Category Archives: Financial Markets and Institutions

Buffett vs. Kozlowski

Buffett is a CEO just like Dennis Kozlowski was at Tyco. One that buys companies and let’s them run themselves. Tyco was built by astute acquisition. But Koz did things that were so dumb that you have to wonder how he built the company in the first place. He had plenty of money to pay for his wife’s birthday party and a NY apartment. Why in the world would he try to cheat on his taxes? Really, quite foolish. Additionally, Jack Welch of GE also ran a huge conglomerate and got into some warm water, note the difference in temperature compared to Koz, when he received such a huge retirement package. Buffett is a CEO along the lines of these two others, it’s shocking that they didn’t have the good sense to follow his lead and stay well clear of foolishness and communicate open and honestly with shareholders.

Hedge funds

Most hedge funds don’t make exceptional returns. It’s just as difficult for them to predict the future as it is for others. They have some advanced strategies, such as merger arbitrage, convertible arbitrage, etc. that are supposed to provide steady earnings and if done correctly, not blow up. Many of them have the goal of market neutral earnings. In other words, they make money regardless of the DOW or NASDAQ.

Yes, if you invest in a hedge fund, you may very well lose all your money. This is basically impossible with an index or mutual fund.

Competition

There has become so much competition that hedge fund managers are doing things that they ordinarily wouldn’t do. Also, the business is so lucrative that it’s worth taking a shot at big, fast returns and if they miss, they can always start another fund. There are now HF managers forcing the hand of management and getting them to buy other firms or sell their own firm to maximize the equity return.

Main street doesn’t need to be involved in this, but why shouldn’t they be allowed to invest if they want to? The criteria for an “accredited” investor is based solely on money, which isn’t a real basis of market knowledge. If a person can day trade stocks, options or commodities, why can’t they place money with a HF? Many hedge funds will allow as little as $25k or less, well within the reach of the many investors. The issue regarding the public that seems to be at hand is how to “accredit” investors, yes?

Municipal securities

Municipal securities are called Munies and are issued by state and local governments.  There are several types and several risks associated with municipal bonds.  Obviously, one of the significant differences between Munies and Treasuries is the credit rating of the insurer.  The federal government is considered to be just about “risk free” where as Munies have credit risk and ratings.  There have been defaults in some Munies but they are rare. 

“Moral hazard”

How many things are out there that the government, essentially the tax payers, are going to have to cover in the event of a disaster? Fannie and Freddie are but two.  The underlying issue is encompassed by “moral hazard”. Essentially, if you have put the downside risk on others, you are prone to take more chances. The common example is the insurance that covers a rental car. Once a driver has it, they tend to take more risks and don’t take the care they would if they had to pay for any damage. If the government will bail them out, why not take on risk?

Deposit insurance

What deposit insurance does is protect the depositors, not the bank. So depositors don’t have any worries about which bank they deposit money into and aren’t a check and balance with regard to bank safety. What this gives the bank is a steady supply of low cost capital from which they can profit. If risk was taken into account, they would have to pay depositors a much higher rate of interest and they wouldn’t be nearly as profitable. This is essentially a federal subsidy for banks.