Opinion

The Great Debate

from Breakingviews:

Memo to Wall Street: more Ace Greenberg please

By Antony Currie

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Wall Street needs more leaders like Alan “Ace” Greenberg. The onetime Bear Stearns boss, famed for his pithy missives to staff, died on Friday. He was 86. Though he was no longer in charge, the firm’s 2008 collapse is a notable blemish on an otherwise illustrious career. The industry could use more of Greenberg’s scrappy PSD: poor, smart and driven.

The shorthand was how he described the people he wanted to work for Bear, perhaps in his own image. Even after he became chief executive in 1978, and until 1993, his office was the trading floor not the executive suite. And unlike most bosses, he answered his own calls. Greenberg also believed in sharing at least some of the wealth, insisting that his senior managing directors donate at least 4 percent of their income to charity.

As CEO, he had a nose for sniffing out risk, and largely avoiding it. Greenberg scrutinized trading reports each morning, congratulating the moneymakers and dissecting the underperformers. Bear prospered in 1994, when Greenberg was still an active chairman and whipsawing rates landed other banks in trouble.

Greenberg’s cost controls are the stuff of investment banking lore. He once distributed one of his single-page memos explaining that the bank would no longer be buying paper clips. He also once chided employees: “This may come as a surprise to some of you, but Federal Express is not a wholly owned subsidiary of Bear Stearns.” Such pointed attention to the bottom line would be useful at today’s earnings-challenged institutions.

What’s a leveraged ETF and what makes it dangerous?

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Larry Fink is sounding the alarm. The chairman and CEO of $4.4 trillion asset manager BlackRock is worried about leveraged ETFs (exchange-traded funds). Fink thinks they could “blow up the industry.” His statement is a little unclear, but the industry he’s referring to is probably ETFs themselves, not the global financial system.

Blackrock is itself a huge player in ETFs, but Fink says they’ll never get into leveraged version of the financial instruments.

So, what’s the difference between regular and leveraged ETFs?

Regular ETFs are designed to track the price of a specific set of securities, taking the place of traditional mutual funds that focuses on particular investment sectors or classes of stock. ETFs started in stocks, particularly indexes, but now cover all types of assets. In this way they are similar to a mutual or index fund, but can be bought or sold like a stock. Regular ETFs, particularly the ones that track broad indexes like the S&P 500, are pretty vanilla financial products. Sure, an index fund might be slightly better for achieving individual investment objectives, but ETFs generally have much lower fees than actively managed mutual funds.

from Breakingviews:

Rob Cox: The worry now is a brewing M&A bubble

By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Stop worrying about the tech bubble – there may be an even bigger one inflating beyond the confines of Silicon Valley. The corporate urge to merge has gone into global hyper-drive this year. Deal activity has surged as investors egg companies on and bid up the shares of acquirers well beyond mathematical explication, or prudence. As new metrics from interested parties are trotted out to justify the irrational, it’s time to exercise caution.

So far this year companies have announced some $1.3 trillion worth of transactions around the world, according to Thomson Reuters data. That’s nearly double the level of activity a year ago. European corporations have fueled even greater increases. Much of this is pent-up demand and a delayed response to the past year’s remarkable runup in stock market values.

How the Nobel economists changed investing forever

The 2013 Nobel Prize for economics celebrates that financial markets work, but cautions how little we know. One theme unifies the work of all three winners: Eugene Fama, Robert Shiller and Lars Hansen — risk. (A disclosure: until August I worked at Dimensional Fund Advisors, where Fama is a director and consultant.) Risk is unpredictable, but can be very profitable. That sounds simple enough, but it has profound implications — not only for the lords of high finance, but households, too. Risk teaches humility, to overconfident investors and also policymakers. That humility was notably absent at the IMF/World Bank meetings last week. Policymakers should take special note of the prize this year; it reveals how little we really understand about financial markets.

Fama’s work showed that prices incorporate all available information; this is known as the efficient market hypothesis. The implication is that you cannot systematically outperform the market, unless you have information other people don’t or can access part of the market others can’t. But that doesn’t mean you can’t make money. Over time you can expect, but are not guaranteed, that riskier assets generate higher returns. Stocks, on average, return more than bonds because they are riskier. The stock of smaller companies is riskier than larger ones, so they typically generate more returns. It’s a straightforward concept, but often poorly understood. Even many sophisticated investors get it wrong.

The implications of this theory changed markets, even for the average investor. The concept of efficient markets helped create demand for index funds. Index funds are a type of mutual fund, which is a collection of many different stocks. Active funds profess to know which stocks will outperform the market. Index funds don’t make that promise; stocks are weighted by their size relative to the rest of the market or use a weighting based on identifiable price or size characteristics. Because there’s no magic formula or talent presumed in constructing these funds, they are cheap; if no one can beat the market, why pay 1 or 2 percent of your assets to someone who claims they can? If you believe in efficient markets you’d only hold index funds. This has been revolutionary for the average investor. Through the 1960s few Americans owned stock at all, and if they did they only held a handful of individual stocks, which was very risky. Now about 50 percent of the population owns stock, mostly through mutual funds and increasingly with allocations based on indexing. The average household can invest as well as many hedge funds, for a fraction of the price. The existence of index funds shows that the best innovations (in finance or any industry) are often the simplest.

from Reuters Money:

Tea Party downgrade? Here’s what S&P actually said

Was it a Tea Party downgrade?

Beltway media has offered the usual pox-on-both-political houses analysis of Standard & Poor's downgrade of U.S. debt and this week's market meltdown. The two parties spent Monday blaming one other side for the debacle. According to this narrative, both sides must bear equal guilt.

But what does S&P actually say in its downgrade report?

Politics: The downgrade analysis is very political. S&P issued the downgrade even though we avoided default -- and even after the Treasury pointed out S&P's $2 trillion math error. S&P went ahead with the downgrade due to its concerns about political dysfunction in Washington, which has created "greater policy uncertainty."

Which political party does S&P fault? Let's go to the memo (emphasis added):

The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.

from Reuters Money:

Fury brewing at ratings agencies as markets gyrate

Carnival revellers are silhouetted as they carry a burning wooden wagon in Liestal, near Basel, February 21, 2010.  REUTERS/Michael BuholzerSo let me get this straight.

Ratings agencies helped spark the financial meltdown of 2008-9, when they deemed that steaming piles of mortgage junk were brimming with triple-A goodness. They were wrong – and epically so.

Now S&P downgrades the debt of the entire country, further threatens to do so another notch, teams with fellow ratings agencies to bring Europe to its knees with each new appraisal and gets an assist for wiping trillions in wealth from investors’ portfolios in just a few days.

Anyone else think the ratings agencies need a time out?

“If you had asked me a couple of years ago if they could do anything more destructive than the mortgage debacle, I would have said never,” says Roger Kirby, Of Counsel for New York City law firm Kirby McInerney, who is involved in a class action against Moody’s on behalf of shareholders. “But it seems they’re managing to do it again, right now. In order to restore their damaged reputations, they’re interjecting themselves unsolicited into sovereign markets.

from Reuters Money:

How safe is your money-market fund?

Here's a $12 trillion question: Are money-market mutual funds safe?

The industry insists that they are and banking regulators aren't calling in the National Guard, although the U.S. Treasury Department is considering some emergency measures in case of a U.S. debt default.

Yet with the U.S. default risk hissing like a cobra, Congress and the White House at loggerheads and all the bad debt sloshing around Europe, is there a reason to be concerned?

Fear has reared its coiled head again. On Monday, stocks worldwide slumped on fears that Europe’s financial woes would spread to Italy.

from Reuters Money:

Consumer cops: Why we need Mary Schapiro and Elizabeth Warren now

U.S. Securities and Exchange Commission (SEC) Chairman Mary Schapiro answers a question at the Reuters Future Face of Finance Summit in Washington March 1, 2011. REUTERS/Kevin Lamarque Two women are fending off a vicious man-handling of investor protection.

As Congress pettily wrangles over the debt limit and the next budget, Mary Schapiro and Elizabeth Warren are fighting to protect you against the ravages of Wall Street.

Wall Street and its Republican allies would like to make the Dodd-Frank financial reforms disappear. The money trust has been pouring millions into lobbying to eviscerate the budget of the Securities and Exchange Commission and blocking the formation of the Consumer Financial Protection Bureau.

Mary Schapiro, who chairs the SEC, said she can't kick start the myriad pro-investor rules of Dodd-Frank without adequate funding. Republicans, lead by Budget Committee Chairman Paul Ryan, want to "starve the beast" in their fiscal year 2012 proposal.

Flight to “safety” eases China diversification

China appears to be taking steps to diversify its holdings away from the U.S. dollar and may just have chosen a pretty good time to do it.

Longer term a meaningful diversification by China, which holds about a third of its $2.45 trillion currency reserves in U.S. Treasuries, is probably both inevitable and highly risky.

Inevitable, because China probably realises that, given the U.S.’s difficult fiscal and economic challenges it is not sensible to have its own fortunes tied so closely to its major client.

Icelandic, Greek sagas show sovereign risks

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

Developments in cash-strapped Iceland and Greece nicely illustrate two themes for 2010: sovereign risk and financial balkanization.

Iceland is balking at crushing terms demanded as part of its making whole overseas depositors in its ruined banking system, while Greece is involved in a game of chicken with the euro zone authorities over how, when and with whose assistance it heals its fiscal difficulties.

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