Mary Schapiro is no money manager

July 27, 2009

Let’s hope Securities and Exchange Commission Chairman Mary Schapiro is a better regulator than a money manager.

That’s because The Financial Industry Regulatory Authority, the last place Schapiro ran, lost $696 million last year. Almost all of FINRA’s red ink stemmed from losses on investments, including ownership stakes in hedge funds and private equity firms, stocks and bonds.

In all, investment related losses totaled $624.1 million, compared with a $156 million gain in the value of those investments in 2007.

FINRA’s tale of woe is included in its most recent annual report, a copy of which was posted recently on the regulator’s website.

Oddly, FINRA’s miserable year has received no media attention, even with Schapiro regularly testifying on Capitol Hill about greater regulatory reform. Schapiro, of course, is the former chief executive officer of FINRA.

The regulatory agency doesn’t provide a detailed list of its specific investments, so there’s no way of knowing which hedge funds or limted partnerships it has sunk money in. The losses in 2008 reduced FINRA’s still substantial investment portfolio to $1.56 billion.

The portfolio, which is managed by several unidentified money managers, represents the proceeds from sale of stock FINRA had in the Nasdaq Stock Market. FINRA’s predecessor, the NASD, had acquired the block of stock when the electronic stock market went public.

Up until last year, the five-year-old portfolio had posted an average annual return of 9.6 percent. The peak value of the portfolio came in 2007, when it had $2.24 billion in assets. Even with last year’s 26.5 percent decline, the value of FINRA’s portfolio is 20 percent higher than what it began with in 2004.

In the annual report, FINRA tries to rationalize its losses with the same kind of half-hearted apology that many hedge fund managers have used in letters to investors:

This last year proved to be an extremely challenging environment for the global economy and investment markets. Investors experienced one of the worst performance periods in modern times, marked by record market declines and volatility, massive financial failures and the beginning of a painful deleveraging process.”

But the good news is that FINRA appears to have learned a lesson and intends to lower the volatility and risk profile of its portfolio going forward.


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