Sunday, December 14, 2008


The Loomis Sayles Retail Bond fund is currently down 28.1% for 2008 as of last Friday.  The Vanguard Total Bond Index fund, which has a great deal of GSE debt in it, is up 3.2% for 2008 (both figures taken from Barron's weekly mutual fund tables).  Now, how exactly is Mr. Fuss going to make up that difference between the dumb low cost index fund and the higher cost product of his "expertise". That is a pretty big hole that he has dug for his fund's shareholders including me,  and he has done it in a year when the individual investor needed the bond part of their portfolio to provide some ballast rather than contributing to the overall disaster.   While Morningstar and Kiplingers have a tendency to sugar coat the dismal performance of this Loomis Sayles bond fund, the NYT took a slightly more jaundiced view of it.  
 Fuss claims that he followed the right process and the correct process led to the wrong conclusions.  Since I am from the hinterland, unable to see New York even on a clear day, and generally unable to comprehend gibberish passing as financial acumen, I am not sure what that means.  Does the process involve, for example, recognizing there is a severe credit crisis sometime in 2007 or early 2008, figuring out which companies might be impacted the most like a CIT, Lehman or the GSEs, sell those holdings rather than buying or even increasing them, and cutting back on junk rated issues going into an economic downturn rather than increasing those holdings?   It is amazing to me that any bond manager for a bond fund marketed as a core bond holding could be down almost 30% and be beaten by numerous junk bond funds that have really had to swim upstream against a powerful current this year.   Given the carnage in the junk bond market, I would not criticize a manager of a "high yield" bond fund for being down 25 to 30%.   For Fuss, his performance is just inexcusable and it does not appear to me to be improving even though sections of the bond market have started to recover from the dysfunction prevalent in October and November.   As I said, I am not a professional manager and just try my best with my own money.  It was not difficult for me to be positive this year with the bond part of my portfolio. 
But process may have a different meaning for the financially sophisticated and astute than it does to this old man and native Tennessean who has never lived in or near New York and would have lasted less than a day at one of the large firms.   I am not sure that I will ever understand the New York financial whizzes or what people will do motivated by greed.     I almost could not help but be amused by the story in the Sunday NYT about this lawyer Marc S. Drier.   WSJ.comAre Messrs. Dreier and Madoff just another manifestation of the greed diseases so prevalent in our financial capital?  This guy Dreier heads up a large blue blood Park Avenue firm with 250 lawyers, many of whom would probably qualify as smart S.O.B.s, and they do not realize that 35 million is missing from their escrow fund, their health insurance was in default,  and the company founder was going around allegedly impersonating other people and issuing bogus promissory notes.  And, then there is Mr. Madoff who apparently is given the opportunity to manage billions from the smart money crowd, and even chosen for his astuteness by fund of fund hedge funds  and others paid large sums to exercise due diligence, without apparently ever having to materially verify his financial acumen in any traditional way such as undergoing a comprehensive audit by a large accounting firm. Worldwide For Madoff investors, big returns trumped concerns 
(last article noted the investors did not receive comprehensive computerized statements) Did anyone think to check out the accountant's office which was the size of a small bedroom located in a plaza next to a pediatrician's office with one partner retired to Florida and only one active accountant who maybe comes into the office for 10 minutes or so, not dressed in business attire,  and then leaves. Worldwide  In Mr. Drier's case, did anyone think to check to see if the notes were valid by calling the issuing company or calling the accounting firm that allegedly had passed on the bogus financial statements? How difficult is it to pick up the phone and make a call?  WSJ.comI guess that looking and acting the part passes for a sufficient inspection under the hood in many quarters and no one should suspect that anyone with a word processor could fabricate a firm's letterhead.   I am not sure that I can comprehend how Drier and Madoff prospered for so long before being arrested.   At my advanced age, I have stopped trying to explain or to understand irrational behavior.   The losses caused by these august members of the bar will no doubt be staggering and could have been avoided by normal precautions.  But greed once again trumps common sense, as it always does and always will. There must be something in the water or air up in New York that makes people both greedy and dumb.   But  Madoff and Drier are just the latest manifestations of  a severely corrupt financial culture. From the heartland of America, they are just more of the same from Wall Street-just a couple of poster children for a system that lacks a moral compass and where greed and self interest trumps everything and I mean everything.  

The 60s minutes story that included an interview with Whitney Tilson  re-confirmed my beliefs in the irrationality and greed of those who created the current financial crisis and I still see little hope that it will end soon.  CBS News  I have said that it will probably take five years for the world to recover from the financial crisis caused by a limited number of people, where literally hundreds of millions of people will pay an enormous price for the greed of a few.   I am not as pessimistic as the forecasters predicting something similar to a Japanese style, extended period of stagnant growth, with the latest story in that vein appearing from an interview with Stephanie Pomboy in this week's Barrons.
Barrons has a well established speciality in financial journalism, unmatched by any periodical, in finding the most negative people on the planet and giving them lots of exposure every week.  But at least Adam Abelson can say he told us so for another year or so before he is wrong again like that broken clock which will be right twice a day.  For now, I am just writing off 2009.  And I hope that the new Congress will make it more difficult for Wall Street to blow up the financial system and take other prudent regulatory measures to reign in the excesses of the greed culture, which makes so many people leave the shore of common sense.   I would also hope that the mistakes made by Phil Gramm and Robert Rubin on the regulatory front can be undone.  Those individuals would never actually admit to ever making a mistake, being titans but maybe some of their self shined luster will start to tarnish. I would not hold much hope for Barney Frank to admit an error either after watching his interview on 60 minutes.  I earlier said that he must be suffering from amnesia in failing to recognize his role in the Fannie and Freddie debacle.  After watching the interview, it is not amnesia but a God complex of superior righteousness that it the underlying cause of his lack of recognition, for a God can not make a mistake and any criticism of a God by one of us mere mortals is not only wrong but just plain stupid.  If there is one fact that is apparent to those in the heartland, including Republicans in the SUV Capital of the World who would not vote for George Washington or Abe Lincoln if they came back as Democrats, running against Sarah in the next election,  the titans of Wall Street can not be allowed to run amok, a lesson learned after the last Great Depression and forgotten in the deregulatory era ushered in by Reagan and the Clinton Democrats- believing with the steadfastness of a religious zealot in the titans of finance working their wizardry in the nation's best interest unencumbered by restrictions and regulations intended to keep them from blowing up their own firms and the nation's financial system while pursuing their narrow personal financial self interest.  They blew up the system and kept their millions for their trouble. But facts will never get in the way of someone who holds a belief with the same intensity as religious zealot or mind numbed ideologue who has learned nothing from the past.

I do not attempt to explain irrational people or to understand them.  I am though surprised by those who believe that when irrational people come together to form a market that the market becomes somehow rational. 

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