Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [110]
Warren felt that after such astonishing corporate malfeasance, it is a “question of restoring trust.” He added “American business is working pretty darned well.” Although compliance with Sarbanes-Oxley cost Berkshire Hathaway tens of millions, he said it might do some good if it restores investors’ confidence: “There are worse things than Sarbanes-Oxley.”30 Three years prior to Paulson’s meeting, Warren attended a conference at which Mikhail Khodorkovsky, the former CEO and owner of AOA Yukos Oil Co., asked him if it would be dangerous to bring an IPO in the United States. Three or four months later Khodorkovsky was imprisoned in Siberia.Yukos went belly-up in 2006 and had back-tax claims exceeding $30 billion.Yukos’s assets were subsequently bought by Russia’s largest oil company, AOA Rosneft at bankruptcy auction.31 Sarbanes-Oxley requirements seemed to discourage Khodorkovsky from making an initial public offering of Yukos’s stock in the United States.We dodged a bullet.
Jeffrey Immelt, chairman and CEO of General Electric Co., also attended Paulson’s conference. He complained that regulatory requirements are “just too gosh-darn complex.”32 As too gosh-darn complex as the subprime-backed investments that later cost GE $300 to $400 million of dollars worth of write-downs?33
In contrast, Warren noted that some of Sarbanes-Oxley requirements promoted transparency, and he eagerly reads financial reports: “like a teenager reading Playboy.”34 Readers of financial reports and Playboy agree that more transparency is desirable.
Part of the reason we are losing business to London may be that quite a few international investors are concerned about structured financial products they bought from U.S. investment banks. Loans were made to people who would not be able to pay them back, ratings are flawed, and securitization technology is suspect. We are losing business because we were found out. Europeans in particular feel that smart Americans abused securitization technology to fool a lot of people in the short run. In a letter to the Financial Times on March 19, 2007, I wrote:
Wall Street’s former standard: “Your word is your bond, did not mean “Your spin is your shield.” . . . [I]n areas in which we are lightly regulated, our words are unworthy.35
Until recently, I opposed hedge fund regulation. Eric Mindich (formerly of Goldman Sachs) now heads Eton Park Capital Management. When Mindich was assigned to head the President’s Working Group Asset Managers Project, I volunteered my perspective: “I am a laissez faire capitalist, and do not believe in protecting consenting adults from making informed decisions, even if that decision is to make a blind bet.” That was in September 2007, but my point of view is changed, since U.S. taxpayers bail out hedge funds creditors.
The hedge fund business is approximately $1.9 trillion in size, and 87 percent of the money is controlled by fewer than 10 percent of the hedge funds.The larger hedge funds have a lot of clout. Large hedge funds act as if they are investment banks. Often they accumulate large trades—taking the other side of an investment bank’s trade—then call up the investment bank and ask them if they would like to negotiate to close out the transaction. In other words, for some types of transactions a hedge fund is the other side of an illiquid market.
Furthermore, when investment banks bail out hedge funds (and structured investment vehicles), these entities are not truly off balance sheet. For example, Citigroup took around $9 billion of assets on balance sheet from Old Lane Partners, the former hedge fund of its CEO, Vikram Pandit.36 Bear Stearns bailed out creditors of two of BSAM’s hedge funds, and Bear Stearns was subsequently purchased by JPMorgan Chase with help from the Fed. Since the Federal Reserve Bank supplies liquidity to the banking system, and since the SEC regulates investment banks, hedge funds should be regulated.
Bank problems could get even worse.