The Great Debate

– James Saft is a Reuters columnist. The opinions expressed are his own –

That 8 percent annual return on investment you and your pension fund manager were banking on is now looking almost as optimistic as Madoff’s magic 12 percent, as deleveraging and deflation bite.

With extremely low or negative interest rates and everyone from consumers to banks trying to shed debt and assets at the same time, what seemed like reasonable projections for a mixed portfolio of stocks, bonds and other assets are now substantially too high.

The implications are a potentially huge hit to corporate earnings and the economy. Companies will be forced to pony up more to keep their pension funds adequately funded while even consumers not encumbered by lots of debt will be likely to raise their savings rate to compensate for lower returns, thus acting as a drag on consumption.

And, while higher savings rates are ultimately what the economy needs, most U.S. company pension plans that promise a payoff based on workers’ final salaries assume an overall return on assets of about 8 percent a year. Individuals and their investment counselors are often even more optimistic, penciling in 9 or 10 percent a year and often maximizing exposure to riskier assets to try and get there.

– Mark T. Williams, a finance professor at the Boston University School of Management, is a risk-management expert and former Federal Reserve Bank examiner. The views expressed are his own. –

With Congress now probing the Bernard Madoff case, some claim the SEC missed the risk because of under staffing. Even if that’s an issue, one SEC enforcement officer using basic risk-management skills, asking probing questions, searching for clear answers, and exercising timely follow up could have helped in detecting this fraud before it grew to such a staggering size.

The central flaw at the SEC is that its current oversight approach is not sufficiently risk focused. Moreover, any changes in approach have tended to be in response to a specific event instead of incorporating an overall risk-based approach across all areas under their regulatory purview.

– Prof. James Post, an authority on corporate governance, teaches “Strategies for Nonprofits” at the Boston University School of Management. The views expressed are his own. –

I am inclined to think the Bernard Madoff affair has blown the lid off the financial madness of this decade.  We have been living in an age of fraud, and now must rethink the way we do business.  As John Kennedy once appealed to the nation’s better angels to call us into public service, Barack Obama’s inaugural address should instruct us on our obligation to serve the greater good.  It’s not just a moral concept; it’s good business.  I offer a corollary as well: Without good business, how far will a moral concept take you?

The management cliché about nonprofits goes something like this: What they lack in business savvy or operating budgets they make up for in passion and vision.  This notion was especially apt in an age of decreased governmental support.  And there’s a private-industry parallel declaring that firms may have a wealth of professionally trained managers but run in the red when it comes to inspiration.  Few organizations have it all, so private and public industry must continue to collaborate to serve the community.