Just line them up against a wall....
Just about when I start coming to terms with The Great Crash Of 2008, I find yet another idiotic aspect of the whole shebang. The good news, however, is that with this one things are finally starting to make some sense - the patterns are beginning to add up.
First, a brief picture of the insanity - For those of you who aren't aware of it, Dave Swensen is the Chief Investment Officer at Yale. He pioneered something called The Yale Way, which basically consisted of investing the Yale endowment in Private Equity, Hedge Funds, etc. instead of the boring old standards (AAA bonds, T-Bills, blah, blah, blah). Mind you, he was phenomenally successful, averaging almost 18% through the good years. His biggest impact was in that virtually all the Big Endowment Universities started going down the Yale road, and the next thing you know, they are all massively invested in PE, Hedge Funds, etc., etc. Which is all well and good, untill The Great Crash Of 2008, when the lights went out. Literally. Vanity Fair has a brilliant writeup about this, but the bottom line is that Harvard lost around $8 Billion (yup. With a B), faces all sorts of capital calls, and is having trouble paying for - literally - anything. So what happened?
If you are up to it, go read this, which is ostensibly a defense of the investment scheme that the Bigs (Harvard/Yale, but most of the other ones too). I say ostensibly because as I read between the lines, what it basically sez. is that the Univs took tuition payments, and instead of using them to - oh - pay bills for example - decided to instead invest it (when someone says 'Meet Capital Calls', what they are actually saying is 'Had to put more money in my savings account'). This is actually quite a brilliant strategy as long as the market is going up.
To put it in simpler terms, say your paycheck is $5K/month. You could put it into your checking account, and then pay your monthly bills out of your checking account. Or, you could lend it out through your local mobster at 50%/month, and pocket the profits ($2.5K. And lets assume that nobody minds if you pay your bills just a wee bit late). Of course, if your local mobster gets arrested, you are out your $5K and you now owe your bills (Hey! $10K in the Hole! w00t!).
So, back to the Big Univs. who were busy using tuition payments, not for salaries, maintenance, etc., but to fulfill their capital commitments at Private Equity Funds!, and then used part of their realized gains in these Funds to then pay the self-same salaries, etc. Which is why Harvard is in such a Hole now - the tuition is already commited, and the Gains are now Losses).
So, what does this have to do with the aforesaid Patterns that I have started to notice? Well, lets take a quick look at the state of the Banking Industry post the Glass-Steagall repeal.
Prior to the repeal, you had two different types of banks. Boring old-fashioned banks that took short-term deposits from customers (you, me, the next door neighbor, etc.), and made long-term loans to "worthwhile" (read stable, secure, reliable) businesses. Without getting into too much detail, they provided a necessary Utility function our economy. On the other side, you had High-Flying investment banks (Exciting banks!). These banks took large sums of money from "private" investors (read "rich"), and invested them in businesses with a higher (usually, much higher) risk profile. Higher risks, higher rewards. The point being, and Taunton makes it much better than I can that these two are very different types of banks. Boring banks take deposits from *large* numbers of customers, make - theoretically - stable loans, and based on their Utility function, deserve to be quite highly regulated. You want your bank to *not* be like the aforementioned 50%/month mobster - if one of these Boring banks goes bust, the depositers are covered by the FDIC, and on the other side, there is quite a lot of strict scrutiny on the type of loans these banks can make (so that the Bank *doesnt* go bust!). Exciting banks, however, don't really require, or deserve, all that much scrutiny. I mean, some regulation is necessary (No Ponzi Schemes, for example, is Good regulation), but on the other hand, they shouldn't get any support from taxpayers (i.e., no Government bailouts).
After the repeal of Glass-Steagall, you suddenly had all these Boring Retail banks buying Exciting Investment banks - Citigroup! JPMorganChase! - taking retail deposits (which are theoretically safe and secure), and making high-flying-risky-YouInvestedItWhere?Huh?Why? investments with the money. So, all of a sudden, this FDIC guaranteed money is being used by Investment Banks to make StupidCrazy loans, which basically ends up meaning that we - the taxpayers - are guaranteeing Exciting Investment Bank loans. With little or no regulation. With little or no oversight. Which is all great and good, till the merry-go-round stopped and the economy proceeded to lose $1.5Trillion (with a T!).
Which now brings us to the nub - the Big Universities. If I, the University, went out and told people that
a) They should give me $100,000/year for four years
b) I would, in return, give them a brilliant education
then - you know - it may not be such a bad deal.
But, If I, the University went out and told the same people that
a) They should give me $100,000/year for four years
b) I would, in return, invest the money however I saw fit
c) I would use any profits from these investing activities to fund their education to the best of my ability (depending, of course, on the profits)
then - you know - the uptake might be slightly different. Truth in advertising, but quite probably not quite as effective.
Which, in the end, brings us to the whole point of this post, viz., the Pattern. At the end of the day, what everybody is trying to do is
a) Get "not so large" sums of money from large numbers of people on a recurring basis (paychecks, tuition, whatever)
b) Tell them that they are getting on thing for their money ("We will keep your money safe". "We will give you an education")
c) Invest this money in some high-risk high-reward venture (Complex interest rate swaps, CMBS, etc. Strangely enough, they *all* invested in the same set of goofy complex ventures)
d) Hope that the music doesnt stop, or if it does, it happens much later when you are gone.
I wonder who else was doing this. Somehow I don't think it stops at Universities and Banks. There *must* be more...
First, a brief picture of the insanity - For those of you who aren't aware of it, Dave Swensen is the Chief Investment Officer at Yale. He pioneered something called The Yale Way, which basically consisted of investing the Yale endowment in Private Equity, Hedge Funds, etc. instead of the boring old standards (AAA bonds, T-Bills, blah, blah, blah). Mind you, he was phenomenally successful, averaging almost 18% through the good years. His biggest impact was in that virtually all the Big Endowment Universities started going down the Yale road, and the next thing you know, they are all massively invested in PE, Hedge Funds, etc., etc. Which is all well and good, untill The Great Crash Of 2008, when the lights went out. Literally. Vanity Fair has a brilliant writeup about this, but the bottom line is that Harvard lost around $8 Billion (yup. With a B), faces all sorts of capital calls, and is having trouble paying for - literally - anything. So what happened?
If you are up to it, go read this, which is ostensibly a defense of the investment scheme that the Bigs (Harvard/Yale, but most of the other ones too). I say ostensibly because as I read between the lines, what it basically sez. is that the Univs took tuition payments, and instead of using them to - oh - pay bills for example - decided to instead invest it (when someone says 'Meet Capital Calls', what they are actually saying is 'Had to put more money in my savings account'). This is actually quite a brilliant strategy as long as the market is going up.
To put it in simpler terms, say your paycheck is $5K/month. You could put it into your checking account, and then pay your monthly bills out of your checking account. Or, you could lend it out through your local mobster at 50%/month, and pocket the profits ($2.5K. And lets assume that nobody minds if you pay your bills just a wee bit late). Of course, if your local mobster gets arrested, you are out your $5K and you now owe your bills (Hey! $10K in the Hole! w00t!).
So, back to the Big Univs. who were busy using tuition payments, not for salaries, maintenance, etc., but to fulfill their capital commitments at Private Equity Funds!, and then used part of their realized gains in these Funds to then pay the self-same salaries, etc. Which is why Harvard is in such a Hole now - the tuition is already commited, and the Gains are now Losses).
So, what does this have to do with the aforesaid Patterns that I have started to notice? Well, lets take a quick look at the state of the Banking Industry post the Glass-Steagall repeal.
Prior to the repeal, you had two different types of banks. Boring old-fashioned banks that took short-term deposits from customers (you, me, the next door neighbor, etc.), and made long-term loans to "worthwhile" (read stable, secure, reliable) businesses. Without getting into too much detail, they provided a necessary Utility function our economy. On the other side, you had High-Flying investment banks (Exciting banks!). These banks took large sums of money from "private" investors (read "rich"), and invested them in businesses with a higher (usually, much higher) risk profile. Higher risks, higher rewards. The point being, and Taunton makes it much better than I can that these two are very different types of banks. Boring banks take deposits from *large* numbers of customers, make - theoretically - stable loans, and based on their Utility function, deserve to be quite highly regulated. You want your bank to *not* be like the aforementioned 50%/month mobster - if one of these Boring banks goes bust, the depositers are covered by the FDIC, and on the other side, there is quite a lot of strict scrutiny on the type of loans these banks can make (so that the Bank *doesnt* go bust!). Exciting banks, however, don't really require, or deserve, all that much scrutiny. I mean, some regulation is necessary (No Ponzi Schemes, for example, is Good regulation), but on the other hand, they shouldn't get any support from taxpayers (i.e., no Government bailouts).
After the repeal of Glass-Steagall, you suddenly had all these Boring Retail banks buying Exciting Investment banks - Citigroup! JPMorganChase! - taking retail deposits (which are theoretically safe and secure), and making high-flying-risky-YouInvestedItWhere?Huh?Why? investments with the money. So, all of a sudden, this FDIC guaranteed money is being used by Investment Banks to make StupidCrazy loans, which basically ends up meaning that we - the taxpayers - are guaranteeing Exciting Investment Bank loans. With little or no regulation. With little or no oversight. Which is all great and good, till the merry-go-round stopped and the economy proceeded to lose $1.5Trillion (with a T!).
Which now brings us to the nub - the Big Universities. If I, the University, went out and told people that
a) They should give me $100,000/year for four years
b) I would, in return, give them a brilliant education
then - you know - it may not be such a bad deal.
But, If I, the University went out and told the same people that
a) They should give me $100,000/year for four years
b) I would, in return, invest the money however I saw fit
c) I would use any profits from these investing activities to fund their education to the best of my ability (depending, of course, on the profits)
then - you know - the uptake might be slightly different. Truth in advertising, but quite probably not quite as effective.
Which, in the end, brings us to the whole point of this post, viz., the Pattern. At the end of the day, what everybody is trying to do is
a) Get "not so large" sums of money from large numbers of people on a recurring basis (paychecks, tuition, whatever)
b) Tell them that they are getting on thing for their money ("We will keep your money safe". "We will give you an education")
c) Invest this money in some high-risk high-reward venture (Complex interest rate swaps, CMBS, etc. Strangely enough, they *all* invested in the same set of goofy complex ventures)
d) Hope that the music doesnt stop, or if it does, it happens much later when you are gone.
I wonder who else was doing this. Somehow I don't think it stops at Universities and Banks. There *must* be more...
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