Thursday, March 21, 2013
Perhaps the easiest financial product to sell is one that offers safety plus a high yield. Of course the product may only offer the illusion of safety plus a high yield (safety plus a high yield being rather hard to obtain). But that won't stop it selling well. Often very well.
Bernie Madoff - apart from being a degenerate wart was the best salesman of hedge funds in the history of the business. No legitimate hedge fund has ever raised $10 billion let alone $50 billion without a huge sales force. Madoff managed that. The cumulative money raised by authentic financial geniuses (Buffett or even Loeb, Einhorn et al) is a small fraction of what Bernie raised. I can assure you as someone running a completely legitimate operation we have raised less in three years than Bernie raised on many days.
In money management what sells is the illusion of certainty... a fund manager who tells the truth (the truth being that he may be wrong at any time) is a more-difficult sale but a better investment.
High yields plus the illusion of certainty make my ears prick up. And it is common enough. In Australia there were two large businesses that sold unit trusts of some description to the public which housed "safe" assets like tollways and airports. These "safe" assets were levered to the point that they were not very safe any more but the leverage and - to some extent distributions paid out of capital - gave them yield.
The managers of these trusts were Macquarie Bank and Babcock and Brown.
In some instances the story was simple. Assets were revalued, borrowings were made against those revaluations and distributions were paid.
Macquarie Bank is still with us - partly saved by the Government guarantee of bank funding and partly saved by having some real and profitable businesses. Macquarie is - like many investment banks - a shadow of its former self. But it is still a real and powerful operation.
Babcock and Brown has gone to meet its maker though a surprising number of ex-B&B staffers are very wealthy.
The investors in the unit trusts mostly did not fare so well. Still some trusts survived - and ex-ante it was hard to tell the Ponzis from the merely over-levered from the well managed. Even ex-post it is hard to tell Ponzis from over-levered - and nobody has been charged with anything criminal anyway.
Often compared to Macquarie and Babcock was the Canadian operation of wheeler-dealers known as Brookfield Asset Management. Unlike Macquarie and Babcock Brookfield is still with us - and largely unimpaired. Its unit holders are not yet angry let-alone resigned to their losses. [Babcock structure unit holders are well past the "resigned" state now...]
But the formula seems remarkably similar (and similar to some MLPs). The formula - find an asset that is fairly stable - not riskless but low risk - and sell a structure based on that asset to mostly a pensioner-needing income investor set. The yield is made possible by either leveraging the asset with debt or endless capital raises.
In all the nasty cases (and in some less nasty cases) the wheeler-dealers did considerably better the holders of the investment vehicles. Pay was not commensurate with long term performance.
Anyway I spent a lot of time (often wasted) picking apart Macquarie structures before the bust. I should have been picking apart Babcock structures because Babcock performed far worse than Macqaurie.
I never got around to picking apart Brookfield because it was so darn complicated. Just breathtakingly complex.
But that doesn't mean it is not worth the effort. If you want to understand what it was like to try and understand Babcock or Macquarie before the denouement you can.
And you do not have to make much of an effort. Roddy Boyd (bless his hard-working soul) has done much of the work for you. And put it online.
Go read it.
The investment required is not large. But reading Roddy is low risk. And this time I can promise you a high yield.
Posted by John Hempton at 1:08 PM
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