Posts Tagged ‘University Endowment’
“Swap” Inventor Blames Regulators for Financial Crisis
Monday, January 5th, 2009
David Swensen, of Yale University Endowment investment management fame discusses the current state of the market and derivatives trading. Swensen is credited with the invention of derivatives now commonly referred to as “swaps.”
Kim Clark from US News and World Report writes today:
The Wall Street trader who invented the swap says he’s dismayed by how other traders have so abused his invention and the “complete and utter failure” of regulators to prevent the abuse that led to the current financial meltdown.
David Swensen, now the legendary manager of Yale University’s endowment funds, says swaps and other financial derivatives ought to be traded on an exchange and hedge funds that get big enough to pose risks to the financial system should be regulated.
“I don’t think it is the tool that is the problem,” he says of swaps. “I think it is the fact that our regulatory authorities aren’t doing their jobs” that allowed derivative trading to balloon dangerously. The bursting of that balloon is one of the main reasons for the Wall Street credit crunch.
In the late 1970s, David Swensen took his new Yale doctorate in economics to Wall Street. While working for Salomon Bros. in the early 1980s, he figured out a way for IBM and the World Bank to trade, or swap, payments in different currencies. It was a key development in a larger Wall Street trend to create and trade new financial “derivatives”–or instruments whose value is derived from an underlying asset or income stream. As a part of this trend, musician David Bowie found investors willing to pay him upfront cash in return for the right to collect future earnings on his hit songs, for example. And an entire industry arose to create and trade derivatives based on the mortgage payments of homeowners.
Tags: Credit Crunch, Current State, David Swensen, Derivative Trading, Derivatives Trading, Endowment Funds, Financial Derivatives, Financial Meltdown, Hedge Funds, Hit Songs, Income Stream, Key Development, Kim Clark, Mortgage Payments, Regulatory Authorities, Salomon Bros, University Endowment, Utter Failure, Wall Street Trader, Yale Endowment, Yale University
Posted in Credit Markets, Markets | No Comments »
Yale’s Swensen: “Extraordinary Opportunities in Distressed Debt
Monday, January 5th, 2009
Legendary Yale University Endowment investor, David Swensen, says there are extraordinary investment opportunities in the credit world and is “pursuing a recovery” by acquiring distressed debt.
“There are some really extraordinary opportunities in the credit world,” said David Swensen, the school’s investment chief, in a phone interview from his office at the New Haven, Connecticut, university. “Everything, from bank loans to investment-grade bonds to less-than-investment grade bonds, is priced at really extraordinarily cheap levels.”
Among Swensen’s core principles identified in “Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment” (Free Press, 408 pages, $35) is the importance of diversifying holdings while focusing on equities. In a recession, the advantages of diversification get overwhelmed by investors’ selling equities in favor of U.S. Treasury bonds in a “flight to quality,” he said.
“When you have a market in which any type of equity exposure is being punished, it’s going to hurt long-term investors,” he said.
In the current environment, distressed corporate securities can produce “equity-like” returns, Swensen said.
“You want to make sure you’re with companies that have the ability to survive in a really tough economic environment” he said, declining to name any of the companies.
Until financial institutions resume lending, the economy will remain stagnant, Swensen said.
“I don’t think the Fed or the administration has figured out how to fix credit markets,” he said. “We are going to experience economic and financial stress as long as the credit markets are broken and it’s not until we start seeing the credit markets functioning properly will we be able to see a path to economic recovery.”
Swensen advocates federal guarantees for deposits in money- market funds as a way to encourage investment in the vehicles that buy corporate debt.
Source: Bloomberg.com, January 2, 2009
Tags: Advantages Of Diversification, Bank Loans, Connecticut University, Corporate Securities, Credit Markets, David Swensen, Distressed Debt, Equity Exposure, ETF, Federal Guarantees, Financial Stress, Institutional Investment, Investment Grade Bonds, Money Market Funds, New Haven Connecticut, Term Investors, U S Treasury, U S Treasury Bonds, Unconventional Approach, University Endowment, Yale Endowment, Yale University
Posted in Bonds, Credit Markets, Economy, Markets | No Comments »
