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Had last Wednesday's meeting ended with the participants telling the
head of the New York Federal Reserve, William McDonough to take a hike,
what would Greenspan have done? There is no legal precident which I am
aware of that the Fed could have used to force the players involved to
cough up the required $3.5B. Conversely, given the global consequences,
there's no way that Greenspan would have allowed a $90B Fire Sale to
take place. So where would that have left him?
If the answer to that question incorporates some type of Federal
bail-out scenario, then we're talking Public Monies. And, if we're
talking Public Monies, then I assert that we must also be talking public
responsibilities regarding the avoidence of abuse of such Public Trust
on the part of those institutions with the *potential* of creating such
scenarios...even though such a secenario quite obviously did not take
place.
It would be no different than if these players had been unable to meet
their financial obligations due to lack of funds...the end result would
have been exactly the same: another Federal bail-out.
And we very well may see a Round #2. Remember: Morgan Stanley has it's
own failing emerging-markets debt fund; Bear Stearns has already
declined to "contribute" in Round #1 for reasons as yet unknown; and,
after passing the hat the first time around, "the total fell short. So
the firms that had put in $250 million each raised their contributions
to $300 million". Not exactly a picture to build
confidence...especially in a pessimistic atmosphere regarding emerging
market volatilities.
In either case, therefore, even though such links may not be direct or
explicit...they are nevertheless every bit as valid as if they had been
explicitly spelled out. There is no law, for example, which explicitly
forbids a parent to allow his 2-year-old child to play in the streets.
No court, however, would uphold such a parent's "right" to do so.
It is the consequences of one's actions as well as the actions
themselves which are drawn into question in a court of law. In the case
of Hedge Funds, if the consequences of their actions require the
ultimate use of public funds or endanger those funds in any manner
whatsoever, then they must and should be held publically accountable for
their behavior. If such behavior is deemed to be negligent, then they
are guilty of Criminal Negligence precisely because they have been found
to have either directly or indirectly betrayed the Public Trust through
fault of their own.
In retrospect, I wish I had used the phrase, "de facto Stewards of the
Public Trust" to better-imply my feeling that indirect links do not
absolve such institutions from their public responsibilities any more
than the Corporate Veil protects a corporate officer from accepting
criminal responsibility when merited.
To *not* hold these institutions accountable for their actions breeds
the type of repetituous behavior which Earl had mentioned in his earlier
post: a seemingly endless series of Federal bail-outs...same church
different pew. Welecome to The Church of the Over-Leveraged.
Last week, mention was made of JP Morgan's Value at Risk metric. There
are, as everyone knows, several sources of risk. The Basle Report
divides risk into two main branches: credit and market risk. JP Morgan
has developed metrics for both of these. And what do you think they say
in the Introduction to the Technical Documentation for both of these
packages: "...no amount of sophisticated analytics will replace
experience and professional judgement in managing risks". Negligence in
professional judgement, in other words, is no excuse. Thank-you, JP
Morgan.
Bottom line: somebody, someday has to put a stop to this type nonsense.
What's needed? A Banking Law which says, "Thou shalt not abuse the
Public Trust"? Do we not already *have* such a law? Can the problem be
as simple as that? Does it all boil down to a Clintonesque pissing
contest about the meaning of the word "abuse"?
My understanding from a post last week is that there will be
Congressional hearings on the LTCM fiasco. I have not been able to
independently verify that fact...does anyone have additional,
more-specific information on this? I assume that the Senate Finance and
Banking Committee will be the body looking into the matter but that's
just an assumption on my part. Does anyone know for sure?
The obvious concern about having a bunch of PAC-Feed Good Ole Boys from
the Political Theatre Guild checkin' up on another bunch of Good Ole
Boys from the Gimme Your Money Guild should almost go without saying.
I am trying to solidify a well-grounded position in order to make a case
for criminal rather than political investigation. In essence, what I am
trying to establish is the following:
1. Hedge Funds are de facto Stewards of the Public Trust.
2. LTCM and it's backers acted in an irresponsible and negligent
manner,
endangering Public Monies in the process.
3. Therefore, LTCM and it's backers are Criminally Negligent.
Your comments were extremely helpful in that respect, Michael...and I
thank you for them.
Just imagine Janet Reno and the Justice Department coming down hard on
these Clowns...is a Waco-style raid on the Grey Poupon Gang too much to
ask for?
Dave
> Subject:
> Re: Hedge Fund
> Date:
> Sun, 27 Sep 1998 21:02:30 -0700
> From:
> Michael Paauwe <mpaauwe@xxxxxxxxxx>
> To:
> Omega-list@xxxxxxxxxx
>
>
> Dave said:
> >If it were up to me, I'd toss the whole damn bunch of them into Prison.
> >They're nothing but a herd of White-collar Con Artists with Ph.D.'s
> >hiding behind their Grey Poupon...and I don't buy it. And as far as I'm
> >concerned, none of them cut the mustard when it comes to living up to
> >their obligation as Stewards of the Public Trust.
>
>
> That's just it, Dave. They're not Stewards of any Public Trust. They are all
> just sophisticated investors, ready to gamble their firms' money. And they
> didn't do their homework.
>
> Hedge funds are exempt, have no prospectus per se, and do not involve the
> public's money. The investors that lost money are just the same as the boys
> running the hedge fund.
>
> Michael Paauwe
> mpaauwe@xxxxxxxxxx
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