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The Investor Perspective on Bailouts – A Statement from CFA Institute President and CEO, Jeff Diermeier, CFA

 

NEW YORK, September 23, 2008 – Today Jeff Diermeier, president and CEO of CFA Institute, made the following statement on the recent financial market turmoil:

 

"By and large we are very fortunate to live in a period of relative economic prosperity fueled by huge expansions of the global work force, productivity-enhancing technology, and more harmonized economic and financial policies. But we have collectively managed to rain heavily on our own parade through a combination of exuberance, carelessness, and undoubtedly some malfeasance. To say that risk has been misestimated or mismanaged is an understatement of rare proportions.

 

Our 96,000 investment professional members, who every year commit to putting their clients’ interests first, operate in financial markets around the world.  Many are responsible for overseeing some of the largest pools of investment capital anywhere.They believe one question must be answered: ‘What do market regulators, central banks, and we, as investment professionals, need to do to ensure that the financial market excesses that led to the current turmoil does not escalate into an erosion of investor confidence that will last for years to come?’

 

In a survey of CFA Institute members, 39 percent (4,650 total respondents) said the bailout plan was reasonable, and necessary. Another 19 percent said government officials should go further to prevent collapse of the capital markets. By comparison, a total of 34 percent said the plan was either excessive, inappropriate, that taxpayers should not assume losses of the financial sector, or that the government was wrong to launch the bailout and that it should go no further."

 

On the Regulators and Regulation 

"The results of this survey confirm that the majority of our members believe that the absolute primary objective of global regulators must be to coordinate their efforts to protect the integrity of financial markets and to restore confidence in the functioning of our global financial system. Initial temporary measures are needed to deal with the crisis at hand. After the dust has settled I encourage all major markets to work together to address the underlying issues and to consider revisions of capital markets regulation. If that process takes a year or two of study to address our long-term needs, so be it.

 

Further, we should not abandon self-regulation as an objective for capital markets. Indeed, it was the regulated sector — commercial and investment banks — whose problems have caused the significant problems we are experiencing. Consequently, we do not believe that more regulation, with the potential for unintended negative consequences, is the answer. Instead, better, more cohesive and transparent regulation, combined with better enforcement, should be an important part of any proposed solution.

 

Ultimately our global financial system is best protected by those in the industry who put their clients and their professional priorities ahead of short-term business priorities. These are professionals who exercise care, prudence, and due diligence before putting clients’ funds into various investment instruments, and who consider whether an investment vehicle is appropriate for sale to a client. Without adopting this ethical perspective every day we put our regulators in a continual position of playing catch up."     

 

On Short-Selling 

"Last week’s actions were marked by particularly strong concerns over expanded disclosure and emergency curbs placed on short-selling for nearly all financial stocks. CFA Institute has been a long-time supporter of short-selling and believes that shorting serves an important role in maintaining orderly markets. Selling short allows the market's collective wisdom to be reflected in security prices, and there are important needs in the market where shorting balances risk.

 

Consequently, we do not support the steps taken by regulators throughout the world to limit short-selling by investors whose positions reflect their assessment of the investment climate. On the other hand, we do support regulators’ efforts to stem market manipulation through abusive practices such as naked short-selling."

 

On Addressing Moral Hazard 

"Of all the actions taken recently, however, none is more controversial or important than the proposal to create a taxpayer-financed liquidity pool. To be sure, a taxpayer-funded exit for firms responsible for the toxic instruments is difficult to accept and more than 1,500 respondents to our survey expressed displeasure with this aspect of the bailout plan. Even with these monumental steps, market turbulence will likely continue for some time to come. We must be certain to confirm that our government will not be routinely available to bail out any risky behaviors of any industry. There must be consequences to the risk-takers and I am hopeful that the moral hazard created by government bailouts will become an important debate for the economic agenda going forward.

 

There is no doubt that the proposed $700 billion pool to purchase damaged securities will be quite different from the Resolution Trust Company process of the early nineties. Nevertheless, the U.S. Treasury will need to accumulate the collective wisdom of all market participants in dealing with the purchase and resolution of these securities in a transparent way that will stand up to scrutiny. It must serve the purpose of making this transfer of risk from financial firms to the broader public successful in saving the public from a more costly and painful collapse of the global financial system."

 

What Investors Need 

"For now, we must focus on prompt and aggressive actions until clarity and stability can be reestablished. First, greater transparency of investment portfolios is an important tool that will allow regulators to discourage manipulation and diagnose financial ills in our increasingly complex financial world. In cases involving private investment funds, such information should be kept by the regulator under lock and key for an appropriate period to prevent others from front-running these firms.

 

Second, as the dust settles, we need to know which institutions and what instruments will and should benefit from a government guarantee — a so-called ‘risk-free asset.’ By definition the least risky asset is one backed by the full faith and credit of a national government. Therefore, governments must act carefully to avoid sending a message that such guarantees will apply in all cases, even if they take temporary measures, as some have recently, to permit markets time to let underlying fundamentals stabilize.

 

Third, we do not believe a blanket ban on short sales is appropriate or will stem negative market sentiment. Whatever restrictions that have been implemented must be temporary and re-evaluated in an accelerated time frame.

 

Lastly, and most importantly, local markets should create high-level task forces to define the future of capital markets regulation in the future. CFA Institute is willing and able to help lead this from concept to reality."

 

CFA Institute
CFA Institute is the global association for the investment profession. It administers the CFA and CIPM curriculum and exam programs worldwide; publishes research; conducts professional development programs; and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. CFA Institute has more than 96,500 members, who include the world’s nearly 83,000 CFA charterholders, in 134 countries and territories, as well as 136 affiliated professional societies in 57 countries and territories. More information may be found at www.cfainstitute.org.