Two years ago, the film Wall Street: Money Never Sleeps created quite a stir in financial circles. It was a sequel to Wall Street, made in 1987, which centred around the main character Gordon Gekko (Michael Douglas) the ruthless corporate raider who, in Money Never Sleeps, has turned into a repentant man.
The first film recreated the infamous economic tragedy resulting from the onslaught of the dotcom boom. Many argued that the crash of the dotcom boom was partly due to the irresponsible actions of credit rating agencies. We shall see later on in this article how greed and the related misdeed “insider trading” are crimes that tempt many traders and, even during a recession, such offences have not been stamped out – it is just that regulators have become better at detecting them.
One realises how difficult it was for director Oliver Stone to avoid libel or slander suits while making the sequel by not treading on the toes of directors of failed banks such as Bear Sterns or Lehman Bros – both prominently featured as collapsed financial giants during the tumultuous year of 2008. This is not to mention the $50 billion Ponzi scheme run by the ex-chairman of the Nasdaq, namely Bernard Madoff, who ran a successful hedge fund that suddenly went bust in 2009.
Back to the film, which depicts succinctly how poor investors were robbed blind by Wall Street barons who, after raiding the store, would successfully plead with the US Treasury for a generous bailout to resist the contagion spreading and keep the entire system from collapsing. It goes without saying that the infamous slogan “Greed is good” epitomises the opprobrium consumers felt when they heard tales of investment bankers in Wall Street selling short and dabbling in worthless paper such as credit default swaps (CDSs) culminating in the sub-prime bubble. On the local scene, we can never forget the saga of the collapsed €84 million property fund administered by La Valette Multi Property Fund managers and having as its major shareholder and custodian the Bank of Valletta plc.
One of the funds that collapsed included the Belgravia Property Fund, the fall of which left a huge hole in the balance sheet. The Sicav’s managers avoided blame for this misfortune by saying, inter alia, that property values had been hit by the global financial crisis at the same time as new financing dried up. It came as no surprise that, months later, investigations by the financial regulator the Malta Financial Services Authority (MFSA) concluded that the fund manager had wrongly applied and wrongly monitored the application by its underlying fund managers of investment restrictions laid down in the fund’s prospectus. So the story goes on – and, unfortunately, the hapless investor is carrying the brunt of the unrepentant investment bankers who many hold responsible for some of the financial failures that led to a post-Lehman recession and paved the tortuous way for the start of the credit crunch.
One can never forget how much fuss was made about bailing out US banks which, due to undercapitalised base, were dropping like flies and, naturally, political pressure was put on president Obama to authorise massive bailout funds (TARP). These were deployed to buy out toxic assets accumulated by banks and other financial institutions such as AIG (among others such as Fanny Mae), all of which culminated in the biggest and deepest recession since the end of World War II.
To return to the film again, we may recall the famous quote by Gekko that “the mother of all evil is speculation and borrowing to the hilt”. Consumers who had their fingers burnt now expect full protection from such speculators who use over-sized marketing campaigns to offer dubious financial products. One only has to read the fine print in an offer memorandum to be lost in the finesse of the legal jargon that dominates it.
Promoters try to persuade consumers that the best way to achieve superior returns is to diversify risk and plough their hard-earned savings into exotic products such as multi-asset class, multi-manager investing. Typically, they prefer fund-of-funds for easy diversification. Sicav managers promise investors safety in diversification by carefully allocating capital within a diversified multi-asset portfolio, that is subject to quantified risk profiles and acceptable leverage. The uncertainties begin when consumers are not aware that such superior returns come from the extensive use of derivatives and leverage with tracker funds. While the markets are rallying, it is easy to maintain traction of what is happening to the underlying funds but, of course, when the bears return, the house built on sand collapses.
No magical portfolio management exists to continually defy gravity and return superior returns, particularly when the market is in freefall. Even the most expensive investment skills cannot perform miracles. Investment gurus who are born to consistently deliver superior risk-adjusted returns are a rare and shy breed. It is true that by diversifying sources of return, fund managers are able to deliver returns that have little correlation to any single market, asset class or risk factor. Unquestionably, the use of modern portfolio theory may help in achieving better growth, even when the markets are slowing down. This theory seeks to assure investors that, once their portfolios are individually monitored, fund managers can ensure that they continue to perform in line with expectations and are not exposed to any unintended risk factors. The mantra on the lips of successful managers is “buy low and sell high”.
This credo is Teflon-coated if rigidly applied, but then mistakes are made in assessing the correct levels when the markets go low – particularly when, as stated earlier, greed sets in and one is tempted to miss the ideal point at which to dispose of the asset. In such cases, the losses that accumulate can outpace previous gains, leading to a collapse of the fund (remember the Barings Bank debacle in Singapore?). Thus, it is opportune here to mention the sudden collapse of Madoff’s hedge fund which, as a nefarious scheme sold to many experienced investors, went undetected by the regulators for so long. As said earlier, this was all done behind closed doors and consumers were attracted by the lucrative returns offered by banks and investment managers. The local investment community is unhappy to read that Bank of Valletta has been held responsible by 240 investors for the way its La Vallette Sicav plc’s multi-manager property fund – once valued at some €84 million – lost three quarters of its value.
It is now all out in the open that the Jersey-based Belgravia Group, which ran three specific funds, had been placed under criminal investigation. No audited accounts were presented by Belgravia to VFM (the managers) in order to assess their credit and investment risks before committing €24 million. This property fund began to be marketed locally in 2005 – purportedly to experienced investors. Last year, BOV – which acted as the main custodian – offered a once-and-for-all refund amounting to 0.75 cents per unit. A majority of unit holders accepted the offer, reasoning that it would be a long and expensive road to fight it out in court. All along, the MFSA has been alerted to complaints and last year it began investigations on nine underlying funds. Obviously, this is a sensitive issue involving competent officers in high places, so any regulator needs to be diligent yet sensitive to avoid unduly creating any systemic effect.
To conclude: it seems visionary to recall the point in the film where Gekko wrote that while money never sleeps, yet – unbridled and unchecked – it never fails to corrupt.
The writer is a partner in PKF Malta an audit and business advisory firm.