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Do Diligence
Riddle
me this: how could a relatively "bit player" of a hedge fund - Paulson
& Co - with little-to-no prior mortgage investing experience do the
research/diligence to uncover "The Greatest Trade Ever," yet somehow
massive institutional investors - Pensions, Endowments, Financial Institutions - somehow get a pass because they "don't
have the resources to conduct their own diligence?"
That is bullshit of the highest order.
I like Mark Thoma, he's smart, actually gets twitter (rare for
Economists), and I think all around a good guy, but I absolutely cannot
stand this sort of "logic" in his response* to the dissenting opinions from the FCIC report"
Securitizers lowering credit standards, a failure of
credit agencies, and buyers failing to do their own due diligence. Once
again, regulation can help where the private market failed. The ratings
agencies exist because they help to solve an asymmetric information
problem. The typical purchaser of financial assets does not have the
resources needed to assess the risk of complex financial assets (which
is why saying that they should have performed their own due diligence
misses the mark). Instead, they rely upon ratings agencies to do the
assessment for them.
Nonsense! IKB had an entire team of structured finance/mortgage
professionals on staff when they contemplated and eventually
bought-into the infamous ABACUS transaction. Here's a simple rule: If
you can't analyze a security yourself DON'T FUCKING BUY IT.
How hard is that?
IKB, despite having this relatively large investment team
apparently did little, if any diligence. In hindsight it seems they,
like so many institutional investors in complex securities, took
innumerable short cuts in their investment analysis, likely in no small
part because of perverse incentives.
What do I mean perverse incentives? Take a look at CalPERS or any
other big institutional asset manager. They're limited to certain
investments and limited further by minimum ratings those investments
must carry. (All thanks to government-created oligopoly NRSRO
regulations, mind you.) Ceteris paribus, many (dare I say most?)
institutional asset managers are incentivized to buy the highest-rated
securities that meet their minimum investment criteria. Best case,
they outperform their benchmark. Worst case, they blame the ratings
agencies and the banks who structured/sold/rated the securities they
bought for duping them into buying garbage. Nice work if you can get
it, eh?
I've beaten this horse to death over the past few years (to the
point where this entire article would be a series of hyperlinks were I
to reference all of my previous work) but apparently my efforts are
largely for naught.
Pension and Endowment trustees need to hold their managers to higher
standards and stop drafting investment criteria that allows, nay,
enables managers to shirk responsibility and shift blame. The
Government needs to vastly reform NRSRO (and related) regulations and
stop rewarding inept/incompetent/lazy actors. Ratings agencies are an
unmitigated disaster as is an entire industry that's
legally/contractually/etc required to rely upon them. Financial
institution investors (equity and debt) need to hold management to MUCH
higher standards. If I were a large IKB shareholder I would be
roasting management over the coals when I found out about their
involvement in ABACUS. I mean I would be F*CKING LIVID. I mean I
would make sure no one involved remained employed there.
Enough of the excuses. Enough of this extend and pretend bullshit.
The longer we put off dealing with these issues the less likely we'll
be able to do anything about them. I fear - for what is astoundingly
clear good reason - if we continue on as we have for the past few years
these issues will never be adequately addressed, and that, my friends,
will result in a crisis that will make this most recent one look like a
day at the beach.
*In a larger, more focused discussion, I expect Thoma's views are
more nuanced than in this narrow context. I'm not picking on him, just
merely using that text as an example of the kind of rhetoric and logic
that I see perpetuated throughout Academia, the media, etc.
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Author said:
"I like Mark Thoma, he's smart, actually gets twitter (rare for Economists)"
What does he get about twitter? Would love to hear your perspective or anyones on how twitter or Facebook monetizes their assets.
WTF? Analysis & Research? DooDilligence?
You know how hard it is to find a job where you can watch porn all day!
http://www.thedailyshow.com/watch/tue-april-27-2010/sex-curities-xxxchan...
Centralization of the interpretation of information/ratings will always get corrupted. It serves to tee up the masses for a killing.
Regulation should be designed to have a level playing field with equal access to all raw information and let the market interpret through millions of independent opinions. Not giving opinions and ratings like agencies which only serve to give people a false sense of security.
When I graduated B-school, I wanted to be a buy side research analyst. The closest I could get was the back office of a mid size mutual fund company. But, I learned quickly, that the place was run by marketing professionals, not investment pros....Basically the only investors using their services were large foundations and endowments. My feeling was always the leaders of those organizations wanted someone to blame when things went bad and that that's what they got for their 1.5% fee.
Amen brother. However you can also attempt to delegate to actively managed mutual funds that supposedly have your interests at heart. Passive lifestyle funds, or an efficient passive portfolio adjusted based on your risk tolerance. If you really think pms or wheat or energy is a.long term winner then overweight it. There is a lot i dont understand and few of us have the.time to go through the public filings. Most of us are better off with an efficient risk adjusted passive portfolio, but we all have to spin the wheel sometime with speculative plays!
I'm talking purely about Institutional investors here but the same applies to retail as well. When your broker tries to sell you principal protected structured notes linked to the MSCI Brazil index with knockout features, chances are you shouldn't buy it, unless its a small % of your investable assets and you can deal with the $ being locked up for 5 years and possibly not pay any interest for the majority of that period. I don't have a problem with people buying securities they don't understand as much as I have a problem with people who do that and then shirk responsibility when the security goes to shit. Caveat emptor mother f'ckers.
People love helicopters.
..."Here's a simple rule: If you can't analyze a security yourself DON'T FUCKING BUY IT."....
human, all too human! forget fundamentals!.... think fraudamentals and fraudmetrics and fraudcounting and fraudenomics.
oh yeah... and don't forget the bottom fraudline.
that's a german hooker named "lola", right?
11/10.
i've worked enough with large financial institutions to know that the whole fucking system, for the most part, is a fraud to screw the average joe out of money. the whole pension fund wall street connection is a glaring example, what a joke
what poser
yet talking about 2008,,, hey it was 3 years ago...
get over it..
wanna be famous/rich like Shiff?/Paulson , stop talking about past, try forecast future..
we wil lsee are you any good ?
alx
"Here's a simple rule: If you can't analyze a security yourself DON'T FUCKING BUY IT."
But *gasp* that's not fair! I don't feel like doing research. ;_;
Doo-Doo Diligence; there, I fixed it.