It’s the time of year to reflect on all that we have and to give thanks. But this year, finding reasons to be thankful is a little harder than usual.
The economy has been in recession for more than 12 months. National housing prices have had their worst annual decline since 1968. Nearly 2 million jobs have been lost with more unemployment on the way. The S&P 500 index has dropped more than 40% and that’s the good news for investors. And the Fed has slashed interest rates to near zero, a sign that things are truly grim out there in the economy.
Here are some year-end musings related to business and the economy…
Missed chances. Goldman Sachs alum Gary Gensler had his chance to step in and provide needed regulation involving credit default swaps and other complex securities during the Clinton Administration. He didn’t. Why then is Obama trusting him to oversee the high-risk derivatives market 10 years later? I’m not really sure, but maybe he’s taking his queue from Adlai Stevenson who once famously said on the campaign trail: “I believe in the forgiveness of sin and the redemption of ignorance.” But in all fairness, Gensler does have two big things going for him: he was a senior adviser to Senator Paul Sarbanes, one of the primary architects of the Sarbanes-Oxley Act, and he wrote a book that argued active trading is an inefficient strategy for individual investors and that individuals should stick with indexing and using exchange traded funds. So maybe he isn’t all that wrong for the job.
Oops, can I have a mulligan? Recently, the WSJ asked four management professors for nominees of CEOs who kept their companies afloat in 2008. Their selections included Anne Mulcahy of Xerox Corp. She may or may not deserve the award for “CEO of the Year” in 2008. I’ll refrain from passing judgment on that. However, I’m pretty confidant that she won’t be winning any “Director of the Year” awards anytime soon, unless it’s handed out by The Onion. Consider this distinguished track record: Mulcahy served on the board of Fannie Mae through much of the housing bubble and then left in 2004 to go and serve on the board of Citigroup where she remains a member of the audit and risk committee. My advice for her: stick to making copiers.
Just how useful is the “risk management” industry anyway? Two years ago, the business of “financial risk management” was all the rave. At the time, I had a front row seat to this hoopla when one of the leading risk companies in New York acquired my firm and then went public in a splashy and overpriced IPO. Firms like Risk Analytics, RiskMetrics Group, Institutional Risk Analytics (you get the idea here) were getting quoted all over the mainstream financial press for their brilliant insights on how to better manage financial risk. These firms are loaded with PhDs and financial wizards who spend their days (and probably nights) doing Monte Carlo simulations and event stress testing on investment portfolios. Most investors – including pension funds – don’t really understand what they do but hire them anyway because they think they should. Unfortunately for their clients – many of which were the same Wall Street firms at the epicenter of the financial crisis – the gurus of risk analysis apparently missed identifying the mother of all meltdowns – the U.S. housing bubble. Makes you wonder about the usefulness of using highly complex computer simulations to assess risk when these models can’t spot a crumb on the end of a nose. Personally, I prefer good ole’ fashion intuition grounded in deep experience and common sense, thank you very much.
A good dose of dickensian irony. His name alone should have raised concerns. Former Nasdaq chairman and once widely respected investment guru Bernie “made off” Madoff pulled off the grandest and most audacious of Ponzi schemes to date. While this may have been the biggest fraud so far it won’t be the last you can be sure. This sad tale should force all aspiring Buffets to revisit rule Numero Uno in the Investor Handbook – DIVERSIFICATION. This maxim refers to investment styles, securities AND investment firms. Never trust one person or even one institution with ALL your money. Always spread the wealth, that is what little you have left after this year is over.
One big lump of coal in the stocking. Credit Suisse deserves special kudos for bringing the monkeys of the Wall Street carnage back down to reality. The Swiss firm just announced that it would pay its investment bankers up to 80% of their 2008 year-end bonuses in the form of “illiquid junk bonds, mortgage-backed securities and corporate loans” instead of cash or stock, as is typically the custom. In other words, their employees are going to eat the toxic pudding they cooked up for the rest of the market. Happy stomach aches guys and gals! This move is beautifully punishing in design and will hopefully take us one step closer in breaking the “tails I win, heads I also win” mentality on Wall Street.
Top of the Heap. Of the 11,585 mutual funds tracked by Morningtar Inc., all but ONE lost money in 2008. APX Midcap Growth Fund was the lone exception and it posted a 0% return for the year. Does any more really need to be said?
We all have one thing to be thankful for this Christmas – 2008 is almost behind us.
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