Back in the U.S. for a few weeks, I've continued to watch the Madoff situation unfold. There's still a lot unknown here -- not just from that firm but from its feeder firms. I also won't be surprised if some unrelated but similar stories emerge from other hedge funds in the coming weeks.
I spent the first half of 2008 in the U.S. and the second half outside the country. Of course, the housing bubble popped and the credit crunch swept around the world followed by the various related stories like forclosures, bailouts, nationalizations, etc, etc, etc. The global participation was apparent from where I sat in Europe. And while much of the roots of those events were American, I didn't get the sense of widespread finger-pointing at the U.S. And that was appropriate. Sure, American firms were the primary manufacturers of sub-prime mortgages, their securitization, and distribution around the world. But, in my humble opinion, that was a buyer-beware situation. If you buy complex, high-risk securities then you should understand ... well ... the complexities and the risks. The bottom line is that the sellers were selling exactly what they said they were selling. And buyers bought 'em. Maybe it's the wild west of free markets, but personally I don't have a problem with that.
But the Madoff thing is different. This is a case of a seller flat-out lying about what he's selling and prohibiting buyers from assessing the complexities or risk levels. Buyers of shares in Madoff funds appear to have thought they were buying hard assets but, in reality, they bought monthly account statements with made-up numbers on them. And this went on for years and included SEC exams and warnings sounded by third party consultants. The scam succeeded because of lax hedge fund oversight in the U.S. And it is impacting buyers around the world.
This is a truly American export and a really bad one at that. In classic ambulance-in-the-valley-vs-fence-on-the-cliff fashion, the U.S. will implement new, reactive restrictions on hedge funds. This is appropriate but I expect an overreaction (see: Sarbanes-Oxley).
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The depth of the penetration of securitized bad loans is in no small way due to the failure of the rating agencies to do their jobs properly. After all, if they call a security investment-grade, you can't exactly fault those who bought it. Beyond, of course, to say caveat emptor.
The current financial crisis is directly and firmly rooted in the economic policies promoted by Clinton Treasury Secretary Robert Rubin.
And who has President-Elect Barack Obama selected as his chief economic advisors? Rubin proteges Larry Summers and Timothy Geithner.
In the words of that famous Zen philosopher-poet, Robert Daltrey: Meet the new boss...same as the old boss.
Is it just me or does Madoff look like Dracula?
And how Jungian is it that his surname is "Made-Off" -- as in, with the loot?
The ratings agencies definitely blew it - but they're third parties. Institutional investors were overly trusting of them. Investors should have dug in more thoroughly on the mortgage-backed securities they themselves were buying.
Rubin shares responsibility for Citi's virtual insolvency and that's a big problem - but it's pretty hard to draw a direct line from him to the problems at Lehman, Bear Stearns, AIG, Merrill, etc. Summers and Geithner are grown-ups and they should get a shot at this thing on their own feet once they actually take up their new positions.
Dracula isn't a bad Madoff analogy.
Oh I don't know -- it was Rubin along with Alan Greenspan who first advocated that derivatives such as mortgage-backed securities should not be regulated. His views on such matters pretty much date back to the beginning of the Clinton administration.
And based on his advocacy, Congress removed the authority of the Commodity Futures Trading Commission to regulate such trading.
I'd call that a straight line -- it pretty much split the wood, stacked it neatly, doused it with gasoline and handed Lehman, Bear Steans, AIG, Merrill and the rest a lighter.
Well, we see that differently. Although, I acknowledge that I might have too much of a free market / direct responsibility bias. I.E. the behaviour of the leaders of those firms are / were smart, highly-paid people and they're responsible for their decisions (not President Clinton, his Treasury Secretary, President Bush, or his Treasury Secretary).
Some of their peers (e.g. Bank of America, Wells Fargo, JP Morgan Chase) operated pretty well under similar conditions. We're not talking about idiots playing with matches.
That said, I do think it's appropriate to dial up the regulatory oversight a bit (or at least enforcement); especially on the hedge fund side.
I'm not discounting their responsibility -- just saying those on the policy side of the matter are responsible as well.
And it pokes a major hole in the whole "this is all the Bush Administration's fault" thing the Obama campaign peddled throughout the fall.
Inconvenient, but true.
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