The Smart Money
Talk about embarrassing: The credit debacle has shown just how dumb and greedy the (supposedly) smart money really is. Bear Stearns, natch, is the poster boy: The 85-year-old investment bank lost about 90 percent of its value in 2008, because, it turns out, the firm was recklessly leveraged. Consider that $1 of its capital controlled more than $30 in assets. Of course, all the big firms are suffering — everyone from brokerages to asset managers. Citigroup has lost half its value since October, and Blackstone shares are also down by about half since its IPO last June, with the cheap-credit-dependent leveraged-buyout business in hibernation. Wall Street firms have fired some 30,000 employees over the last seven months.
Financial advisors, of course, are revenue centers — and not a line item in the “cost of goods sold” column. Therefore, FAs have little to fear, job-wise. It's their bosses — management — who are getting moved around (both Morgan Stanley and Merrill Lynch have recently announced management re-orgs and management shifts). That said, it still has to be embarrassing if you work at any of these companies. (Bear advisors no doubt have an interesting story to tell their clients; according to our columnist Mindy Diamond, a recruiter with Diamond Consultants, Bear advisors will not cotton too well to laboring under the JP Morgan Chase corporate symbol — Bear reps are just too different for the bank's financial-advisory model.)
You can criticize “Helicopter” Ben all you want for dropping cash on greedy financial firms for their imprudent leverage. But you can't blame him for the current mess. See page 45 for our conversation with Bill Fleckenstein, a short-only manager based in Seattle, about why it's Alan Greenspan's fault. At the helm of the Federal Reserve for more than 18 years, Greenspan and the other Fed geniuses left interest rates too low for too long, creating a credit bubble. Fleckenstein is not alone; there is a growing chorus of critics who note that Greenspan was widely hailed as an interest-rate god when he stepped down. But his achievements are being, um, “re-priced.” Steve Leuthold, the Minneapolis-based asset manager, agrees with Fleckenstein. In the Leuthold Group's widely followed monthly research report, known as The Greenbook (because of its color), Leuthold writes, “In fairness, Bernanke inherited a mess, including a housing bubble (the Maestro failed to see), and a crowd of greedy, leveraged-obsessed financial cowboy institutions that both the Fed and government failed to recognize, regulate and control.” We're concerned that Washington will muck things up further with its “fixes,” and we fear the negative effects of more regulation. But, gosh, which industry practically begs to be policed over every little thing?
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