Here's the least-surprising headline of the day:
U.S. Rescue Aid Entrenches Itself
- to a report on this utterly predictable outcome:
Government officials remain concerned about the fragility of the
financial sector. Their hesitance to fold these programs, and the
financial industry's willingness to keep using them, has made it harder
for regulators to re-establish a sense of market discipline, government
officials say.
Podcast RSS Feed
Full EconTalk Text
{ 24 comments }
I only seem to be able to get a small preview, is there another url that would display the whole article?
They better figure out a way to change it fast, because the arrangement is a kleptocracy, and that is not very stable.
And it happened so quickly.
Too late. The country has been a keptocracy for a long time. Why, right this very second California is making a "too big to fail" argument before the oracles in congress.
"Too late. The country has been a keptocracy for a long time. Why, right this very second California is making a "too big to fail" argument before the oracles in congress."
All too true.
Wait until the pension system blows up. The government is going to have to pick up the tab because it will get real embarassing stepping over homeless older people every few feet.
All these pension fund managers had to do was buy treasuries. Instead, they put it at risk to justify skimming the outrageous fees they take.
Ackerman, if you're such an expert in portfolio management, why didn't you manage a pension fund and enrich yourself with those OUTRAGEOUS fees?
Because, as usual, you have no clue what you're talking about.
I didn't think his comment was so ridiculous, but I am not going to comment on the logic of his other posts. I would think that there are high barriers to entry to becoming a pension fund manager. Does one not need an advanced degree in finance, to have been lucky before, and to wear a necktie to become a pension fund manager? I can't charge these outrageous fees because I don't have the credentials or the past luck to justify charging these fees. He might be wrong and he might be right, but I don't see anything inherently illegitimate in his comment. Maybe his ex post-facto confidence on the right move for these managers, but criticizing their risk models and there investment strategies is legitimate IMO.
My, there is so much jealousy of fund managers. I'm embarrassed for you. I don't know if there are very high barriers to entry for pension fund management. Their requirements seem to be lower than my requirements for my traders. I found that particular segment of asset management so boring, I avoided it.
Obviously, no fund manager ever adds value. It's all just luck. We ALL know that and they really should work for free like the rest of evil Wall Street. Which, of course, begs the question – why not just invest all that pension money in an index fund? Why not, as Ackerman suggests, just let the taxpayers pick up the tab from the beginning and buy Treasuries?
Turns out that the higher the expected return the lower the initial investment. Institutions love that for the obvious reason. The rub is that risk and reward are positively correlated. Sure, there are strategies one can employ to make excess returns – alpha – but regulation of pension funds prevents much of that type of trading because regulators and congress doesn't understand them (so, they must be bad) and because there really isn't billions of dollars of alpha laying around anyway. Hedge funds discovered the latter the hard way.
So, they end up being largely long funds. Sure, they diversified across asset classes, countries, currencies, etc. I'm sure they dutifully made sure that they invested in as many uncorrelated or negatively correlated assets as they could to reduce risk. The only problem with uncorrelated assets is that they remain uncorrelated only as long as the sea is relatively calm. During shocks – particularly global shocks – all correlations tend to converge to 1. So, a portfolio of previously uncorrelated assets suddenly becomes extremely correlated. That's what happened in May 2006, for example, when the typically weakly correlated emerging markets suddenly collapsed when inflation fears in the U.S. spiked.
Obviously, we need to kill someone, so we should really burn those fund managers at the stake.
All these pension fund managers had to do was buy treasuries.
Not correct. Pensions have a defined benefit. If the benefit paid exceeds contributions and earnings then you can easily have a shortfall. The main problem with many public pensions is on the benefit side. Politicians keep ramping up benefits payments for themselves, while the contribution, and earnings side of the equation are not keeping up.
Read up on the San Diego pension crisis, and you will quickly see it is more than money managers, and in fact was pretty much government that created the problem, with high benefits, and accounting gimmickry.
Oh…and, of course, those fund managers are under constant pressure to increase returns so that even less funding is required. You know what that means – more risk. If the fund manager reduces risk (always at the cost of return), he's fired and replaced with someone willing to take more risk.
Time to slaughter them (or "cap their knees" as Ackerman previously suggested).
Google "pension fund, criminal", and then we can talk. I scrolled through 37 pages of relevant links out of 1 million+ hits, and then got bored.
http://www.philly.com/philly/blogs/inq-phillydeals/NY_probes_pension_finder_fees_PA_allows_them.html
Tells about Cuomo issuing subpoenas to over 100 investment firms dealing with pensions. He found a nest of snakes in his backyard, but it looks like it might be a national plaugue.
I am sure there are honest ones too. You know, the small ones.
Cuomo's favourite pastime is issuing subpoenas and threatening people. When he found snakes, he must have been looking in the mirror. Or Spitzer stopped by for a visit.
From the article:"The charges began with allegations of a complex criminal scheme involving numerous individuals operating at the highest political and governmental levels under former Comptroller Alan Hevesi, in which the New York state pension fund was used as a piggy bank for the Comptroller’s chief political aide and a favor bank for political allies and other friends."
Politicians using a public pension fund as a piggy bank to pay for political favours!? Why, I'm shocked. Shocked, I tell you. And outraged. But, mostly shocked.
Of course this has fig all to do with your whining about risk management, but I'll let that slide.
I just call the stuff as I see it. All I know is that I am going to be a very angry individual if we have to bail out the pensions. They were not supposed to be that fragile.
With rare exception, I consider it immoral to buy government bonds. It is also very destructive for the economy as a whole.
Ackerman, you might want to consider that you don't always fully understand what you're seeing before you base conclusions on what you think you see.
Nobody will be angrier than I if we have to bail out pension funds. Public pension funds are inherently fragile because they are subject to political corruption and because regulation makes them rigid and allows for less risk effective management. But, all investments carry a level of risk because we have no idea what the future will hold – just as the engineers who worked on the World Trade Center predicted the results and therefore hedged against a smaller jet hitting the towers but couldn't predict the size of the jets flying 30 years later.
K Ackermann, either way it is the politicos that hire the investment managers. If they hire a manger with outrageous fees, then they failed at one of their primary fiduciary duties.
"But, all investments carry a level of risk because we have no idea what the future will hold…"
No doubt, but look at the warnings that were out there long before the market tanked.
I would think a pension fund manager would first and foremost be a bond expert. Bond investors are like turtles, and will pull their head in at the first signs of danger.
The monolines were downgraded all the way back in 2007. That was a clue. Some people got the clue, but most just waved to the clue as it passed by.
If the government allowed the pensions to invest with hedge funds, then I'm sure they would have allowed them to cash out too.
The
governmenttaxpayer is going to have to pick up the tab because it will get real embarassing stepping over homeless older people every few feet."I would think a pension fund manager would first and foremost be a bond expert."
If he is a bond portfolio manager, then yes. But if he must hold an assortment of assets (and a pension fund manager does), then being a bond specialist hampers him. A PM must have a solid understanding of finance and he will employ analysts who are specialists who will advise him. He has enough understanding of what they're saying to be able to intelligently act on their analysis. Besides which – did you miss the part where I said that when a shock occurs all correlations tend to converge to one? Being a bond expert will not help him.
"No doubt, but look at the warnings that were out there long before the market tanked."
Those warnings are much clearer in hindsight.
Here's a fundamental problem for PMs: The dotcom stocks are rallying. There's insatiable demand for even the worst junk coming to market. You know it's imprudent to invest in them. So, you don't. Your portfolio underperforms expectations and you are fired. You understand this. You load up on dot com IPOs. At the wrong time. They crash, your portfolio takes a massive hit. Everyone says you should have seen it coming. BTW, sell side analysts like Henry Blodget were in the same crap position only with recommendations instead of investment.
"The monolines were downgraded all the way back in 2007. That was a clue. Some people got the clue, but most just waved to the clue as it passed by."
No, everybody got the clue. It's just that stampeding out of an asset is a wealth destroying adventure. Generally, when you have to puke a trade, you want to do it as judiciously as possible and avoid actually driving down the price of the asset as you unwind, thereby preserving the value of your portfolio. This may take some time and, even with the downgrade, the bonds may have become cheap and not worth selling at some point. Of course "cheap" and "rich" depends on the estimate of projected cash flow and there may be other considerations such as whether the position is hedged or not. But money managers didn't just wave to clues as they passed by – even if they ended up making a decision that ended up producing worse consequences.
"If the government allowed the pensions to invest with hedge funds,"
Investing in hedge funds was one way they diversified. The most CALPERs ever invested in hedge funds was something like 10 or 12% of its portfolio and that was with a lots of different hedge funds, not just one.
"With rare exception, I consider it immoral to buy government bonds. It is also very destructive for the economy as a whole."
On the whole, it is a bad idea to give the government any more money to misspend than it actually extorts from you at the point of s gun.
A gun, I mean.
"worse consequences." = "worse outcomes"
@Methinks – that was a good post.
Thanks, I'm glad you liked it. BTW, I'm not saying all PMs are smart and good and do everything right. But it's important to understand the incentives and what the PM's are up against before judging them all as greedy retards based on outcomes (which, you know…some of them are greedy retards).