Posts tagged ‘Bernie Madoff’

Wall Street Meets Greed Street

For investors, the emotional pendulum swings back and forth between fear and greed. Wall Street and large financial institutions, however, are driven by one single mode…and that is greed. This is nothing new and has been going on for generations. Over the last few decades, cheap money, loose regulation, and a relatively healthy economy have given Wall Street and financial institutions free rein to take advantage of the system.

Not only did the financial industry explode, but the large got much larger. The FCIC (Financial Crisis Inquiry Commission), a government appointed commission, highlighted the following:

“By 2005, the 10 largest U.S. commercial banks held 55% of the industry’s assets, more than double the level held in 1990. On the eve of the crisis in 2006, financial sector profits constituted 27% of all corporate profits in the United States, up from 15% in 1980.”

 

What’s more, the obscene profits were achieved with obscene amounts of debt:

“From 1978 to 2007, the amount of debt held by the financial sector soared from $3 trillion to $36 trillion, more than doubling as a share of gross domestic product.”

 

Times have changed, and financial institutions have gone from victors to villains. Sluggish economic growth in developed countries and choking levels of debt have transitioned political policies from stimulus to austerity. This in turn has created social unrest. Who’s to blame for all of this? Well if you watch the evening news and Occupy Wall Street movement, it becomes very easy to blame Wall Street. Certainly, fat cat bankers deserve a portion of the blame. As one can see from the following list, over the last few years, the financial industry has paid for its sins with the help of a checkbook:

CLICK TO ENLARGE

The disgusting amount of inequitable excess is smeared across the whole industry in this tiny, partial list. Billions of dollars in penalties and disgorged assets isn’t insignificant, but besides Bernie Madoff and Raj Rajaratnam, very little time has been scheduled behind bars for the perpetrators.

Whom Else to Blame?

Are the greedy bankers and financial institution operators the only ones to blame? Without doubt, lack of government enforcement and adequate regulation, coupled with a complacent, debt-loving public, contributed to the creation of this financial crisis monster. When the economy was rolling along, there was no problem in turning a blind-eye to subversive activity. Now, the greed cannot be ignored.

At the end of the day, voters have to correct this ugly situation. The general public and Occupy Wall Street-ers need to boycott corrupt institutions and vote in politicians who will institute fair and productive regulations (NOT more regulations). Sure corporate financial lobbyists will try to tip the scales to their advantage, but a vote from a lobbyist attending a $10,000 black-tie dinner carries the same weight as a vote coming from a Occupy Wall Street-er paying $5 for a foot-long sandwich at Subway. As Thomas Jefferson stated, “A democracy is nothing more than mob rule, where fifty-one percent of the people may take away the rights of the other forty-nine.”

Investor Protocol

Besides boycotting greedy institutions and using the voting booth, what else should individuals do with their investments in this structurally flawed system? First of all, find independent firms with a fiduciary duty to act in your best interest, like an RIA firm (Registered Investment Advisor). Brokers, financial consultants, financial advisors, or whatever euphemism-of-the-day is being used for an investment product pusher, may not be evil, but their incentives typically are not aligned to protect and grow your financial future (see Fees, Exploitation, and Confusion   and Letter Shell Game).

There is a lot of blame to be spread around for the financial crisis, and the intersection of Wall Street and Greed Street is a major contributing factor. However, investors and voters need to wake up to the brutal realities of our structurally flawed system and take matters into their own hands. Only then can Main Street and Wall Street peacefully coexist.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in MS, UBS, C, JPM, WFC, SCHW, AMTD, BAC, GS, STT, Galleon, RBC, Subway, Amer Home, Brookside Captl, Morgan Keegan, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

November 27, 2011 at 11:37 am 8 comments

Opal Conference: Hedge Fund Heaven and Regulatory Rules

The recent Alternative Investment Summit held December 5-7 at the Ritz-Carlton in Laguna Niguel, California provided a little bit of everything for attendees – including a slice of hedge fund heaven and a less appetizing dollop of regulatory rules. If you are going to work hard, why not do it in an unrivaled, picturesque setting along the sandy shores of Dana Point? The well-attended conference, which was hosted by Opal Financial Group, was designed to address the interests of a broad set of constituents in the alternative investment food-chain, including representatives of hedge funds, fund of funds, endowments, consulting firms, private equity firms, venture capital firms, commodity trading advisors (CTAs), law firms, family offices, pension funds, along with various other vendors and service providers.

Although the topics and panel experts covered diverse areas, I found some interesting common themes emanating from the conference:

1)      Waterboard Your Manager: In the wake of the Bernie Madoff Ponzi scheme and the recent sweeping insider trading investigations, institutional investors are having recurring nightmares. Consultants and other service-based intermediaries are feeling the heat in a fever-pitched litigation environment that is driving defensive behavior to avoid “headline risk” at any cost. As a result, institutional investors and fund of funds are demanding increased transparency and immediate liquidity in addition to conducting deeper, more thorough due diligence. One consultant jokingly said they will “waterboard” managers to obtain information, if necessary. In the hedge fund world, this risk averse stance is leading to a concentrated migration of funds to large established funds – even if those actions may potentially compromise return opportunities. In response to a question about insider trading investigations as they relate to client fund withdrawals, one nervous panel member advised clients to “shoot first, and ask questions later.”

2)      Lurking Mountain of Maturity: Default rates in the overall bond markets have been fairly tame in the 2.0 – 2.5% range, however a mountain of previously issued debt is expected to mature over the next few years, meaning many of those corporate issuers will need to refinance the existing debt and issues longer term debt. For the most part, capital markets have been accommodating a large percentage of issuers, due to investors’ yield-hungry appetite. If the capital markets seize up and the banks continue lending like the Grinch, then the default rate could certainly creep up.

3)      CLO Market Gaining Steam: The collateralized loan obligation market is still significantly below pre-crisis levels, however an estimated $3.5 billion 2010 new issue market is expected to gain even more momentum into 2011. New issuance levels are expected to register in at a more healthy $5.0 billion level next year.

4)      Less Fruit in Debt Markets: The general sense among fund managers was that previously attractive bond prices have risen and bond yield spreads have narrowed. The low hanging fruit has been picked and earning similarly attractive returns will become even more challenging in the coming year, despite benign default rates. Even though bonds face a tough challenge of potential future interest rate increases, many managers believe selective opportunities can still be found in more illiquid, distressed debt markets.

5)      Fund of Funds vs. Consultants: Playing in the sandbox is getting more crowded as some consultants are developing in-house investment solutions while fund of funds are advancing their own internal capabilities to target institutional investors directly. By doing so, the fund of funds are able to cut out the middle-man/woman consultant and keep more of the profit pie to themselves. From a plan sponsor perspective, institutional investors struggle with the trade-offs of investing in a diversified fund of funds vehicle versus aggregating the unique alpha generating capabilities of individual hedge fund managers.

6)      Emerging Frontier Markets: There was plenty of debate about the dour state of global macroeconomic trends, but a healthy dose of optimism was injected into the discussion about emerging markets and the frontier markets. One panel member referred to the frontier markets as the Rodney Dangerfield (see Doug Kass) of the world (i.e., “get no respect”). The frontier markets are like the immature little brothers of the major emerging markets in China, India, Brazil, and Russia. Examples of frontier markets provided include Vietnam, Nigeria, Bangladesh, and Kenya. In general, these markets are heavily dependent on natural resources and will move in unison with supply-demand adjustments in larger markets like China. Of the approximately 80 frontier markets around the globe, 30 were described as uninvestable, with the remaining majority offering interesting prospects.

All in all the Opal Financial Group Alternative Investment Summit was a huge success. Besides becoming immersed in the many facets of alternative investments, I met leading thought leaders in the field, including an unexpected interaction with a world champion and living legend (read here for a hint). Many conferences are not worth the price of admission, but with global economic forces changing at breakneck speed and regulatory rules continually unfolding in response to the financial crisis, for those involved in the alternative investment field, this is one event you should not miss.

Wade W. Slome, CFA, CFP® 

Plan. Invest. Prosper. 

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) is the General Partner of the Slome Sidoxia Fund, LP, a long-short hedge fund. SCM and some of its clients also own certain exchange traded funds (including emerging market ETFs), but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

December 8, 2010 at 12:32 am 3 comments


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