Borrowing From The Future
The acquisition of mortgage lender Golden West by Wachovia may go down in history as a prime example of “borrowing from the future.” The concept was best described in Taleb’s “Fooled by Randomness.” Borrowing from the future is an investment strategy where in pursuit of returns, institutions expose themselves to so much risk, that future losses may exceed the majority of, if not all, prior earnings. Two aspects of this story are instructive. First, is the continuing profound lack of transparency in finance that puts the meaning credit ratings and equity analyses in serious doubt. The second important lesson learned is less obvious.
Curbs on Executive Pay Won’t Pay Off
Compensation of Wall Street executives has been raising eyebrows for some time. So, when Dick Fuld, Lehman Brothers’ CEO, had to defend the fairness of his payouts in a painful congressional testimony, he seemed well-positioned to become a poster child of the excesses of the Golden Age. Unfortunately, attempts to prevent “unnecessary and excessive risks” by curbing executive pay are unlikely to succeed: many executives whose institutions suffered catastrophic losses or ruin in 2007-2008 were victims of financial natural selection, not greed.
The Fannie and Freddie Debacle
There is little doubt that the nationalization of government sponsored enterprises, Fannie Mae and Freddie Mac, in September was a major contributor to the escalation of the credit crisis to its most violent stage yet. While their debt holders appeased, investors in their preferred and common stocks did not fare nearly as well. The damage resulting from the nationalization could be seen on multiple fronts, yet the mainstream media’s focus was misdirected throughout.
Money Market Funds: Riskier On All Counts
Significant losses of money market funds during the 2007-2008 crisis came as a huge surprise to investors, regulators, policy makers – and often to managers of these funds themselves. At the present time, finally, the lack of transparency of money market funds and their investment risks are fully acknowledged. However, the debate stops short in exposing the risks that money market funds pose to asset managers.
