When I read an opinion piece that I don’t agree with, my first reaction is to attack that person for being ignorant and recommend they be removed from the internet for making people dumber. I don’t know if it’s my continued reliance on CVS knock-off Sudafed to get through my day or the simple fact that I realized it’s ignorant of me to attack someone that way, but I’ve decided to respectfully disagree with an article written by Heidi Moore as she tries to debunk the myth of the sophisticated investor.
In this piece Moore talks about Goldman Sach’s excuse they used to sell bad investments to their clients. The excuse is simple, the investors that bought the stuff were “sophisticated“. There’s no official definition for sophisticated investor. Some define it as someone with a net worth of a size reasonable enough to assume they were smart enough to accumulate wealth and must be smart enough to understand investments. Fair enough. A sophisticated investor by that bare definition really would have been duped. Therefore by Moore’s logic these sophisticated investors still weren’t smart enough to understand what they were buying. Therefore the sophisticated investor still deserves the same kind of disclosure you or I would get.
But the investors in the Goldman deal weren’t simply sophisticated. They cross the line into institutional investor. Institutional investors deal in large sums of money, are usually investing someone else’s money, and do this type of thing for their careers. The investors in the Goldman deal in question were institutional investors.
But they were investing the money for sophisticated investors, normal investors (such as you and me), and other institutional investors. When that CDO died its expected death, it was pensions, insurance companies, and private equity firms that lost money. They lost our money. Your pension lost money because of this. So, in essence, Goldman screwed us. Or so Moore would have you believe.
Moore’s argument is that basically pension funds and insurance companies aren’t smart enough to understand what they were investing in. Excuse me? I used a random number generator to give me the numbers 1-50 and it spat out 7. So I looked at the 7th state admitted to the union, Maryland. Their state pension’s chief investment officer has a law degree, an MBA from the currently ranked best business school in the country, and holds the CFA designation. If you can find me someone more qualified to know what they’re investing in please point me to him or her. The point of this exercise is to point out that pensions know exactly what they’re doing. Not every pension or insurance company is as well stacked as Maryland’s, but I did check out 5 other states randomly and they each carried people with similar educations or professional backgrounds.
I have other issues with Ms. Moore’s article. She says it costs a mere $35 million to buy protection from the failure of billions of dollars of assets. But when those assets failed, they didn’t just get $35 million. They got billions. I’m shocked! I’m no insurance specialist, and I obviously lack the intellectual capital to compete with the dear Ms. Moore, but if I put in $35 million for insurance and only got $35 million back I’d be pissed. What’s the premium on your life insurance? Pretend it’s $1,200 a year. Do you think your heirs would expect $1,200 if you died? I’d suspect not. That’s not how insurance works. You put in a little, and if the thing you’re betting on happens, you get back a lot.
My final issue with Moore’s article is that she’s just like everyone else and doesn’t blame the idiots that bought something they didn’t understand. We’ve all pretended to know more than we do so we don’t look ignorant around peers, and that’s what I believe the investors in ABACUS were up to. They didn’t understand the risk level of these mortgages, and they didn’t understand that a WELL KNOWN contrarian was on the opposite side of the investment. A simple question of “is Paulson short or long” would have cleared it up. Why aren’t the investors in the companies that bought this investment not suing the crap out of the company for being so stupid?
My last rant of the day goes out to everyone, everywhere, with every level of money to invest. If you don’t understand what you’re investing in, don’t invest. If you give your money to someone that has free reign to invest in things you don’t understand and lose money, that’s YOUR FAULT. If someone you’re investing with won’t give you every detail that you want about what they’re doing with your money and you lose money, it’s your fault. The exception is pensions, where you don’t have a voice in the investment. So instead you write to your union leaders or the board directly and demand the head of the fool that lost your money.
There’s a big f***ing reason I only invest in mutual funds. They’re highly regulated, fully transparent, and identifying fraud is as easy as catching someone with their hand in the cookie jar. I understand the mutual fund business through and through.
The people involved in this transaction were sophisticated, institutional, and highly experienced in this business buying these specific investments regularly. Unless they directly asked “is Paulson long or short” and get a straight up lie in response their failure is merely a result of their own ignorance and greed.
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
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