Money Managers
Jul. 15th, 2008 02:39 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksI was idly looking for Hank Paulson's statement on Freddie Mac and Fannie Mae, in which he seemed to resort to typical political obfuscation. But, more of that later.
I came across a site of some "independent money managers" in Atlanta. This was their conclusion from the Paulson statement:
The interesting thing here is the fact that money managers, if they are any good, shouldn't adopt value-laden comments. "This is bad news for oil prices" equals "oil prices are going up". "This is good news for gold prices" equals, yes, the gold price is going up.
Indeed, the whole caboodle is really so embarrassing that I won't name the company. But, well, if they just don't understand economics, let alone English, would you trust them with your money?
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But, yes, Paulson. Well, how to make a big crisis out of a small crisis. Paulson has admitted that the two FMs need to be recapitalised, but the fundamental question that this raises is "to what level". To which Paulson can only reply "to a sufficient level".
The problem is, to recapitalise the FMs to a level that would allow them to stand alone properly would require huge sums of taxpayer funds. To recapitalise them so that they go back to the level of "implicit support" from the government could mean that the FM management might start making dangerous bets with taxpayers' money. In other words, Paulson's answer to "where to from here" is, basically "let's see how things develop".
The $75bn that the FMs have as capital is, you will recall, funding some $5tn of debt. To have proper Tier 1 solvency, we should be looking at something like $500bn of capital. Now, if you want to pump $425bn into the company, that either requires shareholders to stump up six times their current investment just to maintain their current stake (and, well, you can whistle dixie for that), or you dilute the shareholding to one-sixth and put in the money from the taxpayer, some $2000 a head. Well, that won't happen either.
What is likely is a sticking plaster. Say, $75bn of capital, of which half can come from shareholders and half from the government. But this leaves the FMs in a strange position, one that is based on its curious semi-governmental status.
On top of this, no-one knows how deep a hole the FMs are in. Taxpayers, in effect, will be putting in cash based on blind faith and little else. The shareholders might not feel that they are being "bailed out" (they will, after all, lose about 80% of their investment on the price of the stock at the beginning of the year; but a bail-out it is. because the alternative would have been losing 95%.
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I came across a site of some "independent money managers" in Atlanta. This was their conclusion from the Paulson statement:
This is bad news for the taxpayer because we have now been saddled with even more debt.
This is bad news for interest rates since increased indebtedness and a threat to America's AAA credit rating will mean higher rates in the long run and lower prices for current holders of U.S. Treasury bonds.
Higher rates are bad for anyone with a mortgage, credit card debt, a home equity loan, a margin account, etc.
Higher rates also increase the government's debt burden via higher interest payments on outstanding debt.
This is bad news for the U.S. dollar for all the reasons above.
This is bad news for oil prices since a weaker dollar helps drive up all commodity prices.
This is good news for gold prices in the long run for all the reasons above.
The interesting thing here is the fact that money managers, if they are any good, shouldn't adopt value-laden comments. "This is bad news for oil prices" equals "oil prices are going up". "This is good news for gold prices" equals, yes, the gold price is going up.
Indeed, the whole caboodle is really so embarrassing that I won't name the company. But, well, if they just don't understand economics, let alone English, would you trust them with your money?
++++++++++++++
But, yes, Paulson. Well, how to make a big crisis out of a small crisis. Paulson has admitted that the two FMs need to be recapitalised, but the fundamental question that this raises is "to what level". To which Paulson can only reply "to a sufficient level".
The problem is, to recapitalise the FMs to a level that would allow them to stand alone properly would require huge sums of taxpayer funds. To recapitalise them so that they go back to the level of "implicit support" from the government could mean that the FM management might start making dangerous bets with taxpayers' money. In other words, Paulson's answer to "where to from here" is, basically "let's see how things develop".
The $75bn that the FMs have as capital is, you will recall, funding some $5tn of debt. To have proper Tier 1 solvency, we should be looking at something like $500bn of capital. Now, if you want to pump $425bn into the company, that either requires shareholders to stump up six times their current investment just to maintain their current stake (and, well, you can whistle dixie for that), or you dilute the shareholding to one-sixth and put in the money from the taxpayer, some $2000 a head. Well, that won't happen either.
What is likely is a sticking plaster. Say, $75bn of capital, of which half can come from shareholders and half from the government. But this leaves the FMs in a strange position, one that is based on its curious semi-governmental status.
On top of this, no-one knows how deep a hole the FMs are in. Taxpayers, in effect, will be putting in cash based on blind faith and little else. The shareholders might not feel that they are being "bailed out" (they will, after all, lose about 80% of their investment on the price of the stock at the beginning of the year; but a bail-out it is. because the alternative would have been losing 95%.
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no subject
Date: 2008-07-15 08:15 pm (UTC)Don't forget that the most notorious case of a Day Trader walking in to the boiler-room and shooting all the people who were, obviously, responsible for his dot-com calamity was, in fact, in Atlanta. Rational behaviour is hard to come by in those parts.
Even so, "a threat to America's AAA credit rating" is surely a bit far-fetched? I was under the assumption that "Sovereign AAA ratings" are classed on an entirely different basis to "plonker AAA ratings." Plus which, if you take away "America's" AAA credit rating, you basically take away every AAA credit rating in the world ... which can't be good.
I suspect you're groping around a little when it comes to Freddie and Fannie, btw. The important point here is leverage, and the semi-demi-quasi-governmental status is key to this.
It's fairly obvious that neither FDMC nor FNMA would have been allowed to exist in the first place at their (traditional) pitiful level of capitalisation without the semi-demi-etc. That may have been wrong then. It may be wrong now. But the rules of the game don't necessarily change simply because of a single catastrophic spike ... I mean, we're not talking about some penny-ante piffle like Britain falling out of the ERM here; we're talking about 40% of the US mortgage market.
So, I predict that sticking-plaster it will be. The share-holders will get screwed, and serve the dumb bastards right, and the Fed will probably pump $25 to $50 million in per quarter (possibly an initial $100 million to shore up whatever's left of market confidence) until the whole thing returns to whatever passes for normal. The terms and conditions of this pump will be very interesting, however.
I also expect to see some extremely creative accountancy going on at the Fed to justify all of this.
no subject
Date: 2008-07-16 08:17 am (UTC)Over the past few years the Fed has been increasing the money supply by over 7.5% per annum. I haven't seen a reciprocal rise in the GDP of the US.
Now that the Fed no longer reports the money supply we can be sure that 7.5% is a gross underestimate.
The presses will be full on to bail out one mess after another.
PJ talks of inflation and holding debt but if stagflation kicks in he won't get a sufficient pay rise to pay off his debt. I'd hold back on the third house and keep a nest egg (of glistening gold, of course) for even tougher times ahead.
There is a solution to this ...
Date: 2008-07-16 12:38 am (UTC)http://www.theonion.com/content/news/recession_plagued_nation_demands
It's a hand up, not a hand out.
DY
Re: There is a solution to this ...
Date: 2008-07-16 11:53 am (UTC)Less long-term strategy, more short-term unviable solutions.... Many a true word spoken in jest....
PJ
Economics and English
Date: 2008-07-17 06:45 pm (UTC)In addition to knowing about economics and English, a money manager must have fiduciary responsibility and years of experience. They shouldn't sell any financial products or get paid on commissions. Most importantly, they should be able to show their performance record, and it should be outstanding. If the money manager you are working with doesn't fix this criteria, I would start looking for another one.
Re: Economics and English
Date: 2008-07-17 10:11 pm (UTC)What is then of concern is that they start to believe their own myth, up their stakes (because they think it was skill rather than luck) and then, when regression to the mean kicks in, they go broke because of an insufficient bankroll.
So, I actually don't rate "past record" anywhere near as much as I rate my own judgement of a person's views. Do they just follow the crowd? Whhat's their rationale behind investment decisions? What's their knowledge of volatility and bankroll. Do they, for example, automatically think that a high beta is bad? The more thought that is evidenced, the more I am likely to favour such a person. "Track record" means nothing if you are convinced that the person is a donk.
That said, I quite agree that the money manager should not get paid on commissions. One of the most invidious is the profit percentage per year. Now, profit percentage per 10 years, I might be more in favour of....
And as for commissions on products sold -- well, that's just beyond the pale.
PJ