It's a bit hard to remember on a day like this but just a little while ago the big concern among journalists and regulators was the systemic risk created by hedge funds? The SEC was trying to regulate them, journalists watched them warily and corporate governance types referred to them as cowboys operating in a wild-west without rules.
As it turn out, the really risks in the system were being created not by hedge funds but by boring old investment banks and insurance companies. Sure there have been hedge fund failures but none on the scale and with the repercussions of the recent failures of Bear Stearns, Lehman Brothers, and the government sponsored mortgage companies. Hedge funds might not have had all that many rules governing their behavior but their incentive pay structure seems to have regulated their risk far better.
Larry Ribstein thinks that maybe we should start paying attention to the kind of corporate governance reform that works rather than the kind the experts favor.
As odd as it might seem seven years after Enron, I think this is the wake up call for corporate governance. Despite all the regulators, independent directors and Gretchen Morgenson, big firms were taking catastrophic risks under the radar.
And, yes, the culprits were the conventionally governed big corporations.
Black Sunday: the implications for corporate (and uncorporate) governance [Ideoblog]
Posted by guest , Sep 15, 2008 4:14PM
Thirst
Posted by guest , Sep 15, 2008 4:17PM
Had the same discussion with some friends yesterday who were from the 'more regulation' camp. Post tech-bubble, a bunch of regulation were put forth, most prominently SOX. The regulators attempted to control what they saw was the trouble then, mostly inappropriate accounting of revenues and costs.
However, now we have a new beast. Improper marks on hard to value assets. The CEOs and CFOs did sign off on the financial statements but it yielded precious little.
Regulators are always behind the curve. Even without regulations, this mismarking is going to automatically go out of fashion. However, something new will come up which the regulators have not yet dreamed of.
All that regulations do is create some additional jobs for accountants, auditors and government agencies.
Posted by guest , Sep 15, 2008 4:18PM
Stan O'Neil actually saw this coming and intentionally got himself fired.
Genius.
Posted by guest , Sep 15, 2008 4:22PM
why is merill stock at 17 when it is going to be bought out for 29/share???
Posted by guest , Sep 15, 2008 4:24PM
What we need is zero regulation. Let the govt say "You're all big boys - be careful". Investors would be much less cavalier in deploying their capital. Mistakes would be rectified immediately and severely.
So what do people think if AIG doesn't get its 40 bil tonight?
Posted by Anal_yst , Sep 15, 2008 4:38PM
@ 4
Its not a fixed share price, its a fixed ratio, .8595 BAC shares for each MER share if memory serves correctly. Subtract out the arb spread and you have your answer.
Posted by guest , Sep 15, 2008 4:39PM
@ 4
Did you happen to work for LEH?
Posted by guest , Sep 15, 2008 4:47PM
My kid brother can do arbitrage better than 4.
Posted by guest , Sep 15, 2008 6:58PM
In 1998 Lehman fired my boss ,John Succo, for telling the truth:
"The trouble started when John Succo, trading manager at Lehman
Brothers’ equity derivatives volatility desk, agreed to speak at an
investment conference sponsored by Grant’s Interest Rate Observer.
After discussing the pricing of risk and the correlation between
equity derivatives and the underlying stock market for a while, Succo
was asked a question. “I don’t think my boss is here, so I’ll address
that,” he responded. “I don’t think that the people running our firm,
our equity floor, have any idea of the things that we actually do, of
how we...(audience laughter) I’m serious...of how we hedge, the
products that we’re involved with, the amount of risk we take or the
lack of risk we actually take.”
He went on to describe a 26-year-old derivatives trader at a big bank
who believed that his senior management’s understanding of the risks
at the institution was “probably off by a factor of 10.” “And I think
that’s probably pretty accurate. I think as I said before, management,
if you’re making money, kind of leaves you alone until there is a
crisis situation. And I don’t think that’s a way to run a firm.”
Posted by Bulging Bracket , Sep 15, 2008 7:05PM
4 has a long resume - he was in Mexican debt, bought Russian bonds, invested in Thailand, worked for Nobel Prize winners, got into Natural Gas trading, then worked for Bear Sterns. I suggest he grab one of those tear sheets for Investmet Banking Bootcamp!
Posted by guest , Sep 15, 2008 8:55PM
Maybe it's a sign that we're going to get a huge hedge-fund or private equity failure next, not that their model is somehow better. Now that would really be a surprise huh?
Posted by guest , Sep 16, 2008 1:37AM
any chance after the dust settles hedge funds and PE firms are going to fill the void left by all the failed ibanks with a combination of new business models replacing those of the failed banks?