The blind self-belief of financiers can’t be abolished. Neither can cycles in the industry. But two years after the disastrous failure of Lehman Brothers, regulatory shifts have the potential to reduce the impact of a repeat. The challenge for politicians and watchdogs is not to go soft.
That’s what happened before. A munificent Federal Reserve helped stoke a leverage bubble that masqueraded as “the Great Moderation.” Meanwhile, financial regulators of all stripes dozed off, encouraged by lawmakers too cozy with Big Finance.
By Christopher Swann and Richard Beales
Any hint of negative numbers, and hedge fund watchers wonder if John Paulson has lost his touch. The industry’s new figurehead deserves the benefit of the doubt, for now. But his firm’s $30 billion scale and directionless markets make it hard for him to shine.
Over-achievers often suffer tall poppy syndrome, in which they are cut down to size by envious peers and public. So it’s no surprise that the 11 percent fall in Paulson & Co’s Advantage Plus Fund, the firm’s biggest, so far this year — against a small positive return for the average hedge fund — is drawing suggestions that he may have run out of big ideas.
Dick Fuld is still hung over from his home-brewed Kool-Aid. The former Lehman Brothers boss hasn’t stopped blaming his investment bank’s demise on “uncontrollable” market forces, false rumors and the lack of a government rescue. That neglects his own hubris and failure to buttress the firm. But he makes at least one fair point: U.S. regulators were damagingly inconsistent.
The Financial Crisis Inquiry Commission may not learn much new about the well-documented Lehman collapse from this week’s hearings. In written testimony on Wednesday, Fuld again argues he and his colleagues did what they could and were still unable to stop a run on Lehman or the dramatic Sunday night bankruptcy filing that ensued. In hindsight, they didn’t do enough. But even at the time, the pugnacious Fuld seemed too dismissive of skeptics like hedge fund manager David Einhorn.
Stanley Druckenmiller’s departure may reveal something important about hedge funds. The famed investor plans to close down his 30-year-old, $12 billion firm, Duquesne Capital Management. On one level, it’s just a very rich guy wanting to play more golf. But on another, it suggests bigger fund firms may struggle to live up to past glories.
The onetime George Soros colleague clearly doesn’t need the money. Forbes pegged Druckenmiller’s wealth at $2.8 billion earlier this year. But he hasn’t wanted for years, and he’s only 57. The desire to keep winning has kept other billionaires involved in the investing business far longer. His old boss Soros, for instance, just turned 80. Warren Buffett is only a couple of weeks off that landmark and Carl Icahn is well into his 70s.
Fannie Mae and Freddie Mac are at last slipping into a form of obscurity. The U.S. mortgage giants will delist from the New York Stock Exchange under order of their watchdog. When they start trading in the penny stock market, investor attitudes may change — but the government fiction that the two are private companies almost certainly won’t.
The ostensible rationale for the Federal Housing Finance Agency’s directive to move them off the big markets is that Fannie’s stock has lately averaged less than the $1 minimum price required by the NYSE and that Freddie’s has fallen close to that level. With no obvious argument to reset their share prices, a delisting was inevitable.
Toyota’s Prius is sometimes known as the Pious. The pioneering but earnest electric car could do with an injection of supercar glamour from Tesla Motors’ Roadster, and vice versa from a practicality standpoint.
Combining the two companies’ electric vehicle nous ought to be bear future fruit. But with both Toyota’s recall-battered U.S. reputation and Tesla’s planned IPO in need of a boost, the partnership also helps with today’s concerns.
Hedge fund group GLG Partners got its New York stock market listing when Freedom Acquisition Holdings, a blank check company, bought a stake back in mid-2007. Then, Freedom’s stock traded at $10-plus. Now, UK-listed Man Group is buying GLG for $4.50 a share. Sure, Freedom’s initial owners got a pop — but longer term it’s another bounced blank check.
Special purpose acquisition companies, or SPACs, were all the rage in the liquidity-flush world that ended in 2008. The idea, akin to the one that spawned the doomed South Sea Company in the 18th century, was to float a shell company and raise capital from investors to make some sort of acquisition in the future — usually with few constraints.
Goldman Sachs’ days alone in the spotlight may be numbered. The U.S. government is looking into collateralized debt obligations involving Morgan Stanley and other Wall Street firms, according to the Wall Street Journal. If so, that could point towards a manageable, industry-wide endgame.
In the only deals mentioned by name — two in a series of synthetic CDOs named for former U.S. presidents — Morgan Stanley didn’t underwrite securities or market them to investors, the role in which, according to the Securities and Exchange Commission, Goldman transgressed.
Warren Buffett claims to love simple things like ice cream. But some 40,000 shareholders at Berkshire Hathaway’s annual powwow in Omaha this weekend may hear a lot about complex derivatives.
For someone who once called these instruments “financial weapons of mass destruction,” the Sage of Omaha has accumulated quite a portfolio. He has written puts on various equity indices and some credit default protection too, with a worst-case exposure of $63 billion. More realistically, the market value of Berkshire’s derivatives liabilities stood at around $9 billion at the end of last year.
Goldman Sachs will be in the dock on Tuesday. Not in court, but in front of a U.S. Senate committee, where seven current and former employees, including boss Lloyd Blankfein and the self-styled Fabulous Fabrice Tourre, will appear. The danger is that the hearing becomes consumed with grandstanding and headline-grabbing hectoring. For past missteps to be avoided, more thoughtful probing is called for. Here are three possible icebreakers.
1. Would you do the Abacus deal again? The Securities and Exchange Commission has sued Goldman and Tourre for securities fraud, a charge the firm vigorously disputes. The deal in question is a synthetic collateralized debt obligation sold in early 2007, one of a series called Abacus. This complex beast was created primarily to allow Paulson & Co, a now-famous hedge fund, to bet against U.S. subprime mortgages. In hindsight the whole structure looks sketchy. Even Blankfein, in written testimony prepared for Tuesday’s hearing, concedes that Goldman needs to strike a better balance between clients’ trading desires and “what the public believes is overly complex and risky.”