An "Alternative" Idea for the Bailout of the Auto Industry

Here's my idea for an alternative to bailing out the auto industry. Obviously, the loss of tens of thousands of jobs is a daunting thought should one or more of the Detroit Big 3 automakers go out of business. On the other hand, why should the American taxpayer have to subsidize a company that hasn't built a superior quality product in over 50 years? Instead of pumping taxpayer money into a losing business, I suggest that any "bailout" provide public service jobs for the former auto industry employees that we can all benefit from such as public works projects. Or perhaps subsidize employee salaries at good companies that are profitable and produce good quality products.

I'm not worried about not having a U.S. owned auto company because even if foreign auto companies fill the void (and hire some of those laid off employees), in the case of a national emergency like what we saw in WWII, the government could always take emergency measures to temporarily nationalize those companies.

Just my two cents for the new president to think about...

Who said bribery doesn't exist in the U.S. government?

Can someone explain to me the rationale for the government accepting only a monetary settlement from the large financial firms every time they do something wrong? I read today (these seem to be occurring more and more often) that Citigroup will buy back $7 billion (that's BILLION) of auction rate securities from investors and pay $100MM in fines to for their part in marketing this product. However, the kicker is:

"Citigroup neither admitted nor denied wrongdoing under the settlements."

When someone wrongs you, what is more important, that they acknowledge they did something wrong or that they just try to ease the pain of the wrong by paying you money. Clearly being paid money helps to ease the pain but it certainly doesn't make it all right. On the flip side, the government knows that if they fight the case in court, they will pay a lot just to reach a verdict which may or may not be in their favor. The result is that large corporations are being "rewarded" for committing wrongs by only paying a fine but not leaving any mark on their record. I'd like to see how the government would behave if a much smaller firm that couldn't afford the fine or the buyback would be treated if they were simply to admit that they had committed a wrong. I can't recall of such a situation but I suspect that the government would prefer to see the firm go out of business even if they did admit wrongdoing but didn't have the ability to pay such a big fine.

I might be wrong on this and I'd love to hear a differing opinion but it just seems ridiculous that the government spends so much time chasing the bad guys but then never actually achieves anything concrete that will deter firms from committing wrongs in the first place.

When "nobody gets fired for buying IBM" applies to the financial services industry

More and more I'm meeting with people who rely on their financial advisors for recommendations of where to invest their money. (Disclosure: I also rely on a financial advisor to manage part of my money)

The question that I ask is what incentive does a financial advisor really have to find and recommend a promising investment opportunity that hasn't been around long enough to present a long track record? For example, research has shown that emerging hedge funds outperform hedge funds with longer track records (http://www.vanthedgepoint.com/vanthedgepoint_news/20070123article.html). However, if an advisor recommends an emerging fund that does not perform well, he would likely be blamed for making a bad recommendation which might result in a loss of a portion of the capital he was managing. On the other hand, if the advisor recommends a well known and more established fund, even if it underperforms, the advisor can always point to the strong historical track record of the fund.

The reason I bring up this issue is not to say that people shouldn't rely on advisors (after all, I still do). However, if an investor does use an advisor to provide feedback on an investment opportunity, they should always keep in mind the position of the advisor and how they might be limited to an answer that may not be a true reflection of the investment opportunity potential.

Rational: To be or not to be? That is the question for 2008…

Looking back at 2007, August will likely go down in history as one of the most infamous months for market neutral quant strategies. While there is no shortage of opinions attempting to explain the causes of August’s volatility, one unifying theme is that quantitative strategies are not as safe as they were thought to be, a theory that initiated a cascade of quant strategy fund redemptions.

Many people believe August was proof no matter how sophisticated computer models become, they cannot predict movements better than humans relying on fundamental data, experience and intuition. Even though August was a unique event, the pattern of an unanticipated industrywide occurrence resulting in steep losses leads to the herd behavior that has plagued the financial services industry time and again. Cases in point: the subprime mortgage crisis and the bursting of the tech bubble. However, if one looks back at historical market crises, investors who benefited were those who used the crisis to their advantage by selecting winners from a sector suffering from negative perception.

One of the biggest challenges in evaluating quant strategies is the complexity and relatively opaque investment process. Therefore, when quant strategies were performing in line with their peers and the general market through much of 2007, it was harder to isolate the true alpha generators from the pack. For example, during the first 10 months of 2007, an average of 58 market neutral equity funds reported positive monthly returns according to the HedgeFund.net database. However, during the month of August, only 39 funds reported positive performance, far below the next lowest month of July when 47 funds reported positive returns. From that data, one can see how August was an opportunity for investors who wanted exposure to market neutral quant strategies to identify non-correlated and differentiated strategies which generate true alpha rather than beta disguised as alpha.

The August crisis was a welcome event for market neutral managers with unique strategies who were able to prove their thesis. As individual and institutional investors contemplate their allocations for 2008, it might be wise to conclude that now is the right time to allocate capital to funds unaffected during the recent crisis instead of simply redeeming from quant strategies altogether.