An Open Letter to Pension/Endowment Trustees & Investment Committees (PG-13 Version)

First of all, why on earth are you investing in OTC derivatives when you can’t even handle basic equity and fixed income securities?  Unless their use is limited exclusively to hedges, do you really think that’s a suitable investment policy given your risk profile and funding commitments?  Second, and more importantly, considering your no-doubt negative answer to the former, why, after witnessing first-hand the epic failures at S&P, Moody's and Fitch do you insist on such unwarranted over-reliance, or frankly, ANY reliance, on them whatsoever?  These firms have proven beyond a shadow of a doubt that their “work” resides precariously on the fine line between rank incompetence and criminal negligence.  Or, as Zero Hedge's Marla Singer has so succinctly put it:

Isn't saying "We can't survive on subscription revenues," admitting that the real source of their revenue is a skim off of the delta between unrated securities and rated securities?  If they said that out loud by saying "We take a percentage of the value we add by rating securities" people would flip.  But they did just say that.  Except, they put it through a PR filter first.

So, let's be honest with each other, ok?  You’re really none-too-concerned unless/until things start to go haywire. Thus, in a failed and mostly-futile effort to avoid such circumstances, you’ve established and implemented a set of blanket arbitrary investment criteria like the one from CalPERS, quoted above. Now, if you absolutely insist on such poorly-conceived, unproven, and ineffectual “risk management” techniques, why not start using Egan-Jones Ratings? You know, the firm that has actually added value - at least relatively speaking - to investors (that’d be you, fyi), instead of to the issuers?  What, you can’t afford them?  Oh, but you CAN afford to trust S&P/Moody’s/Fitch?  How much money did you lose in 2008, again? 

Stop blaming the Government and their asinine NRSRO  regulations; stop blaming "the market," and take some damn responsibility for actually doing your job, not just keeping it.  Even if you’re going to set arbitrary and self-defeating rules, then simply prohibit your traders from buying or entering-into OTC/bespoke derivatives.  Otherwise, let your PM’s do their job and exercise prudent risk management, which you claim to do anyway (but very clearly do not).Stop wasting time, money, and effort on window dressing and focus on the actual practice.  This is Finance 101 stuff here (did any of you even take that?)  If you aren’t willing or able to conduct your own thorough analysis, you are setting yourself up to get raped.  End of story.

So, how about actually doing your own diligence for a change, instead of just taking the Ratings Agencies' word for it?  Some of you will no-doubt make claim you lack the staff or resources to do so. Given the opportunities afforded quality institutional asset managers, and the massive supply/demand imbalance for financially savvy talent this excuse fails to pass muster for all but the most minuscule “institutions.”Also, as I touched-upon earlier, should you really be concerned with activist investing, bespoke derivatives, and other complex strategies when you can’t even hire a core staff of fundamentally sound, experienced investment professionals?

Really, when all is said and done, you have two distinct choices: maintain the status quo and keep making investment decisions by proxy (and taking the attendant risk associated with so doing), or actually conducting your own analysis, and (hopefully) understand(ing) that in which you mean to invest.  

Since world markets started to turn sour in late 2007 (and earlier), supposedly sophisticated institutional investors such as yourselves, and your poor, unfortunate beneficiaries have pointed the (middle) finger at the Ratings Agencies for their role in the credit crisis. 

This, for lack of a better word (or the ability to publish it), is nonsense.YOU relied on the Ratings Firms for impartial, expert advice.  All the while, even Congress - even the braintrust at the SEC - knew both the Ratings Agencies and the underwriters/issuers were relying on your laziness and indifference to be their “greater fools.” Ultimately, the only party you have to blame is yourself. 

If you can’t stand the heat, get out of the fire, or at the very least, stop pointing your finger and take a good, long look in the mirror.

Best,

Anal_yst

Zerohedge.com

Comments

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Give it up.  Everyone is backed up by the taxpayers.  There is absolutely no reason to inject competance into any job.  AIG is backed up by taxpayers.  GS is backed up.  Congress.  Treasury.  The Fed.  State government.  State employee pension funds.  City government.

OOps, the taxpayer is not backed up.  This counterparty is pooped.  Empty pockets.