More Drivel From Henry Kaufman

Yesterday's Wall Street Journal featured another "so what" editorial by the perennially gloomy former Salomon Brothers economist, Henry Kaufman.

Forgive me if I'm growing more than a little annoyed at his seemingly more-frequent, unenlightening prose in the Journal. I'm not sure who annoys me more at this point- Kaufman, for the repetitive, tired observations and ideas, or the Journal's editorial page staff, for wasting so much space, so often, by giving it over to the former economist of a failed investment bank.

I won't even bother quoting from Kaufman's piece. None of it is new. For example, I wrote this piece back in November covering much of the same ground as Kaufman with respect to the misalignment in financial service conglomerates of risks and rewards. And the relative risks to our economy of the existing financial service utilities.

Frankly, much of what I read in Kaufman's pieces lately are echoes of things I wrote months earlier. With the big K, I no longer read anything of note that hadn't occurred to me first. Mind you, I'm not being egotistical. I'm sure the same is true for dozens of other people reading Kaufman's recent tripe. Whereas, with Brian Wesbury, Edward Prescott, or Alan Reynolds, I nearly always learn something new and valuable, with Kaufman, I've already been there and gone.

I continue to differ with Kaufman, as I did, again, last November, here, with respect to financial regulation over the past several decades. It seems that, in Kaufman's world, change brings risk, risk is always bad, so, in conclusion, change is also (usually) bad. It's as if the notion of market-priced risk is nonexistent in Henry K's world.

When I think of Kaufman, the once-chief economist of the failed Salomon Brothers, I think of a doddering old second-tier economist who probably sharpens his own #2 pencils, muttering something like,

"things sure ain't like they were in 1990 anymore. What's a body to do?"

I wrote about him in this post, on the occasion of his 80th birthday, and appearance on CNBC,

"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 ...... 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?"

After wringing his hands about opaque CDOs, which nobody forced any institutional investment managers to purchase, Kaufman goes on to chide the Fed on being too transparent.

Honestly, it's just too much. Kaufman is apparently a member of that group of 100+ 'economists,' some with appropriate degrees, others merely self-styled, who all feel they should be on the FOMC, if not Chairman of the Fed.

It's instructive, by the way, that CNBC's Larry Kudlow fell from grace, due to substance abuse, while chief economist at Bear Stearns. Under the legal guardianship of his wife, Kudlow was put into treatment, emerged victorious, and nearly immediately began to write pieces for the Journal's op-ed pages. In short order, he had a co-hosted hour program on CNBC, culminating in his current nightly hour on that financial business-oriented network.

To my knowledge, nobody's ever extended that sort of offer to Kaufman. Maybe the Journal should print less Kaufman, more Kudlow?

With respect to CDOs, and their opaqueness, I would simply note that, in contrast to most financial meltdowns, such as the 1990s technology stock bubble, the 1980s S&L crisis, or the 1960s 'go-go' mutual fund and 'nifty fifty' stock collapse, virtually no retail investors appear to have suffered damage from this latest calamity. This has been a collapse among the smart set- those professional, institutional investors, many on the investment committees of counties, educational institution endowments, and union pension funds.

Kaufman, in my opinion, is barking up at least one wrong tree. These investors thought they were getting a bargain. As I wrote here and here, they, and the salesmen who preyed upon them, each thought there were conning the other party. Surprise- they both lost!

The transparency of which Kaufman writes isn't going to happen. Large commercial and investment banks aren't going to list every security they own. Rather, we can glean some understanding of their risk profiles by analyzing their performance over time. Managements leave trails, and those trails are valued by markets.

I not only don't, and haven't, owned any CDOs, Henry. I didn't own Merrill Lynch, Citigroup, or Bear Stearns. But I did own Goldman Sachs.

Seems there's enough transparency already, if you just know where to look.