My dad was a cynic, having little faith in Washington and not much more in Wall Street, though he voted and invested.
I have leaned more on the idealist side. While I have been aghast at some decisions by government, I tried to believe these were done for the good of the country in the minds of those whose course of action prevailed.
In business, it has been my belief that while the goal was, necessarily, profit, actions taken to get that profit would be reasonable and done so in view of the larger picture. How does the company treat its employees? Is the product safe? If it were still possible to make a deal with just a handshake, could a company do so due to its reputation?
Needless to say, particularly in the last few years, those beliefs have been shaken (though not abandoned).
Take the similarities of the strategies described below. Now, I don’t think short-selling should be banned (though I believe the uptick rule is reasonable). And I don’t think hedge funds, bankers and others should be penalized for success.
But it’s apparent patterns like those that follow invite questions.
From: The Sellout, by Charles Gasparino:
Bear’s stock was barely holding at $80 a share and was trending lower, and it was increasingly the target of short sellers, who were engaging in a new maneuver that put even more pressure on the firm’s stock price: they bought credit default swaps and shorted Bear’s stock. When the prices of credit default swaps began to rise, word spread about Bear’s problems – after all, why would investors be buying credit protection if they thought Bear would surprise everyone with good results? The speculation was repeated in the press, and shares of Bear declined. As they fell, the short sellers reaped huge profits.
From: Hedge Funds Try ‘Career Trade’ Against Euro, in the Wall Street Journal (2/26/2010):
Again, derivatives, known as credit default swaps, are playing a part in the current trading. Some of the largest hedge funds, including Paulson & Co., which manages $32 billion, have bought such swaps, traders say, which act as insurance against a default by Greece on its sovereign debt. Traders view higher swaps prices as warning signs of potential default.
Since December, the prices of such swaps have more than doubled, reflecting investors’ concerns about a default by Greece. Paulson had built a large bearish position on Europe, people familiar with the matter say, including swaps that will pay out if Greece defaults on its debt within five years.
Paulson since has closed out that position and has taken the other side of the bet, leaving the firm with a bullish stance now, a person familiar with the matter says.
In a statement, Paulson declined to comment “on individual positions,” saying it “does not manipulate or seek to destabilize securities in any markets.”
Late last year, hedge funds bought swaps insuring the debt of Portugal, Italy, Greece and Spain, and began making bearish euro bets. More recently, the hedge funds have sold these swaps to banks looking to “hedge,” or protect, their holdings of European government bonds, traders say.
Are these “successful” people making self-fulfilling investment decisions? If so, one also has to wonder about the brain-drain worries on Wall Street. Does it take a whole lot of smarts to choose a course of investment action when you practically know it won’t fail, especially when you’re making the bet with what is essentially other people’s money?
I am not a conspiracy fan. And it could probably be argued that these interestingly similar investment strategies are just that. Coincidence. Unrelated.
But, even as I keep the faith, I hear my father’s voice.
