Money Managers Need to Get Real With Clients
Hiding inevitable losses is a cynical way of doing business.
I cite the case of Amaranth Advisors, which collapsed under the weight of massive losing natural-gas trades a few years ago. I argue that asset allocators who had clamored to get into Amaranth should have clearly seen the warning signs -- monthly volatility wholly inconsistent with the capital-preserving strategies Amaranth claimed to follow. Because Amaranth's historic performance had been good, and because it was a badge of honor among asset allocators to be admitted to the Amaranth club, too many of them stuck with the fund when it was clear that the managers had drifted far afield from what they were supposed to be doing.
Now, I have no problem with volatility of returns. Indeed, I think they're a fact of life, and we should embrace them rather than deny their existence.
But professional money managers don't look at it that way. They want to avoid losses at all costs. It's really a very cynical way of doing business. Rather than explain to clients why the losses occurred, as part of a long-term strategy bound to have ups and downs, they try to find ways to say that the losses never really happened. Or, in the case of public companies, if the business didn't actually "make the quarter," the financial-reporting people will find ways to make the quarter.
This has been going on for years, of course, so in a way it's a bit unfair to single out General Electric (GE), which copped a plea bargain yesterday for accounting shenanigans. But I'll single it out anyway, because, as it's been pointed out, the company is a standard-bearer for the economy and has the resources and responsibility to do things the right way.
When it turns out that the company was shading its books to make its numbers in order to preserve a fictitious streak of predictable success, we need to blow a loud whistle. The $50 million fine for a company with a $150 billion market capitalization doesn't do the trick. The company is trying to play it off as a result of deficient systems that have been improved.
Don't believe it.
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