Henry Kaufman Turns 80 On CNBC Yesterday: Who Cares?

An old, retired guy named Henry K. shows up on a cable news channel. He talks about a recent editorial he wrote for a prominent national newspaper. The program's anchor gushes admiringly over Henry's every word, despite the famous guest's accent.

Henry Kissinger? No, not that still-lucid foreign policy veteran. Instead, it was second-tier economist and perennial market bear, Salomon Brothers' Henry Kaufman.

Kaufman appeared on CNBC yesterday, the occasion of his 80th birthday, to stump for his recently proposed plan of increased regulation of large US diversified financial institutions. I wrote posts about his plan two weeks ago, and his assumptions, here and here.

Kaufman didn't say much yesterday that went beyond his Wall Street Journal editorial of earlier this month. The most salient thoughts I had, in summary, about Kaufman's idea were these,

"And, contrary to Kaufman's typical gloomy outlook, perhaps, as I observed here, in a post echoing an article appearing in the Wall Street Journal just this past September, we are observing a pendulum of credit creation that is swinging between securitzation and portfolio lending. Right now, it's swung far to the securitization pole, but appears heading back toward the center, and, probably, beyond.

My point is that, over time, financial conglomeration does not, in fact, lead to consistently superior shareholder total returns. In fact, the only currently, or, for that matter, historically frequently-appearing large financial institution in my equity portfolio is Goldman Sachs. It's not a widely-diversified financial services company. Rather, it tends to specialize in two areas- institutional businesses, such as underwriting and trading, in which superior knowledge, modeling and risk management matter, and asset management, which shares the same salient characteristics.

The price that US consumers have paid for financial services innovation and cost reductions over the past five decades has been the concentration of many financial services into fewer, larger entities, which concentration has increased risks to the banking and credit system.

Failures such as First Pennsylvania Bank, Continental Bank, SeaFirst, and numerous banks weakened by loan losses, which were acquired during the 1980s and '90s, such as BofA, Shawmut, First Interstate, and a clutch of Texas energy-lending dependent banks, provide examples.

Perhaps the most serious threat to the US financial system in the past decade was the 1998 collapse of Long Term Capital Management, a Connecticut-based hedge fund founded by former Salomon Brothers partners, led by John Meriwether. However, that entity doesn't fit Kaufman's warning of a diversified financial conglomerate bringing down our system through complex, opaque dealings among its many tentacle-like businesses.

No, LTCM managed to do that with just one business- asset management. It complied with then-existing hedge fund regulations. No problem with concentration of financial service businesses and risk in that case. Yet, it is generally regarded as the worst single-firm example of excess in recent memory.The US financial system weathered the LTCM situation, and the prior crises involving various insolvent banks.

So, in conclusion, I'm not at all certain that Kaufman's warnings are even correct. Most of our financial system's largest failures have been committed by non-diversified banks or financial services companies."

But something else struck me about Kaufman's appearance yesterday on CNBC. As I watched the program's co-anchor, Bill Griffith, fawn over Kaufman, the latter's track record began to come back to me.

Kaufman was once Salomon Brothers' chief economist, and, as befits a fixed income house, usually a market bear. Then he left Salomon to become a money manager. But, as I recall, he foundered. Salomon didn't participate in his firm, and I believe he failed to attract sufficient funds to make in the razor-thin margin world of fixed income management.

Come to think of it, does anyone else know of a successful institutional investment manager who came out of Salomon and went on to consistent success?

The only name that comes to my mind, of course, is John Meriwether. But Long Term Capital Management, as mentioned in my quoted passage, hardly constituted a successful example of consistently superior investment management.

Most of the better institutional managers about whom one hears, if they have an investment bank pedigree, more often than not, seem to be Goldman, Sachs alumni.

Could it be Salomon's fixed income heritage somehow biased its managers?

Take the longer term view. Salomon isn't even independent anymore. It was rocked by the Treasury bid-rigging scandal some years ago, which required Warren Buffett to step in temporarily as acting Chairman. Then it was acquired by Sandy Weill in 1997. So it hasn't even been a separate investment bank for over a decade.

Goldman, on the other hand, prospered continuously for the past several decades, culminating in its own public offering.

Given the rather checkered history of Salomon, Kaufman's early departure to a rather forgettable career thereafter, as his one-time employer stumbled and was acquired, why does anyone take Henry's views seriously anymore?

Why didn't Griffith ask Kaufman on what basis, with what credentials, he is qualified to propose refashioning US financial markets regulatory mechanisms?

Honestly, in Kaufman, I see little besides disgruntlement at lack of accurate calls when he was an economist for Salomon. And, subsequently, reason to call into question his presumption that Salomon now counts for much when weighing in on this topic.

Perhaps his appearance simply reflected CNBC's indiscriminate need to fill air time on a weekday afternoon.