if we give one percent to someone we both trust. That person breaks the tie if we can’t agree. I believe we have a mutual friend named George.”
“You know George Shannon?” Tommy was completely caught off guard.
“Yep. He worked for me for ten years on my first business and cashed a check when I sold it,” John said.
“Well, then you obviously know he worked for me, and he just got some money when I sold. He told me he was going to take the few hundred thousand and take some time off to be with his wife and kids.”
“My guess is that this venture might entice him to come back. Let’s assume, for your decision-making process, that I can make that happen,” John offered.
“I don’t know . . .”
“Remember, Tommy, you have the chance to turn this into big money. Your name on a building at your alma mater kind of money or, a do-gooder like yourself, you can go change your corner of the world.”
“Will you give me a couple of days to think about it?” Tommy asked.
“Two at the most. We’ve got to move or move on, by noon Friday.”
Tommy labored under the weight of the pending decision as he lumbered slowly past the receptionist and toward the oversized glass double doors, scenarios sprinting through his head. He turned and glanced back at John who was already on the phone, poised to tackle whatever came next.
3
Tommy’s mind was churning. Do some good and make some money. What’s not to like? He shared the opportunity with Susan as they lay on the floor, naked with a sheet and blanket woven around their bodies.
“You’re nuts. You have all the money you’ll ever need. Go work in a soup kitchen if you want to feel good about helping someone. Keep your money.” Susan’s voice was escalating.
“I knew I could count on you for an opinion.” Tommy had expected her response, so he had waited until after he had greeted her, clad only in boxers. Her clothes made a trail from Tommy’s front door to the rug just short of the bed that had been the target destination. The physicality of the moment and its accompanying release of sexual tension had been enough for each of them. After the adrenaline ceased, Tommy felt too vulnerable and he had reached for the covers. Both Tommy and Susan started to see a pattern in their visits to each other’s homes. Have sex early, before they had time to argue.
“Are you seriously considering this?” Susan asked.
“Yeah. You want to know more about how it works?” Tommy offered and continued without waiting for an answer. “The new business would pay companies to help them complete projects or do more projects that save energy and reduced carbon emissions. In exchange for helping to pay for the project we would keep the value of the carbon credits. The price eventually goes up. There is a positive environmental impact. Everyone wins.”
“Sounds like if the value of the credits, or offsets, or whatever goes down, you lose,” Susan said.
“Well, true,” Tommy responded. “But we’ll have sixty million, and as long as we don’t get crazy with options, derivatives, or borrowing money, we can ride out any short term drops. We’ll be fine in the long run.”
“And who is we?” Susan asked.
“John DeFallo. I’m sure you’ve heard of him. The guy is a legend! He has the background to help pull this off, but he’ll be behind the scenes. I’ll be running the main business,” Tommy explained. “He just takes care of the trading in a sister company.”
“Of course, I have heard of John and I’m sure then that you have heard he’s nearly impossible to work with. Very demanding and uncontrollable. I’m sure that anyone that you ask that knows both of you would tell you this is a bad idea,” Susan lectured.
“Probably they would, so I won’t ask. I can make this work. I can handle him,” Tommy reasoned.
“Even if partners are a good match, I see bankruptcies all the tim
e when people think too big. I still think it’s a bad idea,” Susan cautioned.
She knew that he had already made the decision by the look in his eyes and the tone of his responses. She knew the possibility of making more money and being able to do something positive was going to be something Tommy couldn’t pass up.
“I know you’re going to do this, so at least let my firm set up the bylaws and get you incorporated,” Susan suggested.
“Great!” exclaimed Tommy. “Let’s celebrate.”
They got up, put on their clothes, opened a bottle of Merlot, and ordered Indian food from a place around the corner.
The next morning Tommy called John and said he was all-in as long as they spent some time getting to know each other and that his attorney could structure the deal. After a week of intense discussions and negotiations they were in business and ready to go with sixty million dollars in the bank and a twenty million line of credit with a promise from banks for more if they needed it. Tommy was confident that he could work with John and excited to take a shot at making something better of his life. He thought John was just the guy to help him pull it off.
John had worked out the details to get George on board, and Tommy hired him as the first employee. They rented an office space so that anyone coming to see them could gaze to the right of the entrance, with comfort, at the Chicago Board of Trade building. Tommy and George would laugh about their office location choice on the corner of Adams and LaSalle.
Their business had nothing to do with the old and trusted institution just down the street, but they hoped someday carbon would be traded like other Board of Trade commodities such as corn, soybeans and metals.
For now, it would all be through the various, relatively obscure, regional Carbon Trading Exchanges, with the hope that someday there would be more market size and mainstream legitimacy. They thought for now most people wouldn’t be any the wiser and perhaps they could garner some comfort level for clients by association with the large pillared institution that was the Chicago Board of Trade building on Jackson.
Tommy and George met once a week with John as they started up, usually in John’s office. He was too busy to veer from his schedule. The way John looked at it, he had a great deal of money invested, but even if it tanked, it wouldn’t bury him. Besides, he had a lot of ideas about how to help make sure it all went according to plan.
John paced back and forth on the opposite side of the conference room table from where George and Tommy sat. John was bold, colorful, and positive. Tommy thought this contrasted nicely with his own intense but unpretentious style that was accompanied by a somewhat negative outlook on life and pessimistic view of business in general. Being around someone more optimistic, he thought, would be a good thing. For some reason he trusted John. Maybe it was John’s confidence. Or maybe it was the challenge of working with a guy many thought was too difficult to manage or who needed fixing.
“We are on the cusp of something huge,” John reminded Tommy and George. “With the rep you two have in the environmental community and my ties to commodities, we can create the most powerful firm in what someday will be a huge industry.”
“How big? How soon?” George asked.
“A business worth hundreds of millions in two or three years. If we get the right president that mandates this shit, even sooner. Hell, almost overnight then, but we have to be the biggest and the best first.” John was caught up in his own rhetoric and continued on. “Right now, there are only millions of dollars of trades a week. If there is a cap-and-trade system, that will turn into billions. This market is only going to get bigger in the meantime.”
“How can you be so sure?” Tommy asked.
“Listen. Tree huggers like yourselves, no offense intended, are coming out of the woodwork. Your kind will drive this world. Green this and clean that . . .”
“Our kind?” Tommy interrupted, somewhat offended.
“Yeah. I love you guys. You’re creating the opportunity because you need to do the right thing by the environment. Don’t take offense; you people will be running the goddamn economy pretty soon if you don’t already. Are you against doing the right thing and making money? You want your twenty million back right now?”
“No.” Tommy said. “Well, maybe some of it.”
“Shit, wait until you have a couple hundred million. You can start giving it away if you feel guilty. Bottom line is you need a capitalist slug like me to really make this go.” Tommy was thinking and George was dazed, so John continued. “Hey, if it makes you feel better, we can give away ten percent of the profit to whatever swinging . . . do-gooder you want. Plus, it will be good for business and our image anyway.”
Tommy smirked. He was way more entertained by John’s mannerisms, energy, and word choice than offended. “Fine, but remember in our deal, I am responsible for every aspect of creating carbon credits—engineering, field verifications, quality. You stay out of the day-to-day business.”
“You have my word. That sounds boring, anyway,” John promised.
“Maybe boring, but we are trying to create millions of dollars of tradable carbon credits virtually out of thin air, so it needs to be done right.”
“Well, go ahead, and do it right,” John requested. “We’re all set. One company you run to create the carbon credits and one that I run to buy them up and resell them on the market. We’re in this together, and together we’ll make millions.”
4
Tommy and George turned all of their attention to setting up the necessary systems and staff to expand from their small startup operation.
George wasn’t as much a complement to Tommy’s skills and abilities as he was an extension of them. He was a decade older than Tommy and an odd combination of engineer and accountant. He was wicked smart and had picked up on everything from marketing to programming during his two previous, separate stints working for John and then more recently for Tommy. George was rail-thin with a full head of surprisingly dark hair parted crisply on the left. He wore larger-than-stylish dark-framed glasses but dressed much more hip than would be expected from someone his age. He had dutifully put three kids through college and now needed to concentrate on his and his wife’s financial future. George adored his wife and always thought that she deserved better than he had provided. This was his shot to change that.
Tommy took half of their 10,000 square foot office for his sales team. They worked through contractors to find customers that wanted to do energy projects, or sometimes were doing them anyway and offered them money to own their carbon credits. The way the carbon credits worked was that if someone reduced their energy use, they were deemed to have saved carbon from being belched from a power plant and into the air.
They, in essence, had stopped creating some power plant emissions and could sell those “credits” if they were properly documented.
Once a customer project was done, it was turned over to George and his staff in the other half of the office. They collected project invoices, documented savings, inspected projects, and tied a bow around the verification work, sending an electronic file to one of the carbon exchanges. In a few weeks back came verified tradable financial instruments that they could sell right away on the exchange that had certified the credits or hold and sell later. That was the firm’s only product for now, but there were also secondary markets developing that they could potentially engage in to make or lose more money. In a matter of months, their firm, Environmental Verifications, was cranking out millions of dollars of carbon offsets a month that were being regularly traded on the exchange that had approved them. Exchanges would only approve projects with real energy and carbon dioxide savings, so Tommy and George were diligent.
Tommy would routinely take projects he had turned over to George and have his team do their own inspections. They always checked out—every light fixture, motor, boiler, wind turbine, or whatever was always in place. The carbon credits were legitimate as were the markets they would help to sustain. When the credits we
re complete, they were sold roughly at cost plus ten to twenty percent to their sister company that John ran, Carbon Traders, Inc. In turn they were to be resold on an exchange or put in inventory to be sold later, presumably, at higher prices.
Tommy, George, and John sat down to look at the financials for the first six months. It was more a celebration than a meeting. After paying customers for their projects and all of Environmental Verifications’ costs, the company was creating credits for about six dollars per ton of carbon emissions and selling them to Carbon Traders for about seven dollars per ton. Tommy always thought that paying seven dollars per ton for a ton of anything sounded pretty cheap. Maybe it was, but maybe it wasn’t worth more money because electric utilities in the United States were releasing so much carbon pollution—hundreds of millions or even billions of tons. No one really knew what it would be worth in the long run. It was still a small market with huge potential to grow, and maybe someday the price would go up. They were betting their business, and their futures, on it.
John’s side of the business, which included two traders and a couple of desks and computers out of his “Ideas” office on Jackson, would take the seven-dollar credit and resell about twenty percent of the inventory at the market price. The market had been moving from about eight dollars to nine dollars per ton. They were holding eighty percent of the inventory at their seven dollars and change cost, waiting for the market to go up more.
“Our inventory of credits is already worth millions,” Tommy said.
“Why don’t we sell more and take some money off the table?”
John shot back, “Do you know what the markets are trading at in Europe? Twenty to thirty dollars per ton. We should wait. This is a gold mine.”
“How about ten percent more?” Tommy asked.
“We’d be wasting an opportunity. Besides, remember in our agreement, I have the last say on buying and selling. I’m staying out of your end of the business. You need to stay out of mine,” John said.
The Squeeze Page 2