Friday, March 16, 2012

Real Men and Women of Genius

Matt Taibbi has yet another excellent piece out today Bank of America: Too Crooked To Fail. It is a long detailed piece but please don't let that stop you from reading it as it's well worth the effort. Rather than talk about the piece, which is spot on in my opinion, I want to discuss a related issue that Matt brings up somewhat offhandedly that deserves more attention. When discussing the toxic paper BAC was bundling and selling to pensions and sophisticated investors Matt remarks:

"Some of these institutional investors were at least partial accomplices to their own downfall. In the boom era of easy money, financial professionals everywhere were chasing the lusciously high yields offered by these bundles of subprime mortgages, and everyone knew the deals weren't exactly risk-free."

The issue I want to discuss is these sophisticated institutional investors who purchased the garbage for your pension plan. I am not letting BAC, JPM, GS or any other of the too big too fail, crony capitalist oligarchic douche bags off the hook for peddling absolute toxic garbage as gold in any way but not nearly enough attention has been focused on the marks here.

How is it that these purported 'smart money' institutional investors got taken so easily?
How is that they were loaded up with this crap?
How did this get by the investment committee?

We can all understand it when John Q Public walks into a Merrill office expecting unbiased, professional investment advice and gets the shaft via being sold whatever the 'product of the day' the firm is trying to unload from its own inventory. (See movie Boiler Room for the 'how to' training video, focus on the rip).

History sidebar. I still remember as a retail broker having prospective clients come in for sit downs and after a quick look only at names of their positions could tell them with surprising accuracy when they were purchased. Clients were astonished at this feat which I must remark is a truly sad and disgusting characteristic of the industry.

Back to committees. For those unaware these institutions do everything by committee up to and most likely including going to the bathroom. Committee is code for cover thy asses. Yes men who do and say all the right things for show in public love committees as it is a offshoot of the heads we win, tails someone else loses too big to fail bail outs we just witnessed.

They, as a committee, cannot all be galactically stupid now can they? I mean they have their allotment of Ivy league MBA genius's there to prevent this type of disaster, don't they? Aw heck, at least 1 member of the committee has gotta be doing some due diligence, right? Just in case you were wondering, investopedia defines 'due diligence' as:

An investigation or audit of a potential investment which serves to confirm all material facts in regards to a sale. This includes reviewing all financial records plus anything else deemed material to the sale. Sellers could also perform a due diligence analysis on the buyer. Items that may be considered are the buyer's ability to purchase, as well as other items that would affect the purchased entity or the seller after the sale has been completed.

We have an educational 'class system' mentality here that gloats and rewards 'where you matriculated' both in the boardroom and the country club. Surely you've been in the meeting when regional VP so and so opens with "Welcome to the meeting everyone I'm going to turn things over to our Princeton grad Jennifer", or "I want to take a minute to introduce you to our Harvard MBA Andrew who we were so fortunate to land."

The phrase if you repeat a lie often enough people start to believe it applies here. The lie being that an Ivy league education is light years better than say a city college degree. How ironic that the brilliance that accompanies said esteemed degree cuts only one way. When you succeed you must be brilliant because you went to Harvard or Princeton but when you fail, no one could have seen it coming. Sadly this formula only cuts it on CNBC and Ivy league tenure reviews.

Seriously now, based on all the rosy ratings, the accolades and the hype surrounding these MBA's, weren't Jenny and Andy supposed to be smart enough to avoid this toxic crap? Weren't they being paid the big bucks to keep your pension from being blindsided by the likes of this? While we're at it, let's not omit my assertion that the vast majority of institutional and hedge fund managers are like parking lot valets? The mindset of "heck everyone else owns this stuff, it can't be that bad now can it? I can just hear them now...

"Hey Jen and Andy, its Vice president and youngest managing director Smith here. Did you check to see how many other institutions own this subterranean tranche of Southwest Detroit sewer bonds we bought? Just so we have an out in case something goes wrong. I mean nothings gonna go wrong, but I got 3 kids in private school, alimony checks for 2 ex's and a hot new shop-a-holic trophy wife to support, know what I mean."

Could it be the 'smart money' MBA crowd is just playing one big game of follow the leader with your money? Or could it be all the pomp and circumstance surrounding a vaunted Ivy league MBA is nothing more than smoke and mirrors. Could it be this much sought after MBA is simply an egregiously overpriced ($300k) piece of toilet paper? I mean, we all know the hot dog vendor on the corner outside your office tower, who may or may not have gone to Hoboken Community College for a semester if lucky, is in no way, shape or form equipped to know an orchestrated hussle when he sees it right???

Said hotdog dummy would never poke around and find out with minimal effort that when a Countrywide in house auditor showed up at an office for an exam there would be little to no paperwork. Nor would he know that after said in house auditor brought this up to the district manager was screamed at and thrown out of the office and when brought up to the regional director in house auditor was told to forget about it.

Nope, way to complicated for that sophisticated MBA crowd. They forgot to teach that part to Jenny and Andy over in Ivy league land as the PhD instructors are too busy writing papers for the highest bidder, say like Frederic Mishkin and the Icelandic Chamber of Commerce. Or constructing complex inverted libor Yen/Drachma derivative swaps (think 2+2=6 and you understand it) Yes, ya gotta know that garbage for sure but a no money down, Ninja/Liar loan with a strawberry picker who allegedly makes 150K per annum and not a trace of paperwork...well, not so much.

I am not defending any of the maggots from Wall St. for peddling the crap as Taibbi's article covers in yet more detail but anyone trying to portray these institutions that purchased the junk as faultless and the victim here is dreaming.

I fully realize Wall St. and the institutional world are not 100% full of maggots. Same goes for the MBAs. There are quality people in there but they are few and far between. There may even have been entry level people at these savvy institutions who did the due diligence and had the onions to speak up at the meetings or at least turn it over to their direct manager but odds are it was quashed by the bonus chasing yes men Wall St. so richly covets.

Based on this it appears the only people other than maybe some of the idealistic junior analysts at the purchasing institutions who did any due diligence was the likes of BAC as it's not by chance that such a high percentage of mortgages in a pool can all go to pot. It takes skill and forethought. It takes a intentional criminal enterprise to do so. Lets also give BAC credit where credit, they did their due diligence on the 'mark' institutions who Greg Smith of GS fame so aptly referred to as Muppets (a) was the institution dumb as a box of rocks (b) were they under performing bench marks and/or desperate for yield and (c) did they have the cash to pay for said toxic garbage in full. Yes, BAC did do their due diligence A-Z.

My personal guess is these same 'smart money' institutional investors who bought this toxic mortgage crap after performing said due diligence and dismissing it or not even doing it at all were the same guys and gals who bought Cramer's 4 horsemen of tech,, and host of other related pieces of garbage during the dotcom bubble and yet again, via that Ivy league MBA smarter than you mentality, thought they were brilliant enough to get out before the music stopped, only to get their heads handed to them. Sorry, that's incorrect, I meant to say their annuitants heads handed to them as it was their money in the fund. This is also the same crowd no doubt buying the social media stocks today, not to mention as much AAPL (this time it's different) as they can get their hands on.

These institutional marks were chasing returns and hence bonus' in very similar fashion to their Ivy league brethren on Wall St. on the other side of the deal hawking any piece of garbage to a gullible buyer stupid enough to pony up. Far too many strongly feel they'd have moved on up the food chain by the time the deals blow up if they even had a clue it was gonna blow up. One can make a case either way. Both groups thought they were smart enough to get out in time. Sadly neither did. Real men and women of genius those Ivy League MBA's.

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