Issue: 375
Sent: 02-02-2010 13:29:03
In this issue:

Searching For CulpritsJohn RobertsonThe Angelides commission is geared up to find wrongdoers. We might all get poorer regulation as a result.The Angelides commission is a bipartisan enquiry established by the U.S. Congress into the causes of the 2008 financial crisis. Many expect its findings to set the tone for financial market regulation for decades.With global financial market integration now demonstrated so conclusively, the findings of the commission will probably also influence financial industry regulation worldwide.At the extremes, there are two schools of thought about how the crisis began. One school believes that it arose from bankers behaving badly. This view dominates thinking among U.S. political leaders.At the other end of the spectrum are those who believe that the crisis arose from a set of macroeconomic conditions promoted by a Federal Reserve taking risks with asset prices for more than a decade before the bubble it created burst. This view is more prevalent among investment strategists.No doubt, reality lies somewhere in between in an extraordinarily complex mix of policies, politics, greed and reaction to legitimate market incentives.A taste of the commission's thinking could be seen in the employment histories of the first senior staff appointed by the commission.Appointment 1. Former leader of the 300 attorneys in the affirmative litigation area of the office of attorney general in California.Appointment 2. Handled enforcement matters at the Federal Home Loan Bank and served in the private sector with an emphasis on banking litigation.Appointment 3. A former federal law enforcement professional specializing in white collar crime and corporate financial integrity.Appointment 4. Nationally recognized for his ability to investigate and prosecute financial corruption.Appointment 5. A lawyer with a background in complex financial and securities litigation.Appointment 6. A lawyer at leading firms with a background in complex securities cases.Such a stark emphasis on investigational and enforcement skills signals that the committee is unlikely to react favourably to arguments about markets and monetary conditions being the primary driver of the financial crisis.Lloyd Blankfein, the chairman of Goldman Sachs and one of the chief villains in the eyes of some, put the macroeconomic and sociological aspects of the crisis at the center of his explanation of why the crisis evolved when he gave evidence before the commission recently. One exchange between the commissioners and Blankfein was illustrative of the gulf between the two.Blankfein had been at pains to have the commission members understand the role of market making in which Goldman Sachs, acting as principle, facilitated decisions by institutional investors to buy or sell securities.Angelides was highly critical of the idea that Goldman Sachs would sell a security to an institution and make a profit if the price of the security subsequently fell in value. While Angelides believed this was wrong, Blankfein believed it was a service investors wanted ans an important contributor to market efficiency.Indeed, taken to its logical conclusion, the Angelides view would mean that no investor could sell a security if he believed that its value was subsequently going to fall. That would be a radically different world than the one we live in now.When chairman Angelides pushed Blankfein on whether he would look back on some of the financings undertaken by Goldman Sachs as negligent or improper, Blankfein observed in response that "those were very typical behaviours in the context in which we were in".Blankfein described the context in the following way in another response to commission questioning: "The markets got a lot more competitive. There was a sense that the world had a lot of liquidity so the commodity of money got less scarce and people paid less attention to it and as a consequence people were lending for transactions.... that had more multiples of debt for the equity and the covenants became more and more lax."He was aware at the time that lending conditions had become less stringent but "we talked ourselves into a place of complacency". He recalled the rationalization in this way: "The world is getting wealthier. Technology has done things. Things are more efficient. There is no inflation. These businesses are going to do well."There was no sense that any of this satisfied Angelides or his fellow commissioners. Indeed, the contrary was evident.A bias toward finding wrongdoers implies future structures which will constrain financial product development and market making. Unfortunately, this would be akin to compelling use of covered wagons because of the large number of road deaths from people using motor vehicles.The world will be disadvantaged if the recommendations of the commission were biased in this direction simply because the alternatives had been excluded before their benefits had been assessed.Email Marketing Business Opportunity - Helen BairstowGender is alive & well - Part 2The Easiest way to do a Client NewsletterWhy Warren Buffett won't buy a NewspaperTax Expenditures & IGR No. 3A How To Book Of Self Managed Super Funds
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Gender is alive & well - Part 2

Click here to buy - A How To Book of SMSF's by Tony Negline
Lester Wills

I am continuing to look at the Gender Gap in relation to retirement savings, as evidenced by a recent report from the ING Institute for Retirement Research entitled: "GENDER GAP: Women & Retirement...all is not equal".

ING found, like many before them (including me with my research both for my Doctorate and with IFSA), women, often with lower salaries to begin with, tend to invest a lower percentage of their pay in their retirement plans. As a result, they have significantly lower account balances. If that was not bad enough, in the US where retirement saving is voluntary, women tend to wait longer to enroll in a retirement plan than do men. Like in other countries (such as in Australia) women are more likely to have employment gaps than are men due to caregiver responsibilities, be it for children or other family members, which can result in lower lifetime wages, and a lower base to calculate any benefit.

What this all means is that women are more likely to report no retirement savings at all than are men (25% against 18% in the US). The income gap may explain this dynamic, but it is not that simple, as when household income is controlled, both women and men are equally likely to have at least some retirement savings.

I have commented on previous research that has shown the conservative approach taken by many women when investing. The ING report notes the same thing when it comments that women tend to be more conservative than men when investing for their retirement. Indeed it found that while the relationship between time horizon (or number of years until the (retirement) goal ) and appropriate investment risk is always a key consideration, ultra-conservative Stable Value investments remain the most "popular" for investors of all age cohorts, and even more so for women than for men. In general, a greater percentage of women than men invest in the more conservative asset classes.

However, when analyzing the findings, they note that only when the risk/reward spectrum begins to approach equity investments do men edge ahead of women in terms of investment allocation. But, as we all know, in the context of today's economic environment, however, the long-term effects of more conservative (or aggressive) investment activity on retirement balances remain to be seen.

What the ING report discovered was that while the overall pattern or spread across asset classes is similar for women and men, i.e. greater allocations to Large Cap U.S. Equities and Stable Value, low Self-Directed allocations, women consistently show higher allocations than men to the asset classes at the conservative end of the risk reward spectrum. This was in contrast to typical allocations for men which were more focused on the riskier asset classes.

They also found that women are more likely to "leave it to the professionals," with some 43% choosing a lifestyle of pre-mixed asset allocation retirement investment, e.g. Balanced or Lifestyle/cycle approach. On piece of potentially good news is that women tend to be less active investors, which could be a long-term benefit as "Stay and hold" has long been the mantra with numerous studies indicating that long-term investors fare better than those who attempt to "time markets".

In terms of retirement confidence and expectations, a recent Consumer Affairs.com report noted that "Women Fear Retirement More than Men - for Good Reason". ING used recent statistics from the Employee benefits Institute to back this up noting that, In keeping with identified retirement investment behavior gaps, women are less optimistic about retirement than are men. They showed the following results from the 2008 Retirement Confidence Survey

All Workers

Men

Women

Will have enough money to live comfortably throughout retirement years:

18%

23%

14%

Will have enough money for basic expenses during retirement:

34%

40%

28%

Doing a good job of preparing financially for retirement:

23%

28%

19%

Will have enough money for retirement medical expenses:

18%

22%

19%

Will have enough money to pay for long-term care in retirement:

13%

16%

11%

More next time.


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