Tuesday, February 16, 2010

More Curious Omissions From Elizabeth Warren's Rants

Last week I wrote this piece concerning Congressional TARP Oversight Panel chair Elizabeth Warren's flawed editorial in the Wall Street Journal. In a related appearance on CNBC the next day, Warren continued her rant along similar lines.



Back in November of 2007, I wrote this piece discussing what was really occurring as investment committees of various endowments, pension funds, et.al. bought debt obligations of a then-hot topic, bank-originated SIVs, or Special Interest Vehicles.



In my fictitious example, I suggest that investment committee members of various entities, with their fiduciary obligations, do a poor job investigating and/or understanding some of the prospective investments they ultimately purchase for the funds of which they are trustees.



Warren goes on rants about allegedly-predatory bankers, but seems to conveniently overlook the members of the investment committees for union pension funds, corporate pension funds, non-profit endowments, municipal funds, and other entities.



How about those buyers of CDOs and other ultimately over-engineered paper? Did anyone put guns to their heads? Hold their children hostage against buying the instruments?



No, not so far as I've been able to discover.



The dirty little secret of the investing world is that these so-called "sophisticated" investors, a technical term of legal consequence in the investing world, are frequently ill-prepared, unqualified people put on investment committees as a sort of plum assignment or favor.



They engage in practices which are supposed to be beneath sophisticated investors. Practices such as: using only S&P, Moodys or Fitch ratings to guide their investment choices, rather than do their own due diligence; succumb to overtures from investment bank sales people without doing objective analysis and asking tough questions; failing to consider, and ask about, the motivations of the selling institutions of various exotic, financially-engineered instruments; believing outsized yields on complex financial instruments can occur without accompanying outsized risks.



Years ago, a colleague introduced me to a middleman for several union pension funds. The person in question was a retired, rather beefy ex-working guy himself. Now wearing a white shirt, tie and suit, he never the less behaved pretty much as he probably did back in the day when he worked beside his fellow union members on a line or dock, etc.



When I met him, however, he was essentially peddling his connections to now-aged union chiefs whose investment committees he could deliver to deserving fund managers. He wasn't too shy about claiming that, either.



At no time did he ever suggest that the investment committee members of the union funds to which he could provide access and to which he would provide endorsement of selected fund managers would ask tough questions, were well-trained in analyzing various fund strategies or instruments, or that there would even be any serious analysis of a manager's approach.



It was pretty much a case of passing muster with the middleman, in order to gain access to relatively easily-provided union pension funds to manage.



I don't recall the person's name, nor the sectors in which he had union connections. But at the time, it was quite clear to me that this was SOP for marketing to some pension funds. Investment committee members were just not very responsible.



I'm sure this was not a rare exception. In fact, in CNBC's 2009 production, House of Cards, David Faber interviews the mayor of, I believe, Narvik, Norway. Unbelievably, the woman seemed aghast that the investment bank vendors of complex financial instruments had apparently hoodwinked her concerning the risks of the CDOs they offered to her municipality. She seemed incredibly naive, never engaging in independent information gathering or analysis of the instruments.



Why doesn't Elizabeth Warren go on a rant- and crusade- to find, identify and punish inept members of investment committees? Why isn't she advocating using existing laws to charge and punish such persons for failing in their fiduciary duty as trustees of the funds on the investment committees of which they sit?



For every flawed, risky asset sold by an investment or commercial bank during the period of financial excess, there was a willing institutional buyer.



Why do we only hear about the sellers, and never the culpable, guilty buyers, as well?

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