Hogs on a Diet

The hogs at the trough in the finance industry seem to be on or going on a forced diet. For decades these hogs slurped down huge pay in bonuses and "profit" shares while eventually running their firms into bankruptcy or huge losses that wiped out all the "profits" their prior pay purportedly compensated them for generating. Lehmann, Bears Stearns and quintessentially, Merrill Lynch, are public examples. Large numbers of private hedge funds and buyout funds are other private examples.

Their bosses were supposed to be promoting the firms' long term value, but they had their snouts in the trough bigtime, too.

As a proponent of populist libertarianism, readers know I favor regulating the ruling classes while letting the common man have maximal freedom. And somehow regulating the hogs of finance is part of that. Europe is imposing government rules on bonuses in the finance industry.

From FT: "[UK Prime Minister] Gordon Brown has pledged tough action to clamp down on excessive remuneration for bankers as part of an international effort to rectify the systemic weakness that led to the global financial crisis. The prime minister said in an interview with the Financial Times that pay and bonuses should be based on long-term success not short-term speculative gains; banks should “claw back” bankers’ rewards if their performance suffered in subsequent years; and regulators should be able to impose higher capital requirements on financial institutions."

And: "Banks will be barred from lucrative French government mandates if they fail to abide by new international guidelines on pay, President Nicolas Sarkozy warned on Tuesday as he unveiled tough domestic rules on rewards for traders. “We will not work with banks that do not apply the rules,” the French president said after a meeting with the country’s top bankers, who were summoned to the presidential Elysée Palace."

How can this be done in the US, with our tradition of individual freedom inherited from the pioneer days ?

Shareholders and investors need enhanced powers. For decades the SEC has emasculated shareholders, letting boards of directors become pawns of the CEO hogs. Large investors now know the costs of letting the hogs eat too much. I suspect given powers they will act now. There is evidence of this.

FT: "Private equity groups are facing mounting opposition from investors over their attempts to raise annex funds, which buy-out firms hope will provide fresh cash to bail out many of the companies they bought during the debt bubble. Apollo Management had been forced to drop plans to raise an annex fund, after opposition from some of the US private equity group’s biggest backers, according to people familiar with the situation. Apollo declined to comment."

These annex funds are a particularly sleazy way for the hedge funds and buyout fund to grab more fees. The managers are supposed to work hard to get the funds back to the "high water" marks before getting more fees. But what do they really do ? Create a "sister" or "annex" funds and divert all the good ideas and deal there, so they can grab for fees. Their greed and sleaze knows no bounds of propriety.

Investors now know how this is crucial to their long term profits. They'll act, if given the powers.

SEC, Congress, Fed and Treasury: get on the ball and follow Europe's lead in working out how to give shareholders and investors real powers to limit these and align them truly with the long term investors.

Memory

Today is the 70th anniversary of the beginning of World War II in Europe, as Nazi Germany invaded Poland on September 1, 1939. In Asia, World War II began in 1931 when Japan invaded Manchuria. Let's remember the dangers of totalitarian or militarist regimes. They are true enemies of humanity and deserve no quarter.

Actions

Doing nothing. Je ne fais rien. The sell-off is orderly so far. No significant bad news has appeared. More tidbits of evidence than economic growth is returning continue to appear. This is likely a minor pullback in a bull market. Buyers are taking a breathers and perma-bears are getting a bit bolder. I'll continue to buy dips and sell rips. This week I'll prepare a list of ten or so exporters to buy in Obama Fund or Fido Fund.

Word of the Day

"Crepuscular" - noun [$10] from reading of Conrad's "The Tale"
Crepuscular means 1.a. of twilight; 1.b. dim; 2. (zoology) appearing or active in twilight.
Sentence: During crepuscular light mosquitoes become especially active as they can target one's body better.

[btw, "twilight" is the period of partial light just after sunset. Dusk is the darker period of twilight.]

[Soon I'll recommence "Word of the Day" for the other langauges I am learning.]