April 30, 2008
The return of high-risk optimism
My FT column this week is about Michael Milken and his defence at the Milken Institute Global Conference of high-yield finance in the wake of the subprime mortgage crisis. I think he gets some things wrong but is correct about one big thing.
You can read it here and comment below. Incidentally, Andrew Ross Sorkin of the New York Times is at the conference and wrote about the same topic earlier this week, so you can compare and contrast here.
For as long as i have been in the business “genius” quants have been convincing investors with the blessing of the bell curve and senior management that they can carve cash flows from underlying collateral and enhance the performance of the collateral to the benefit of all parties including the mother company. Junk bonds, CMO’s,CLOs, CDOs all rely on a similar pretext that by disassembling pools of questionable collateral and reassembling them to prioritize cash flows to senior tranches turned the pig to a princess. All it really takes is wise management, a quant with a blade and just a little lipstick.If no one answered Milkin’s sales pitch in the 80’s with a greedy yes then the pitch would have fallen on wise ears. But as I have learned greed impares an investors judgement and must steal IQ points as well. Some buy the pitch that asks us to suspend critical thinking and buy into the idea that if you slice an apple properly it becomes a pear.
Posted by: gym-bob | May 1st, 2008 at 2:31 am | Report this comment