Bob Rodriguez
Kevin Drum reads The Wall Street Journal and is prepared to hail fund manager Bob Rodriguez as “pretty spectacularly prescient”:
He saw storm clouds gathering in 2005 when newly minted pools of supposedly high-quality “Alt-A” mortgages began acting oddly….He quickly dumped the holdings, reckoning that by the time he figured out what was actually going on, whatever disaster the odd behavior foreshadowed would have already occurred.
….He stopped buying Fannie Mae and Freddie Mac debt and took giant insurer American International Group Inc. off the list of approved commercial-paper investments. He refused to invest in financial-services companies because of what he saw as “a pandemic collapse” in the rules by which lenders approved mortgages.
As of 2004, he began moving his fund to more than 45% cash, even as one big shareholder yanked out $300 million because of his bearish stance.
To me, the most troubling thing about this story is that while I’m sure Rodriguez is a prosperous man, and I’m well-aware that a lot of other titans of finance have lost a lot of money in 2008, I’ve seen no indication that Rodriguez analyzing the situation accurately and making the moves that ex post were the correct moves to make has actually gone and made him the wealthiest fund manager in America. You’d like to be able to say that, looking back on things, it would have been smarter for more people to follow Rodriguez’s lead. But things like shifting your fund to a cash-heavy position while some major shareholders pull out vast sums because they don’t like your bearish stance would have been a bad career move for most folks.
Ever since the crash, there’s been a lot of self-serving talk from people in the business about how nobody could have foreseen this. That’s wrong. What would be more accurate — and more disturbing — is that it’s not clear that it actually would have been smart for people in the business to have behaved in a radically different manner even if they had understood the situation well. There are a lot of fields of endeavor where it’s more important to be in tune with the CW than it is to actually be correct, and this seems to me to mostly be one of them.
54 Responses to “Bob Rodriguez”
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January 2nd, 2009 at 5:25 pm
John Paulson made billions betting against
the housing market the last years.
He is now one of the most acclaimed hedge fund managers in the world.
January 2nd, 2009 at 5:35 pm
Those fund managers who did well recently should see a lot of money flowing into their funds. Investors have a tremendous sense of recency, piling money into winners (i.e., buying high).
January 2nd, 2009 at 5:37 pm
Obviously this was a huge one to call correctly, or even just mostly correct, but I’d like to see how well they’ve done over the last 10-20 years.
How much money have they made in bull markets? My understanding is that Schiff has basically been predicting the end of the world for a decade or so.
January 2nd, 2009 at 5:40 pm
Just depends when you got bearish. Doing it in 2004 and meaning it (shifting to cash) deprived you of the gains of the next couple of years, and may well have left you behind someone who simply left everything as-is and took a big loss in 2008.
January 2nd, 2009 at 5:49 pm
Only the suckers didn’t see this coming. When Wall Street is telling everybody they can get rich with a portfolio and working people are led to believe that buying a house is a financial “investment”, you can bet it’s a sucker call. Many people made a lot of money betting against the market. It’s about time we stopped considering this casino to be a valid measure of economic health. Wall Street is perverse.
January 2nd, 2009 at 5:56 pm
People are taking a bizarre “personal investment” reading of MY’s post.
He’s arguing that a fund manager would have lost clients for proposing to do the right thing in 2004 or whenever. There are internal structures to the world of finance that made challenging the conventional wisdom particularly hard.
January 2nd, 2009 at 5:57 pm
He could have just shorted the market have made loads in the process…?
January 2nd, 2009 at 6:03 pm
John Paulson made billions betting against
the housing market the last years.
He is now one of the most acclaimed hedge fund managers in the world
I heard that there were others who started betting against housing slightly before Paulson who got killed. Timing — matters of a year or 2 — was the only difference.
Rodriguez had enough clout to “Stay the course” when a shareholder took $300 million out of the fund. Joe Shmoe Fund Manager would have been fired for making the same decisions as Rodriguez.
January 2nd, 2009 at 6:03 pm
More important than the fund managers (who, it’s true, could have bet against the mortgage market and theoretically profited even more than those who were long and happened to get out at the right time) is thinking about this in the context of the big investment banks. People like to say the the I-bank CEOs are (were!) given incentives to promote long-term success by being paid mostly in options, but this overlooks the downside of short-term “failure.” If Dick Fuld had decided three years ago that the CDO market was bad news, Lehman would have likely survived, but he probably would have been fired sometime in the past four years as Merril and Bear’s skyrocketing profits would have eclipsed Lehmans. Of course, those profits all got written down in the end, but that would have been only so much consolation to Fuld…
Once we get back on our feet, the financial industry needs to rethink the incentive structure at the top so that CEOs don’t have to weight the risk of their own continued employment against the long-term health of the company/civilization itself.
January 2nd, 2009 at 6:25 pm
Rich nails it. Timing is everything here. There are perma-bears who are taking credit for anticipating the disaster of ‘08, but some of them had been calling for a crash for ten or fifteen years.
Rodriguez is one of the managers who will probably benefit from his wariness going into ‘08. Another is John Hussman, whose hedging in his equity fund limited its losses.
January 2nd, 2009 at 6:48 pm
There are a lot of fields of endeavor where it’s more important to be in tune with the CW than it is to actually be correct, and this seems to me to mostly be one of them.
This strikes me as entirely backwards Besides the fact that much is made in the popular financial press of the self-described ‘contrarians’ – who occasionally get it right and score big, but just as often get it wrong and lose – what’s important, in this field (and others, but esp this field) is to be about 10 minutes ahead of the conventional wisdom, and have it meet you were you’re at – and then move on. The problem was there were too many followers and not enough leaders. Now, this is not in itself a bad thing – it is almost axiomatic that there will be more followers than leaders – but of course, the other issue is that we were paying followers the salaries of leaders. Which, for the most part, is correcting itself.
January 2nd, 2009 at 7:01 pm
If you look at it from the point of view of an investor who has a wide range of funds, think about the following chain of events:
1. you set up your allocation, carefully selecting how much you want to go into various asset classes, including cash (among many others). Part of that process is to hire FPA Capital (Rob Rodriguez’s fund), because you thought that FPA would give you exposure to a nice range of small cap value equity and bonds. You also hired a wide variety of other managers to manage other asset classes, and put some of the portfolio in cash.
2. Instead of doing what you hired him to do (invest in small cap value equities and bonds), Rodriguez put the fund into half cash. Now your cash allocation is much higher than you wanted it to be. But that’s not what you hired Rodriguez to do – if you wanted to be in cash, you wouldn’t need to pay him to put your money in it. You could put the money in a CD and not pay any external manager a dime.
3. I.E., unless you’re having Rodriguez manage either the entirety or the bulk of your portfolio, he’s managing the portfolio not to benefit your asset allocation strategy, he’s managing it to drive up his own raw numbers.
4. There’s not much defense for Rodriguez to be in half cash – the fund’s not that big that he couldn’t have doubled up on his other positions, or found new ones.
January 2nd, 2009 at 7:37 pm
Matt has this affectation where he confronts subjects that he doesn’t understand, takes a cursory glance and then decides that because it has fraud, the entire field (business, investing) is baloney. I find it off-putting.
January 2nd, 2009 at 7:39 pm
I think you are right: businessmen act within a given reality.
But guess what? That is why we have regulators. Regulators are supposed to incorporate a wide view, a long term view and a historical view. They are kind of like parents. They, or their institutions, have been there, they have heard all the arguments for relaxed regulation and oversight. But these arguments always come from the kids who are just trying to do what they want to do and don’t care about any rules or potential downside.
Just as you can say that evolution is self-adjusting, and the bad actors die off because they don’t produce offspring, you could say that evolution is self-adjusting because it produces parents who prevent their kids from making big mistakes. Same with the free market. The free market could include a parent function which prevented the bad kids from stealing the credit cards, the car and heading to Vegas for a long weekend.
January 3rd, 2009 at 1:18 am
The paper explains this phenomena quite well.
http://blogs.ft.com/wolfforum/author/ftblog/
January 3rd, 2009 at 8:26 am
That is one ugly mofo…
January 3rd, 2009 at 11:04 am
wow…sounds like finance is a lot like high school.
i don’t remember THAT being stated in the prospectus.
January 3rd, 2009 at 11:34 am
Matt is quite right. Roubini and Baker are emerging from this fiasco as being the guys that called it right. But in the cold light of day if you had taken the advice of either in real time you would have lost a lot of gains. For example Baker advised people to dump home ownership in 2004 and took his own advice. Somehow I doubt he is dollars ahead. Similarly Roubini was predicting meltdown a couple of years before it actually happened, 2005 and 2006 did not in fact unwind as predicted, that 2007 and even more so 2008 ‘vindicated’ him glides over the fact that following his advice AT THE TIME would have been a loser.
Now if there is someone out there that accurately predicted that the exact right time to exit real estate in the hottest bubble markets was late fall 2006 we should make him King of the World. (Or not because someone is shorting every market at any given time.) Shorts and bears and I guess even short bears are going to be proven ‘right’ given a long enough time horizon. But the notion that market timing is not important is to say the least odd. Because lots of people made lots of money ignoring Roubini and Baker. And some of them probably still have some of that money-if they exited the market by luck or skill at the right time. (On the other hand right wingnut Sheldon Adelson lost $24 billion (out of $28 bn) by not listening. But since with Atrios I consider him one of the ‘bigger asshole’s I am not exactly crying.)
Hindsight. Still and always 20:20.
January 3rd, 2009 at 12:23 pm
There are thousands of money managers out there. Every trade has one of these people on each side. Therefore, it is simply logical that out of the whole universe, someone will be right. What has always been wrong is expecting that person to always get it right going forward. Mostly, they regress to the mean. Trying to pick the correct money manager is a fool’s errand.
January 3rd, 2009 at 1:13 pm
The Article you quote says:
Pfft….
I saw it coming in 2004 when the percentage of personal income being used for rent and mortgage started shooting up.
When you’re paying 50% of your income towards you mortgage, it only takes something like, say, a huge upshot in gas and food prices, to lead to a default on your mortgage. I knew alot of people that bought 500k homes on less than 6 figure salaries… because that’s all there was available, and now they’re struggling, 1 of my friends sold his home for less than he bought it for, and moved into an apartment.
No need trying to understand “mortgage pools”, when the answer was right in front of everyone’s face the whole time.
January 13th, 2009 at 12:42 am
I think you are thinking like sukrat, but I think you should cover the other side of the topic in the post too…
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