Dave: Excellent post and not a thing I can think to add to that.
My background is in corporate finance and accounting and I spent eight years with a large international insurance broker (Willis) as an office CFO (San Diego and then Orange County).
While in Orange County (and this is back in 1994), my boss (the CEO, a former Bear Stearns guy and Ohio State MBA) and I met with a rep from one of the investment banks regarding FRNs (floating rate notes) and repos (repurchase agreements). These were highly leveraged instruments, and nearly identical in type and flavor to those bought by Bob Citron, the Treasurer of Orange County, to the tune of nearly $2Bn. Rates of return in the high teens were being touted (we were told that 18% was the norm on an annualized basis), as was the relative “safety”, risk-wise.
I remember sitting through this presentation and thinking, “I have no idea what the hell this guy is talking about”. It was a convoluted scheme to say the least and to refer to it as safe was laughable. In December of that year, Orange County was forced into BK when Citron’s overleveraged position was exposed by rising interest rates and Credit Suisse called his margin.
My point is this: The rep knew what a piece of crap he was marketing, but it was the hot ticket in town right then and one that was putting the most money in his pocket in the short-term. While we certainly weren’t an institutional investor, our risk posture and risk allocation model should have been obvious. However, this was a whole lot less about a client’s needs and a whole lot more about a stock jockey lining his pocket, NO MATTER WHAT THE EVENTUAL FALLOUT. Yeah, in a long-winded, circuitous fashion I’m making your point for you, but, the more things change, the more they stay the same.
