Tag Archives: Wall Street

Exercise Caution: A New S&P Index

At first glance, the announcement was an impressive one. At the swanky Word Economic Forum in the Swiss resort town of Davos last week, the Canada Pension Plan Investment Board joined Standard & Poor’s in announcing the creation of the new S&P Long-Term Value Creation Global Index.

Standard & Poor’s, of course, is the global provider of financial information that maintains a corporate mission of providing “data and research … (that is) independent, transparent and cost effective.” Presumably, S&P achieves its mission by utilizing its own expert professional staff to create clearly defined financial metrics without undue influence from — or overt reliance on — asset management and investment advisory firms.

In fact, that’s exactly what S&P is claiming to do with its new Long-Term Value Creation Global Index, comprised of 246 companies that purportedly “have the potential to create long-term value based on sustainability criteria and financial quality.” S&P continues:

The S&P LTVC Global Index is constructed by combining qualitative and quantitative measures into a single metric to determine the potential for long-term value addition. The Economic Dimension Scores provided by RobecoSAM are included in the qualitative assessment to gauge corporate governance effectiveness.  The quantitative assessment consists of drivers of long-term investment returns – Return on Equity, Balance Sheet Accruals ratio and leverage ratio.

Okay … but what is RobecoSAM? And are those investment metrics expertly and transparently designed to focus on long term value creation? In addition, doesn’t more than one balance sheet accrual ratio actually exist? And more than one leverage ratio as well?

Apparently, RobecoSAM is an asset management company. And one can find those investment metrics in elementary primers of standard accounting financial statements. And yes, there are many accrual and leverage ratios in active use by financial specialists.

In other words, S&P’s new Global Index of Long Term Value Creation simply takes a set of qualitative metrics that is computed by a single asset management company, and combines it with a set of generic and undefined financial metrics. Although S&P’s press release appears to imply that its qualitative assessment function encompasses other activities, it doesn’t specifically describe any additional work.

To be sure, the Canadian Pension Plan Investment Board should be commended for attempting to promote a long term value perspective in the financial industry. And S&P should certainly be encouraged to continue its mission of developing expert metrics that are “independent, transparent, and cost effective.”

Nevertheless, when the qualitative component of an S&P index emphasizes the metrics of a single asset management firm, it doesn’t bode well for the firm’s mission of independence. And when an index provides no detailed description of its investment metrics or its other qualitative assessment activities, it doesn’t bode well for the firm’s mission of transparency.

One could argue, of course, that such effortless approaches to constructing indices may help S&P achieve its mission of cost effectiveness. Nevertheless, given these other concerns, financial investors might wish to exercise a bit of caution while reviewing the S&P Long-Term Value Creation Global Index.

Bartleby, The Scrivener

Are you feeling a little overwhelmed by the recent spate of films about the unethical and immoral activities of Wall Street professionals? From Leonardo DiCaprio’s dissipated performance in Martin Scorcese’s The Wolf of Wall Street to the current film adaptation of Michael Lewis’ The Big Short, we seem to be inundated with tales of banking dishonesty and brutality.

Come to think of it, though, has there ever been a successful film or book about a moral and upstanding Wall Street professional? It’s awfully difficult to name one. After all, even Jimmy Stewart’s George Bailey in It’s A Wonderful Life conducted business in Bedford Falls, which was a long way from downtown Manhattan. And the classic Christmas movie hardly portrayed financiers in glowing terms, pitting Bailey against the evil banker Mr. Potter.

In fact, we might need to reach all the way back to the year 1853 to find a published tale about an admirable Wall Street professional. Bartleby, the Scrivener, written by Herman Melville just two years after he published Moby Dick, is a short story about a kind-hearted Wall Street attorney who hires a para-legal assistant named Bartleby and then doesn’t have the heart to dismiss him.

Or, to be more accurate, he tries repeatedly to dismiss him, but he doesn’t have the heart to insist that Bartleby leave when the employee decides to stay. So what’s a generous boss to do when a gentle but utterly unproductive worker politely refuses to go home?

The brief text begins as a light comedy, but quickly evolves into a perplexing mystery and then concludes as a spiritual metaphor. The entire content is now in the public realm, and is available for free download from the Project Gutenberg web site.

What compelled Melville to write such a story? It’s possible that he was terribly disappointed by the dismal failure of Moby Dick, which reportedly only sold 3,200 copies during his life, earning him a mere $1,200. Melville’s Great American Novel was only rediscovered by the literary world after the First World War, decades after his death.

In a sense, Captain Ahab’s compulsive connection with the Great White Whale is analogous to the attorney’s inability to squirm free of his pale skinned employee. Perhaps Melville wrote both stories to symbolize how writers become enslaved to their own blank white sheets of writing paper … or, in today’s terms, to the blank white screens of word processing files.

Even if these interpretations are a bit too surrealistic for your tastes, I’d recommend giving the Bartleby story a little of your time. Considering all of the vicious characterizations that have lately plagued our friends in the banking industry, the tale might restore your faith that there is a little human goodness in every corner of the world.

Yes, even on Wall Street.

Yet Another Global Banking Scandal

Just when we thought that the global banking industry couldn’t possibly produce another financial scandal, guess what happened last week?

Yes! Yet another scandal emerged from Wall Street, according to the Wall Street Journal. Or perhaps we should refer to it as a potential scandal, given that the federal government has only begun to launch its investigations.

This time around, the Fraud Section of the United States Justice Department and the Commodity Futures Trading Commission are looking into allegations that the banks manipulated (or “rigged”) their sales of government Treasury Bonds. The banks help the federal government sell its debt securities in order to finance its deficits.

If proven true, would this represent a new and unusual type of illegal activity? Not really. In fact, the accusations represent a somewhat archaic and musty version of Wall Street brazenness.

That’s because the very first banking scandal in American history involved the manipulation of debt securities that were issued by the United States Treasury. In 1792, a former Treasury official named William Duer and his accomplices drove up the prices of the government bonds that were issued to help refinance the loans that were first incurred during the American Revolution.

Duer briefly became wealthy as he drove up the valuations of the securities, but the inevitable subsequent market collapse (known to history as the Panic of 1792) drove him into bankruptcy. He spent years in a debtor’s prison, and eventually died there.

Alexander Hamilton, America’s first Treasury Secretary, led the government’s effort to quell the panic. But fear of the future damage that might be wrought by further financial manipulations compelled two dozen major Wall Street brokers to establish a set of rules for regulating market behavior. This contract, known as the Buttonwood Agreement, served as the founding document of the New York Stock Exchange.

So if you’re concerned about the federal government’s ability to investigate and decipher innovative criminal financial activities in this new age of derivatives and flash crashes, you need not worry about the latest global banking scandal. There is actually nothing innovative at all about rigging the Treasury bond market, a scheme that was first hatched 223 years ago.