Inside investment: Big trouble
Regulators and litigators have become latter-day big-game hunters. That spells trouble for the world’s biggest corporations and should encourage investors to look beyond mega-caps.
‘Metals, currency rigging is worse than Libor, BaFin says’ read a recent headline in the financial press. The head of the German federal financial supervisory authority (BaFin), Elke Koenig, went on to say in a recent speech in Frankfurt: "The financial sector is dependent on the common trust that it is efficient and at the same time honest." (Ah! The Golden Age, before they ate the apple!) Regulators in the US, UK and Switzerland are involved in the investigation. A dozen firms have been contacted for information, including Deutsche Bank, and they say 13 traders have been suspended or fired.
Big lawsuits and big regulatory actions abound. Chevron is still fighting a patently spurious $9.5 billion 2001 pollution judgment in Ecuador. BP’s travails in the Gulf of Mexico remind one of Karl Marx’s observation that historical events often begin as tragedy and then repeat themselves as farce. The predicament of Tokyo Electric needs no comment. Alcoa has been caught in the crossfire. Multi-billion dollar fines seem to rain down on corporations with the intensity of Singapore’s northeast monsoon in January.
Years ago, when I was an undergraduate, the Dartmouth College dean of students, Thaddeus ‘Thad the dad’ Seymour, invited us to a conversation with Kingman Brewster, president of Yale, who was later the ambassador to the Court of St James. Brewster told of once being on the Yale admissions committee when, among the many qualified candidates, he picked out one applicant from Africa because he had killed a lion to earn his manhood. This act not only conferred status among the Maasai but also, apparently, admission to Yale.
The story was memorable, but I must say that I felt some sympathy for the lion that had to die just so a fellow could get into Yale. What a misfortune it is for a species that it must be killed simply so that the males of another species can prove their manhood. The regulators have become in this respect like the Maasai.
Big banks, big oil, big retailing, big mining, big private utilities, big shipping, big sports (for example, the NFL concussion settlement), big food, big pharma – and in fact almost anything that is big, except big government – constitute big game and face big fines and big penalties.Big regulators are staffed by men with big ambitions who want to prove their manhood and make big names for themselves, and this can only be done by doing something big. Fines and penalties, therefore, must be big enough to do big harm to investors, big and small.
Now don’t get me wrong. No one decries wrongdoing more than I do. But I prefer to be a neutral observer, as is Rick in Casablanca when Major Strasser tells him that he, Strasser, is on the trail of Victor Laszlo and wants Laszlo kept in Casablanca. Rick indicates that he is mostly indifferent to Laszlo’s fate, saying: "My interest in Victor Laszlo staying or going is purely a sporting one." (Rick has a bet with Captain Renault.) Strasser then asks: "In this case you have no sympathy for the fox?" "Not particularly," Rick replies. "I understand the point of view of the hound too."
BaFin is probably right that something stinks in the currency and precious metals markets. On January 6, a single gold futures fat-finger trade with a nominal value of $500 billion (about 4,200 contracts) knocked gold down $30 an ounce. What institution has enough capital to engage in a single trade where a 1% move would make a gain or loss of $5 billion? Not even the now extinct London Whale could have done that. Perhaps it was a central bank or a treasury department; maybe it was a computer error.
Whether this be right or wrong is a matter not only for further investigation but also of one’s point of view: the fox’s or the hound’s; the lion’s or the Maasai’s; the bank’s or the regulator’s. I am reminded of a story that I have not bothered to verify for fear it might be untrue. Henry Kissinger was in China negotiating a rapprochement and president Richard Nixon’s eventual visit. In a social moment, he asked Mao Zedong how the world might have been different if Nikita Khrushchev had been assassinated rather than John F Kennedy. Mao thought for a moment and replied: "I doubt that Mr Onassis would have married Mrs Khrushchev." That was Mao’s point of view.
So how are investors to evaluate the global currency and metal-price manipulation investigation now under way? If I had to guess, I would suspect that we will eventually see fines big enough to have an impact on bank earnings for at least a few quarters. In the present environment, banks are not likely to get away with a slap on the wrist. But more damaging in the long run might be additional restrictions on the way banks do business that might permanently depress their profitability.
The travails of the big firms provide more scope to smaller, more specialized ones. Investors should give preference to low-profile enterprises. As the Japanese wisely say: "The nail that stands above the others will be pounded down."