The Lay of the land
The Lay of the land
10 May 2021
Photo credit: Ken Lay
The Lay of the Land: Q&A with IFFIm Board Chair Kenneth Lay
Ken Lay was just 24 and not yet out of law school when he went to work at the SEC and started his career in finance. That job, and the mentors he met, set Ken on a career that brought him to the World Bank, where he earned a reputation as the architect of the modern bond market. As Chair of IFFIm’s Board of Directors, Lay will lead IFFIm as it extends its pioneering vaccine bond model to financing COVID-19 vaccines and supporting the Gavi COVAX Advance Market Commitment. We sat down with Ken for an interview and learned how curiosity, a love of the outdoors and a midwestern work ethic shaped his life and career, from the World Bank to leading IFFIm as it steps up to meet its greatest challenge ever.
Tell us about where you grew up and what influenced the path you took in your life and career.
I was born in Boston while my dad was on assignment with the FBI, but we moved back to mom and dad’s St. Louis hometown when I was very young. Dad set up a small law practice and we moved into one of the little houses that sprung up in the suburbs after the War. It was the classic ‘50s and ‘60s childhood: I went to public schools in the St. Louis suburbs, did the Eagle Scout thing, and really got into the outdoors. In the early ‘60s, my dad had found an abandoned Depression-era farm that he bought on the courthouse steps for $22 per acre, and on the weekends, we set about restoring the woodlands on it. This was about the time Rachel Carson published Silent Spring, and our whole family became concerned about environment. I still have a first edition of that book on a shelf at our ranch in central Wyoming.
I ended up going to Dartmouth College because of its focus on the outdoors. At Dartmouth I met Gordon MacDonald, who was an early voice on climate change, on the first Council on Environmental Quality of the President and actively engaged in the early environmental movement. He referred me for a part-time staff position on Capitol Hill. It was a time of controversy and change: Vietnam, LBJ’s Great Society, Watergate and the environmental movement were all hot topics. In retrospect, though, it also seems a time when compromise was within reach, and it was great to have a chance to see up-close how it could happen. At the same time, I started law school at George Washington University, and then had a chance at the end of the first year to go back to Dartmouth to teach a summer-term class in environmental law.
But for most of the summers during college and law school, I was going to Alaska to run a byproduct operation in fish canneries. We were producing a caviar called “sujiko,” which we sold to Japanese trading companies. I had zero experience processing salmon roe, but I wouldn’t have to be paid over the winter when the fish weren’t running and that’s probably why folks like me were hired. The first team I led was a group of indigenous Haida women from a remote village down the coast from the cannery. They mostly spoke in their native dialect, but I understood enough to begin to comprehend the realities of their difficult lives. As a young guy from typical midwestern family it was an eye-opener. I worked in the canneries for five summers. This work, the landscape, and the people I met and worked with amounted to the adventure of a lifetime.
How did you start your career in finance?
I started getting into finance when I went to work as an intern in the SEC Enforcement Division my last year in law school. When I graduated, I got hired, and then spent several years representing the Commission in finance-related investigations and litigation. During my years there, I had a broad range of cases that gave an interesting perspective on securities markets, asset management and accounting. But I really got into it when I met Gene Rotberg, a former SEC lawyer who Robert McNamara had hired to be Vice President and Treasurer of The World Bank. Gene suggested that I move to the Bank and join the capital markets side of his Treasury team. The opportunity sounded fascinating, but I had to tell him, “Mr Rotberg, I don’t know anything about international finance.” To which he replied, “Don’t worry – you’ll learn it on the job.” IBRD at that point was one of the largest issuers in international bond markets, so it was a very quick immersion in the field.
That was an extraordinary period in bond markets, wasn’t it?
Oh, yes. Postwar institutionalization of savings in pension funds, insurance companies and mutual funds was changing the dynamic in the bond markets, the Eurobond market was growing rapidly and in Japan yen-denominated bonds were beginning to offer an alternative to the commercial banks and the market for mortgage-backed securities and other collateralized debt obligations was taking off. New instruments were entering the toolkit – Richard Sandor launched Treasury bond futures at the Chicago Board of Trade, and Gene Rotberg and World Bank Treasury colleagues developed the first currency swap just before I arrived there. U.S. dollar interest rates, meanwhile, began the long decline that’s brought them to where they are today. But there were still a lot of inefficiencies that kept transaction costs high and liquidity lower than the scale and globalization of institutional investment would have supported.
You have been described as “the architect of the modern bond market.” Can you explain the role you played to earn that reputation?
There’s more than a little overstatement in that description, to say the least! It mostly has to do with our developing the first “global bond” as a way to get past the market fragmentation that was keeping borrowing costs higher than they needed to be. We were seeing virtually identical World Bank bonds trade at a half-percent higher yield in the U.S. than in Europe. It seemed obvious to me at the time that if we could bring both international and U.S. domestic investors into a single IBRD bond issue it would bring much larger scale and a diversification of the investor base that could dramatically improve liquidity. My colleague Jan Wright, Scott White in our legal department and I spoke directly with dozens of institutional investors, investment banks, regulators and the clearinghouses to tackle the legal and business practices that got in the way of a single bond issue being launched and then trading simultaneously in the U.S. and internationally. It took two years of effort to get there, but when we launched the first World Bank global bond in 1989 it was hugely successful, brought our U.S. dollar financing costs down and led after that to similar global transactions in Japanese yen, Deutsche marks and even New Zealand dollars. And other major issuers followed suit in the years that followed.
Weren’t you involved in the first “green bonds” too?
Yes, but I don’t claim credit for that. It happened while I was the World Bank Treasurer, but the idea came from SEB’s Christopher Flensborg and his Nordic pension fund clients. In a visit to our offices in DC, they said to my colleagues Doris Herrera-Pol, Heike Reichelt and me, “we’re concerned about climate risk in our portfolios and want to contribute to positive climate action around the globe but don’t have the internal resources for project selection, due diligence and monitoring. And we need a liquid product for our portfolios.” So, we told them we could set up a process that shows how proceeds of investments they would make with us would be allocated specifically to support climate mitigation and adaptation activities. Christopher, Doris, Heike, Judith Moore, Laura Tlaiye and other colleagues put a huge amount of effort into getting this done internally and introduced to investors, and ensuring the authenticity of the “green bond” model. And the rest, as they say, is history.
You became World Bank Treasurer in 2006, the same year that IFFIm issued its first vaccine bond. What do you remember about the launch of IFFIm? Has your perspective of it as an innovative financing instrument changed since then?
I had been Deputy Treasurer and head of the capital markets team while IFFIm was in the works. The credit for IFFIm, though, goes 100% to Gordon Brown, Christopher Egerton-Warburton (“Edge”, then at Goldman Sachs), Alice Albright (the CFO of Gavi) and Susan McAdams, the World Bank colleague who worked with Edge to develop the IFFIm framework and arrange for the Bank to provide treasury and financial management services. I thought at the time, and I’ve remained convinced ever since, that IFFIm’s capital structure is brilliant. It’s a really efficient use of the public credit of its donors. They make up-front commitments to contribute instalments over a period of years, and IFFIm uses those commitments to issue bonds that let Gavi deliver vaccines today. In retrospect, the underlying value proposition seems obvious: If vaccines can get delivered today, it will dramatically reduce the need for poor countries to seek assistance from donors in the future. To put differently, there’s a huge “avoided cost”, and IFFIm is a very cost-effective way to monetize it.
What do you think has driven the rise in the investment community’s demand for and interest in SRIs like IFFIm’s vaccine bonds?
I think two major factors have evolved over the 15 years since IFFIm launched its first transaction. For one thing, significant groups of asset owners – notably endowments and foundations, family offices and some mutual funds and pension funds – have decided to pursue investment policies that favor “global public goods” simply as a moral and ethical matter. More recently, as we’ve become better at quantifying the risks and potential returns associated with these investments, even assets owners pursuing more traditional approaches have begun tilting their portfolio allocations to investments that will benefit (and benefit from) efforts to deal with pandemic risks and mitigation, climate change mitigation and adaptation and the UN Sustainable Development Goals (SDGs). We’re at a point now where these “sustainable” portfolios are outperforming conventional portfolios in many cases. This is a major change, incidentally, and it’s transforming the debt capital markets perhaps to the most significant extent since the globalization and other developments of the ‘80s.
Are there other roles that for-purpose financing platforms such as IFFIm can play in the global effort to defuse the threat of COVID-19 and in other areas?
There’s huge potential. IFFIm, of course, is a vehicle for front-loading donor commitments to make grants for Gavi’s vaccination work. But there’s no reason that it couldn’t leverage donor capital investment to make low-cost loans for that work, too. And the concept of establishing collective financing platforms (whether for grant-making or lending) for specific global priorities, outsourcing implementation and financial management to the World Bank or other existing institutions, is well established and could be further expanded – as examples, think of the Global Environment Facility, the Climate Investment Funds and the Green Climate Fund.
Aggregating key investments in areas such as urban energy efficiency, forest conservation and restoration or watershed protection (there are many others, obviously) across several countries - perhaps both developed and developing - would allow collective financing platforms to achieve scale and diversification that could mitigate risk and attract private-sector investment on affordable terms, with as little application of ODA and other public-sector capital as possible.
But we need to avoid creating multiple new institutions, with all the associated administrative cost. This means that the existing DFIs’ boards and management need to continue to expand their role as global public resource managers that their strong franchises and 70+ years of experience (in the case of the World Bank) have given them. It’s no longer enough for them to limit their efforts to their traditional on-balance-sheet country program financing work.
What are your biggest priorities for your tenure as Chair of the IFFIm Board?
Two things: The first is sustaining IFFIm’s current value as a financing tool for Gavi, so that it can make maximum use of IFFIm’s franchise and resources both to support the equitable distribution of the COVID-19 vaccines and make sure that Gavi continues to drive a rise in routine immunization, especially for the hardest-to-reach, “zero dose” children. The second priority is to draw on Board members’ experience and creativity to develop innovative ways that IFFIm can catalyze an even greater pool of resources. The pandemic has hugely reinforced the need to build out IFFIm’s proven model and get it to scale and accelerate the pace at which we do this. IFFIm has provided surge funding for this pandemic and will be ready for the next health emergency if needed.
Ken Lay joined the IFFIm Board of Directors in November 2020, and assumed the role of Board Chair on January 2021, succeeding Cyrus Ardalan. He is Senior Managing Director of The Rock Creek Group, an asset management firm based in Washington, D.C.
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