The Financial Crisis Winners and Losers
Research Question:
- Who are the top winners and losers of the financial crisis? Top
investors, economists, intellectuals, government officials, think
tanks, and universities that lost or won because of the crisis
Research Findings:
We identified several winners and losers in different categories,
including the following:
- Economists, Policy Makers and Intellectuals
- Investors and Money Managers
- Investment Banks and Financial Firms
- Universities and Academia
- Economic Think Tanks
Economists, Policy Makers and Intellectuals
Top Losers
The list of the top experts whose intellectual
abilities and credibility are put to question are Nobel
Laureates like Harry Markowitz, Merton Miller and
William Sharpe. Their work on portfolio theory underestimates
equities risk
in their asset pricing model. The economists from the Bush
Administration including, Alan Greenspan, Ben Bernanke, Chuck Blahous,
Pierce Scranton, Edward Lazear, and Henry Paulson. This
group missed the crisis despite several warnings over the years.
On July 7, 2009, Cullen Roche, an opinion leader on
Seeking Alpha,
wrote: Ben Bernanke has no formal banking background and has never
worked at an investment bank. He is a lifelong academic yet he is
selected to run the most important branch of the global economy.
That makes very little sense to me. This is not to say that he isn't
a phenomenally intelligent person, but if I am going to choose
someone to fly my next flight he/she better have some hours in the
cockpit rather than just thousands of hours reading the
manual. - (Source:
Seeking Alpha)
On October 3, 2010, Charles Ferguson, wrote in the Chronicle of
Higher Education: "(Larry) Summers is unique but not alone. By now we are all familiar with
the role of lobbying and campaign contributions, and with the
revolving door between industry and government. What few Americans
realize is that the revolving door is now a three-way intersection.
Summers's career is the result of an extraordinary and
underappreciated scandal in American society: the convergence of
academic economics, Wall Street, and political power. - (Source:
The
Chronicle Review)
Top Winners
Every decade or so, a few geniuses are
discovered. For years they work hard trying to solve incredibly complex problems,
they labor in relative obscurity until they achieve great results.
At first they are ignored, dismissed or ridiculed by their peers,
later they are recognized for their exceptional abilities and
achievements.
These exceptional experts saw what most of the world failed to see.
To be
accurate in our research and to avoid offering these experts
unsubstantiated titles, we looked up the definition of a genius. "A
genius is someone embodying exceptional intellectual ability,
creativity, or originality, typically to a degree that is associated
with the achievement of unprecedented insight".
In an article on Seeking Alpha (July 7, 2009), Cullen Roche,
an opinion leader, asks "Why did economist fail to predict the
crisis?" He writes: In hindsight, it seems like the crisis was so
obvious... it's still astounding that we can count the "experts" who
actually predicted the crisis on two hands. And many are even
skeptical of this small sampling of prescient economists and
analysts. Statistically speaking you could easily make the argument
that most of these "experts" who got it right were anomalies
or lucky" Source:
Seeking Alpha
In an interview (Dated Jan 9, 2009) with the Associated Press’s
Vice
President Cheney repeatedly insisted that no one anticipated the
looming U.S. financial crisis. “I don’t think anybody saw it
coming,” he said.
REICHMANN: But why, why didn’t you see such a huge downfall in
the economy coming?
CHENEY: I suppose because nobody anywhere was smart enough to figure
that out.
Warren Buffett said no one should be punished for missing a
bubble that the entire U.S. — himself included — failed to see
(Source: Jessica Dye
Forbes Magazine )
The list of top economists, experts and intellectuals who gained more respect and
are recognized for their genius in predicting the economic
crisis include Dean Baker,
Med Jones,
Nouriel Roubini,
and Peter Schiff.
Although Dean Baker was the first to warn
about the crisis, and Med Jones had the most accurate predictions, they
both were covered far less by the media. Nouriel Roubini
predictions lagged behind other experts and Peter Schiff was
the most bearish about the US economy.
Robert Prechter, a stock market analyst and forecaster
warned about the housing bubble and its impact on the banking sector
(Source:
Fox
News)
Other experts who saw the some of the dangers of the financial
sectors and warned about them include (more research and predictions
profile is being prepared for these experts):
Brooksley Born who called for regulating financial derivatives and
was fiercely opposed by Larry Summers and Robert Rubin
(Source:
PBS Frontline)
Raghuram Rajan, former chief economist of IMF. In September
of 2005 he presented a paper titled "Has the Financial
Development Made the World Riskier? He focused on financial
compensation incentive structures allowing bankers to take very high
risks to profit in the short term while not penalizing them for
losses in the long term, thus leading to imbalance in investment
risk/reward decisions and putting the world at risk. (Source:
NBER)
Robert Gnaizda, the cofounder of the
Greenlining Institute - A public policy, research, and consumer
advocacy organization, warned Ben Bernanke and
Alan Greenspan subprime mortgages several times (Source:
NY Times)
Bill Ackman, a hedge fund manager of Pershing Square Capital
Management warned about the subprime mortgage sector in May of 2007 in a
presentation titled who is holding the
back (Source:
MarketWatch)
Nassim Taleb was also credited by many with predicting
the crisis and had regular appearances on TV and major conferences
like World Economic Forum in Davos. However, our research finds that his Black Swan theory
is not about the prediction of this financial crisis and
the ensuing economic crisis. On
the contrary, his early statements on the crisis states that no one could have predicted
the crisis. The Black Swan book is more of a risk management
theory explaining how unpredictable
catastrophic events can impact the financial markets. We found no
specific warning from him about subprime mortgages, housing bubbles
and the ensuing financial market crash. Nassim Taleb books
became best sellers as a result of the financial crisis. To his
credit, he is correct in his criticism of the theoretical financial
risks models that were flawed (in using mean variance to price risks), yet
those theories won
Nobel Prize in Economics and as a result many hedge funds
on Wall Street used them to price their risky assets. Although he was wrongly credited
with the prediction of this crisis, this does not take away from the brilliance
of his intellect and the quality of the book that he wrote.
Investors and Money Managers
Top Losers
Harvard Management Co., which runs the world's largest endowment
fund (Manages the funds of Harvard University) lost more than $10
Billion in 2008 because of the crisis (Source:
Business Week). Many of Wall
Street investment professional and US economist are Harvard
educated. Losing so much money hurt the academic reputation of
economic and investment education of the school.
The top investors who lost credibility and money because of the
crisis include Warren Buffett and Len Blavatnik (Investments
managed by JP
Morgan), and David Tepper of Appaloosa Management
Even more surprisingly, Billionaire investor and Berkshire
Hathaway Inc. CEO Warren Buffett defended
credit rating agencies’ performance prior to the 2008 economic
collapse, saying that no one should be punished for missing a bubble
that the entire U.S. — himself included — failed to see. If the
rating agencies did their job, investors would have not mispriced
their assets and the financial market could have avoided the
collapse. Buffett, whose
investment vehicle Berkshire Hathaway is the single largest
shareholder of Moody’s Corp. with a 13 percent stake, delivered his
remarks sitting side-by-side with Moody’s CEO and Chairman Raymond
W. McDaniel. (Source: Jessica Dye
Forbes Magazine )
Mr. Buffett testified that he did not know all that much about
the credit rating market, even though the holding company he
controls, Berkshire Hathaway, is the largest shareholder in Moody’s
Investors Service. “I’ve never been to Moody’s,” he said at a hearing of the
Financial Crisis Inquiry Commission, which is investigating the
causes of the global crisis that led to the government bailout of
big banks. “I don’t even know where they’re located. I just know
that their business model is extraordinary.” - (Source:
New York Times Report)
One must wonder how Buffett and his team invested so much money
without adequate due diligence. This is not a minor mistake. This is
a multibillion dollar mistake.
Top Winners
Top Investors who won money because of the crisis
are John Paulson, Philip Falcone, Kyle Bass, and
Jeff
Greene
Wall Street Firms
Top Losers
The top loser is Lehman Brothers and its CEO
Richard S. Fuld, Jr. - It was the only major bank that was not bailed
out by
the Fed. Other top losing financial services companies, include AIG,
Fannie Mae and Freddie Mac, New Century Financial, DR Horton and
Countrywide Financial, Bear Stearns, UBS AG Swiss bank, IndyMac,
Washington Mutual, and Merrill Lynch
The Chief Economists of the biggest financial institutions
including
Morgan Stanley, Goldman Sacks, JP Morgan, Barclays' Bank,
Bank of America and other major financial institutions and
investment firms. Many of them are ranked as top economists
by the Wall Street Journal, which is a case in point about the
credibility of the Wall Street Media and their role as
a promotional and advertising platform than financial journalism
Top Winners
Top investment bank John Mack, CEO of Morgan Stanley -- See
NY Sun
For Top money managers who lost or won in 2008 because of the
crisis (directly or indirectly) -- See
Hedgeable
More research to be done in this category
Universities and Academia
Top Losers
Ivy League Universities: Harvard, MIT, Yale, Wharton,
and Northwestern
On November 22, 2010, in an article on Huffington Post, Brian Ross,
wrote an ironic article on how poisonous "Ivy" League graduates made
the global financial system and the global economy sick with "toxic" banking assets. He blames Ivy
League presidents, CEOs,
compensations, and their policies (Source:
Huffington Post)
He is right in saying that Ivy League Schools flooded Wall Street and top government jobs with
their financial graduates and economists (See
Guardian UK). However the article is not entirely fair and
generalizes the blame by using guilt by association. On the other
hand, his questioning
of the fascination with brand name educational institutions rather than
focusing on the
individual abilities of the job candidate is a valid point.
These institutions, along with their economics and financial
departments lost credibility as thought leaders and their abilities
to produce top economic and financial talents.
It also is ironic that Harvard University, the top brand in
business and financial education and its president, Larry Summers,
who
is the US Top Economic Advisor to the Obama Administration during the crisis, lost more than $10
Billion in 2008 because of the crisis (Source:
Business Week).
Top Winners
Our research shows that only two research institutions predicted the economic crisis
caused by the housing bubble; they are CEPR (See
Dean Bakers Predictions)
and International Institute of Management (See
Med Jones Predictions)
Economic Think Tanks
Top Losers
Think Tanks that totally missed the crisis:
Brookings, American Enterprise Institute, Center for Economic
Policy Analysis, Institute for International Economics, American
Enterprise Institute, Brookings Institution, Cambridge Energy
Research Associates, Cato Institute, Center for Economic Policy
Analysis, Century Foundation, Committee for Economic Development,
Economic Policy Institute, Economic Research Council (London),
Employment Policy Foundation, Economic Strategy Institute, Heritage
Foundation, Institute for International Economics, Jerome Levy
Economics Institute, Joint Center for Political and Economic
Studies, Kiel Institute of World Economics, National Bureau of
Economic Research, National Center for Public Policy Research,
Progressive Policy Institute Rochester, Center for Economic
Research, Theoretical Research Institute United for a Fair Economy,
Urban Institute, and Washington Institute for Policy Studies
Top Losers
Wall Street Economists
Stephen Stanley, RBS Securities; Nigel Gault and Brian Bethune,
IHS Global Insight; Maury Harris, UBS; Neal Soss, Credit Suisse;
Spencer Staples, EconAlpha; John Silvia, Wells Fargo; David Greenlaw,
Morgan Stanley; Michael Feroli, JP Morgan; Dean Maki, Barclays
Capital; Jan Hatzius, Goldman Sachs; Thomas Lam, United Overseas
Bank; Kurt Karl, Swiss Re; Richard Berner, Morgan Stanley; Daniel
North, Euler Hermes; Brain Fabbri, BNP Paribas;
Top Winners
Center for Economic and Policy Research CEPR (See
Dean Bakers Predictions)
International Institute of Management (See
Med Jones Predictions)
The Greenlining Institute who warned Ben Bernanke and Alan Greenspan
subprime mortgages (Source:
NY Times)
All three think tanks warned
about the housing bubble and its impact on the economy. They are
smaller in size and less prestigious, yet they were right while top
think tanks were wrong.
Other research questions and findings
-
Why did the world's top economists fail to predict the financial
crisis? (Others who missed the crisis, include government
leaders, award-winning scientists, market analysts and
investors). Was the crisis predictable or was it a Black Swan
(unpredictable) event? Are government policy makers competent
enough to manage the nation's financial freedom and security?
Are economists and their policies helping or hurting our
economic growth? Do we need to re-define the education of
economic science and the role that economists play in our
financial markets, government policies and business regulations?
-
Who is to
blame for the financial crisis? Who contributed to the
creation of the crisis? Can they be held responsible
for their actions or inactions? Was there a conspiracy by some
Wall Street executives and government officials? Do investors
have legal cause to seek compensation for damages caused by Wall
Street firms?
- Who predicted
the financial crisis and the ensuing economic crisis?
Is there a documented evidence supporting their claims? Were those who warned about the crisis lucky or did they have a clear logic behind their
predictions? Can we use their knowledge to predict future crises?
What are their future predictions? How do their predictions
compare with each other? Where do the experts agree and where do they
disagree? How accurate are their economic predictions? Can they
be relied on for investment decisions?
- Who are the
top winners and losers of the financial crisis? Top
investors, economists, intellectuals, government officials,
think tanks, and universities that lost or won because of the
crisis.
- What are the lessons we can learn to
avoid future
crises? What the the economic policy lessons? What are the
investor's lessons? Do we need more or less financial regulations?
|
London
School of Economics
Financial Journalism Ethics
Expert
Economic
Predictions
Dean Baker's
Predictions
Med Jones
Predictions
Nouriel Roubini's
Predictions
Peter Schiff's
Predictions
The Rise & Fall of Financial Assets
City
University
London
Challenges of Financial
Journalism
Knowledge
@
Wharton
University
Wall Street
Economic
&
Financial
Research
|
