The Ten to Watch ‘08
The most interesting, power-wielding players in the financial services business today.
MAKING LISTS OF BIG HITTERS, particularly one this short, is an act of capriciousness. We try to be as scientific as we can — picking regulators, politicians and business leaders who will have the greatest impact on the financial advisory industry; perhaps they personify an industry product or trend; steer the strategy of a major firm in the midst of a great transformation; or have the influence to shape the regulatory landscape of the industry.
With the Federal Reserve now preparing to revamp securities laws in the wake of its unprecedented bailouts, we could have merely named Fed Chairman Ben Bernanke and his staff. (We did select the New York branch's leader.) We also could have chosen one of a slew of lawmakers, who are currently pushing through legislation to save hundreds of thousands of homeowners from foreclosure.
Instead, we tried to spread our choices around. We have asset managers, securities firm CEOs, a lawmaker and even a noted economist and newsletter writer whose opinions are widely followed by professional money managers. Whether you agree with our choices or not (our short list was pretty long), we think you'll agree that each person merits close scrutiny in the coming year.
— David A. Geracioti
The Lawmaker
Chrisopher Dodd
Age: 64 | Position: U.S. Senator, Connecticut | Location: Washington and East Haddam, Conn. | Education: Providence College; University of Louisville School of Law
This five-term Democrat is chairman of the powerful Senate Banking, Housing & Urban Affairs Committee. That's a nice seat to occupy, since the Banking Committee has a wide-ranging bailiwick, with oversight of everything from the Federal Reserve system and monetary policy to banks and financial institutions.
Dodd is the consummate Washington insider, having served in the House and the Senate for more than 30 years. As the new chair of the Banking committee, he helps set the agenda. He definitely plays the populist card, putting the onus squarely on financial firms for the rise in foreclosures. In a July committee meeting, Dodd said, “In this committee, 18 months of exhaustive hearings have documented what I have called a pattern of regulatory neglect.” He has also introduced legislation to stop “abusive credit card practices.” Dodd co-authored the Sarbanes-Oxley law, which was meant to strengthen accounting and managerial practices, but is widely criticized for inhibiting U.S. capital markets. As for the current mortgage crisis, he backs increased government intervention in the financial industry. He supported the nationalization of IndyMac, and helped author the mortgage rescue plan intended to save hundreds of thousands of homeowners facing foreclosure. He was also the architect of the overhaul of Fannie Mae and Freddie Mac, and is currently being eyed as a potential running mate for Barack Obama. Alas, Dodd now has baggage. Dodd has been denying that his special VIP mortgage rate from Angelo Mozilo's Countrywide was to curry favor. Yet financial firms seem to like him: During his brief presidential campaign, securities firms and banks were among his top sources of cash, according to opensecrets.org. Let's see how they feel a year from now.
— David A. Geracioti
The Short Seller
David Einhorn
Age: 39 | Position: Co-founder and portfolio manager, Greenlight Capital | Location: New York | Education: Cornell, B.A., Political Science
Boyish hedge fund manager David Einhorn excels at both Texas Hold 'Em and attracting publicity. Like many short sellers, Einhorn is righteous. When he uncovers what he believes is corporate malfeasance, his firm shorts the stock — and then he broadcasts his findings about the offending company to the world. Mere rumor mongering to help drive his bets? Perhaps. But Einhorn has the advantage of having been right a few times. His work on Lehman Brothers was detailed, exhaustive — and accurate. Had you listened to him, you would have sold Lehman in May — and missed the ensuing 60- percent plunge in share price. He is the classic crusading short seller: banging his drum in the belief that “Sunlight is the best disinfectant.”
Einhorn founded Greenlight Capital at the tender age of 27, and now manages more than $6 billion. His fund has averaged more than 25-percent net returns since inception on both long and short positions. In 2006, Einhorn placed 18th in the World Series of Poker, winning $659,730, which he gave to charity.
His basic criticism of the industry is one familiar to any reader of Michael Lewis' classic, Liars Poker. “The investment banks outmaneuvered the watchdogs,” he said at an April conference. “With no one watching, the managements of the investment banks did exactly what they were incentivized to do: Maximize employee compensation. Investment banks pay out 50 percent of revenues as compensation. So more leverage means more revenues — which means more compensation.”
Einhorn began publicly expressing reservations about the securitization model popular with Wall Street banks last October, mentioning several banks — including Lehman and Bear Stearns — by name. In May, Einhorn announced that he was shorting Lehman. With his penchant for publicity and for exhaustive security analysis, Einhorn could help us get a handle on what's next in the current financial crisis.
— Nate Wendler
The Contrarian
Marc Faber
Age: 62 | Position: Founder, Marc Faber Limited, an investment advisor, fund manager and broker/dealer. Publisher of The Gloom, Boom, & Doom Report. | Location: Hong Kong | Education: Economics, University of Zurich, Ph.D., magna cum laude
It's tempting to dismiss Marc Faber as a perma-bear, but that description isn't exactly a fair one. Actually, the asset manager and author of the widely followed monthly newsletter, The Gloom, Boom, and Doom Report, is bearish on securities in the U.S. and Europe. And, for that matter, he's now bearish on emerging markets, too — for the short run.
Why should we listen to Faber, since he seems so, well, bearish on everything? For one, Faber's opinions are heard — if not followed — by some of the savviest professional investors on the planet. His publications and predictions have been consistently thought provoking, and, more importantly, in recent years, highly accurate, particularly his warnings on the U.S. markets. Faber correctly anticipated the current real estate decline in the U.S. residential markets, and previously predicted the Asian flu of 1998, the collapse of the Japanese stock market in 1990 and the 1987 crash in the U.S.
While Faber has long been positive on Asia, he turned bearish on both the emerging and Chinese markets in late 2007, a call that looks particularly prescient given the collapse in the Chinese indices, now down as much as 50 percent from their highs of last year.
Faber's outlook for U.S. markets is one of restrained skepticism. He says, via email, that he expects a shallow but extended period of economic weakness worldwide in the short run. This weakness will weigh on stock markets, and also ease pricing in commodities, forcing down steel prices and potentially sending oil to $80 a barrel. In Faber's view, one way to play this is the common stocks of airlines like AMR, Lufthansa, Japan Airlines and Singapore Airlines. Now that's a contrarian call all right.
— Nate Wendler
The Regulator or Mister
Timothy Geithner
Age: 47 (on Aug. 18) | Position: President, Bank of New York Federal Reserve | Location: New York | Education: Dartmouth College; Johns Hopkins School of Advanced International Studies
As far as what the future holds for regulation of financial markets, the man of the moment is Timothy Geithner, the ninth president of the Federal Reserve Bank of New York. It was Geithner who, in March, orchestrated the bail-out/fire sale of Bear Stearns for $10 a share to JPMorgan Chase, the Fed's most significant intervention in the financial markets since the Great Depression.
The New York Fed served up the $29-billion loan that made the deal digestible for JPMorgan Chase, and then, in the following weeks, opened the “discount window” to investment banks that needed capital — something it hasn't done since the 1930s. The Fed is responsible for supervisory oversight of depository institutions and financial holding companies like Citigroup and Bank of America; the SEC regulates securities firms, including Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley.
The SEC was also responsible for monitoring capital and liquidity standards (oops!) as well as disclosure of that information. That's all changed now that the Fed is handing out money to these firms. Not only have teams of examiners from Geithner's office been working with the SEC to comb the books of investment banks, but as of July 7, the Fed and the SEC have formally agreed to share information, coordinate exams and consult on supervisory expectations. “Geithner is the person who will control how much money will be lent to the big b/ds and [investment banks], and the structure and terms of that lending — that's huge,” says Hardy Callcott, an attorney with Bingham McCutcheon who focuses on broker/dealers and investment advisors. “He's now the backstop liquidity provider for these firms.” And liquidity seems to be in short supply these days.
— John Churchill
