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March 06, 2009
Redemption
How much money do you need? You could get a million dollars. And you could get it in cash. I know where it could be gotten. I mean its not easy, but it could be done. But, uh, the question is who the hell would handle it? Let me say there should not be a lot of people going around getting money. Richard Nixon
Dont come to the table with the same worn arguments and tired ideas that helped to create this crisis. Barack Obama
Today Federal Reserve Bank of New York President and CEO William C. Dudley stated in a public session at the Council on Foreign Relations that he expects the hedge fund universe to be reduced by 50% in the near future. We are in a period of redemptions and low trust in counterparties. Madoff, Stanford et al dont help market confidence.
Elsewhere, earlier in the week, AIG repeatedly was described in the press as operating as an internal hedge fund scheming outside of regulatory the tent. AIG allegedly assists European banks dodge Basel capital reserve requirements. BofA is also announced to be investigating Merrill hidden losses and non-transparency. Meanwhile in US Congress, SEC and NY insurance regulators were admonished for missing Madoff, AIG, others.
It is known now for fact that the housing bubble was full of perverse incentives. AAA and models for valuing firm and transaction creditworthiness are in tatters.
What was it the oil soaked duck said to his pal after a swim near Exxon Valdez? Massive clean-up continues to be necessary.
Missing in the prior period was a realistic understanding of the control systems faults. What are the levers of control over the subject? How have they been tested? What are the terms of accountability? These affect the industrys profile. Redemptions (and market failure in general) are unlikely to halt until these market and government regulatory weaknesses are addressed directly and adequately.
I have spoken in prior posts about the need for greater introspection as well. There must be greater attention paid to internal weaknesses. This goes beyond often weak bench strength (e.g. publicized reports of pre-allocation decisions in Madoff funds). It also addresses the vulnerabilities to fraud caused by internal staff and the market itself.
On Monday I have been asked to speak about the profile of a fraudster. They are conscious active and adaptive opponents but have a variety of motivations. Fear will likely continue to be the driver for fraud for next 2-3 years with deleveraging and redemption pressures affecting management judgment. Tier 1 long established teams and particular individuals may also be motivated to fraud (perversely) by honor, and there are many sacred cows. Greed always a problem, and was the primary motivator in the boom (see prior posts).
Current fraud prevention best practice is to identify key risk indicators on operational risk and background checks and compare with other assessments of level of transparency and risk disclosures. Rigorous profiling is essential, as is the need to revisit individual assessments annually or bi-annually.
Posted by jtunkey at March 6, 2009 09:16 PM
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