By Rob Cox and Richard Beales
Crises have historically spawned great cinema. Wars brought “Apocalypse Now” and “The Bridge on the River Kwai,” for instance, and high-profile crime brought “The Godfather.” Business and economics have played their part. Without the Great Depression there would be no “It’s a Wonderful Life.” But the movies, fictional or not, have yet to capture the heart of the financial panic of 2008.
In the documentary department, Charles Ferguson’s “Inside Job,” which opens in New York on Friday, comes closest yet. Narrated by Matt Damon, it pulls together many threads for understanding what went wrong and why. But it overreaches for polemical barbs, thereby undermining its credibility. At least it’s more effective than “Wall Street: Money Never Sleeps” — Oliver Stone’s sequel to the 1987 classic that introduced Gordon Gekko to the world — which opened in the UK this week.
The “flash crash,” or something like it, could happen again. There’s no real blame in a report last week from the Securities and Exchange Commission and the Commodity Futures Trading Commission on the sudden plunge in stock prices on May 6. Some fixes can be made. The broader lesson is that markets will always have tipping points.
Waddell & Reed’s $4.1 billion computerized sale of E-Mini S&P 500 futures in the middle of that spring afternoon certainly hit with a thud. Sales were programed at the rate of 9 percent of the total market volume in the previous minute, with no adjustments for price or time, parameters that often are applied to such trades.
American International Group is throwing off its shackles. But taxpayers will be locked in for a while yet. The company’s deal with the government over its $100 billion of bailout funds makes the insurer’s finances simpler and healthier. That’s potentially good for shareholders. But initially the plan largely just rearranges the government’s interests. It is hard to see how it gets taxpayers cash back any sooner, while increasing their risk.
Bob Benmosche, the AIG boss, understandably likes the deal. It will remove the New York Federal Reserve as a senior secured creditor and swap the $49 billion scarlet letter of government bailout preferred shares for common stock. That should allow him to normalize a borrowing relationship with lenders right away and give him more flexibility. As for dealing with the government, the Treasury will take on the remaining New York Fed interests, leaving only one master for AIG to deal with.
There’s no quick way for the U.S. government to exit American International Group <AIG.N>. Converting $49 billion of preferred stock to common shares and selling them would, like the government’s exit from Citigroup <C.N>, take a while. And that’s assuming other share sales, needed for separate repayments relating to AIG, go smoothly.
As of June 30, AIG owed the government just over $100 billion — though a further $4 billion has since been repaid. AIG has also made progress offloading assets. Big examples include the IPO of AIA, the Asian unit currently expected to debut on the Hong Kong market in the next month or so, and the $15.5 billion sale to MetLife <MET.N> of American Life Insurance, or Alico, which is winding its way towards closing. The New York Fed converted debt into preferred shares in these entities worth $16 billion and $9 billion, respectively, and the deals will help pay that off.
Hedge fund types don’t have much to complain about. The latest evidence is Blackstone’s seeding of a new fund for commodity traders, led by George “Beau” Taylor, who are leaving Credit Suisse . With even foreign financial institutions in the U.S. wary of breaching the Volcker Rule, opportunities are coming the way of the non-bank system.
The writing is on the wall for the small groups of people who make bets with banks’ capital. Exploiting arbitrage opportunities in the commodities markets is an especially obvious form of proprietary trading. From Goldman Sachs down — or up, depending on how Wall Street’s top dog is viewed — prop traders, uncertain of their career paths thanks to the new U.S. rule, are on the lookout for fresh pastures.
The time for “bail-ins” may have come. The idea of rescuing banks with rapid, creditor-enabled restructurings has been overshadowed by a slew of other plans and some resistance. Regulators are now giving the scheme more attention. The practicalities would be fraught, but the concept ticks many boxes.
A non-financial company that runs into trouble often can invoke bankruptcy processes and restructure its balance sheet. Banks often don’t have any option other than liquidation. Even if they did, a run on deposits or credit can put them out of business in days, so months of restructuring negotiations won’t cut it. The idea of a bail-in is that a bank’s creditors agree in advance to have a restructuring imposed on them rapidly if the firm hits the skids, averting failure and any systemic fallout.
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.