Goldman Sachs Group Inc. is a widely admired Wall Street firm. But doesn't it bother anyone that while it was betting against subprime mortgage loans with the firm's proprietary book last year, it was pushing the stuff out the door to customers? Unfortunately such activity should not come as a surprise.
Early on in my career, a bond salesman gave me sage advice. He took me aside and said that when it came to dealing with Wall Street, “Jeffrey, this ain't church.” How true. Wall Street brokers are not charitable organizations. They aren't worried about your spirituality or saving your soul. They just want to make money. And you will be their friend as long as you make that happen.
I always remind our traders that a salesman's job is in part to be your friend, so things will get done because of “the relationship.” This usually means at prices that favor the dealer. I have almost always found that putting dealers in competition results in better prices for the customer. At a minimum a “trust but verify” approach keeps everyone honest.
These days, investors are finding out the hard way that Wall Street can be a fair-weather friend as dealers are reluctant to provide liquidity during these difficult times. “He who fights and runs away will live to fight another day” seems to be the current Wall Street mantra.
The latest problem surrounds adjustable-rate securities, which are now resetting at penalty rates as Wall Street steps away from making markets or supporting deals that they were not contractually obligated to support. Investors are stuck with an illiquid security, and not the short-term money-market obligation they thought they owned.
Issuers face a double whammy of sorts. The ARS interest rates are much higher than originally contemplated. And, many issuers entered into a Rube Goldberg maze of derivatives, swapping this for that in order to save a few basis points. Those swap “hedges” have turned sour as well.
“Read the fine print” is the lesson to be learned here and don't count on “the relationship” in a pinch. That goes for both buyers and issuers.
Of course, even Wall Street has fallen on hard times. Bear Stearns Cos., a sacrificial lamb if ever there was one, is now out of business having been sold at a fire-sale price to JP Morgan Chase & Co. It was no bailout of Bear Stearns, as shareholders have gotten little, although the other brokerage firms are now sitting pretty having been given access to the Federal Reserve System's discount window for a laundry list of collateral.
Perhaps now the Street will stop howling at the Federal Reserve and Washington to “do something” to solve the recent credit crisis that has plagued the financial markets. Not surprisingly, they seem to be in favor of laissez-faire capitalism and survival of the fittest in the good times, but eager for government intervention when their ox is being gored.
Unfortunately, the dirty deed had to be done. The ship was taking on water, and we needed to plug the leak now and worry about assigning blame later. Still, is there any doubt that more regulations will be coming down the pike when we get out of this mess? Is there any doubt that we deserve them?
Of course it's not just Wall Street that can be ethically challenged. The Securities and Exchange Commission recently charged famed Fidelity Investments portfolio manager Peter Lynch and others for grubbing for free tickets to sold-out events via the equity trading desk at Fidelity, which of course received the loot (“gifts”) from Wall Street.
Why wealthy people (or anyone for that matter) do this is beyond me. It is unethical, and these folks can surely afford to buy the tickets themselves. Is it a sense of entitlement, invulnerability or maybe the thought that the rules don't apply to these financial superstar athletes? Meanwhile clients toil away.
Fred Schwed's famous book “Where Are the Customers' Yachts?” comes to mind. There are no customer yachts, only the “helpers” have the yachts. Warren Buffett warns about managers, brokers, salesmen and consultants who take slices out of a fixed pie, leaving less for the customers — pension funds, endowments and other investors — who created the wealth in the first place.
We all like to be big shots, and throwing around a lot of money seems to do the trick for some. That's fine if it's our money, but usually it's not. It's other people's money and there is a special duty of care that is imposed on individuals who serve others: Diversify the portfolio, keep expenses down, measure performance, and hold yourselves and others to the highest standards.
Some time ago I attended a conference where former U.S. Attorney General Elliot Richardson was speaking about ethics. He noted that auditing and compliance were important safeguards. An audience member opined that people knew what was right and we all had a conscience. Mr. Richardson answered, “Yes, but what is your conscience? It's that little voice inside you that says someone might be looking over your shoulder.”
While that might seem terribly cynical to some, there is ring of truth to it and it's probably a good working hypothesis. After all, when it comes to the money management business, this ain't church.
Jeff Pantages is chief investment officer of Alaska Permanent Capital Management Co., Anchorage.
