On Ethics, Stress Tests, Goldman, and More

On Ethics, Stress Tests, Goldman, and More


By David Merkel, CFA of Alephblog

First, I have some blog news:  my hosting provider made me delete 7000 spammers out of my user database.  That left me with 200+ users.  Inadvertently, in the process, around 70 bona fide users with surnames starting with the letters J-Z got deleted.  So, if you got deleted, and have to re-register, my apologies.  I tried to be careful, but made an error when matching databases.

Second, MetLife should not have to undergo the stress tests that banks do.  Banks borrow short and lend long; they are inherently unstable.  Insurance companies generally match assets and liabilities, and are stable.  The only insurer of consequence to fail in the crisis was AIG, and it was because of derivatives and securities lending issues, areas that other insurance companies do not touch, or handle differently.

Third, why does an institutional investor use an investment bank?

When I was a corporate bond manager, we used everyone.  We wanted access to deals, and if you don’t deal with all of the majors, you are shut out.  Of course every manager deals with Goldman Sachs even if they don’t trust them.  The big guys know this and keep their brokers at arm’s length.

If you are a reporter, that is why managers will not speak on record.  If the syndicate desks on Wall Street don’t like you, they won’t give you good allocations on contested deals.

Bond managers are wise to use Goldman.  They are wiser to realize that Goldman does not act in their interests, and so, be cautious.  And to the degree that you are a smart manager, you can lessen your dependence on the big guys, and work with the hungry second tier, who know that money can be made by implementing the ideas of smart investors, so find ways to buy cheap bonds for smart investors from dumb investors, and sell rich bonds from smart investors to dumb investors.  After all, brokers only make money when assets are bought or sold.

There are few friends on Wall Street.  Big institutions know that, retail investors should learn that.  But the guy who resigned from Goldman should be aware that not all clients were muppets.  Firms I was with would avoid derivatives unless we were the ones structuring them.  If we have control, derivatives are good.  If we don’t have control, derivatives are bad.  Control is good….

You should always be thinking that those who you deal with may not be acting in your interest, and often, it is because of forces beyond their control.  I was pinned with $10MM face of Teleglobe bonds and the main broker dealing in them held (unknown to me at the time) $100MM+ of the bonds.  My efforts to sell the bonds failed because the broker had a larger position, and there was no active market.

Fourth, just because you live in America, it doesn’t mean you should get a high wage.  Particularly for manufacturing wages are declining, and why shouldn’t they decline, because productivity is not rapidly advancing.  It’s like my article on comparable worth.  Most Americans are going to have to get used to being poorer, because there are many others who can do what they do for less.  And, that partly explains the 1% vs 99% argument, because as the rest of the world grows, and the US doesn’t, it has impact on those in the US that earn too much relative to their productivity.

Fifth, imagine for a moment that you are in charge of an organization that is going to play a baseball game against the winners of the World Series.  You can choose any people to be players that have not been employed in MLB for the last five years.  How well do you think you will do?

Duh. You know you are going to lose.  Well, the same thing applies for those that are arguing that the 99% can dominate the 1%.  Short of Soviet tyranny, it won’t work.  The 1%, should it really exist as a stable organization, is too smart, and will beat the 99% nine times out of ten.

We talk a lot about democracy, though our government thwarts it when it can.  Government typically boils down to aristocracy — the rich rule, and it can’t be otherwise, unless we want Communism, like China under Mao.  In the Eurozone, under the “socialism,” the wealthy happily rule.  Only societies that are wiling to destroy wealth are willing to deny power to the wealthy.  And China is a great example here, as the wealthy increasingly dominate their government, to a greater degree than is true in the US.

Money talks, losers walk, and I never give money to politicians; it is all too corrupt.  Just realize that the deck is stacked against you.  Money finds a way to win in the process eventually.

Sixth, California will suffer for making retiree healthcare unchangeable.  Retiree healthcare in its present form is not affordable by almost everyone.  Why destroy your state by making  promises that can’t be upheld?

Seventh, after you read this, explain why you might trust Chinese statistics.  I reminds me of AIG where bad news had a hard time traveling to the top.