Sunday, August 10, 2008

Doesn't Make Sense

9 August 2008

Howard Marks is the Chairman of Oaktree Capital.

I think he's got it exactly right.

Example: Chuck Prince, the former CEO of Citigroup, lost his job in 2007 for following the crowd and wasting tens of billions of dollars of investors' money gaining "market share" in a worthless market ("unconventional" - read undercapitalized - or uncapitalized - mortgages).

Mr. Marks' point: Had Mr. Prince done the right thing and sat out the rush of the lemmings into valueless mortgage-backed assets, he would not have lost his job in 2007 - he would have lost his job sooner!

What? Why?

For losing so-called market share to the other lemmings.

Mr. Marks refers to this phenomenon in American financial markets as "short-termism." Targets are set and evaluated quarterly, so there are no long-term objectives - such as "gradually building value." Results must be instantaneous or they are disregarded.

The other problem Mr. Marks sees is the compensation of executives based on their ability to jettison research & development efforts and to pillage the pipeline of future sales in order to "maximize shareholder value" one quarter at a time - while collecting disproportionate pay and option packages - until of course, London Bridge comes falling down.

Anyway, why take it from me?

Read it here - the article is a PDF document on Oak Tree Capital's website.

Rating: five stars - must read!

Oh - by the way, Niall Ferguson says that a local (financial) squall in the United States could grow into a global tempest. Read about it here. (Linked through Finance Trends Matter - a great source for the best of the best stories each week.)

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