Tuesday, December 16, 2008

Even the best and the brightest of college endowment funds are getting slammed

Sure, there has been a bear market over the past year, but with all of their resources and sophistication you would have thought that the top university endowment funds would have repositioned themselves to avoid the brunt of the bear market and financial crisis. But, no, they in fact managed to pre-position themselves in a variety of "alternative" investments which in fact became very illiquid and resulted in dramatic paper losses which would be much worse if they actually tried to liquidate many of these positions in such assets as mortgage-backed securities, real estate, commodities and natural resources, and hedge funds. Harvard, Yale, Michigan, Columbia, you name them, they all have whopping paper losses, upwards of 25% to 30% and potentially more. What all of this illustrates is that the financial system and investment landscape has broken down to an unprecedented degree that is normally only associated with a depression.

Why did this happen? It happened simply because traditional common stocks were no longer attractive to so-called "institutional" investors, resulting in an excessive level of over-investment in so-called "alternative" investments, which help to fuel the real estate, commodities, and asset-backed securities "booms". Unfortunately, a lot of those alternative investments have proven to be one-way or dead-end streets with bursting bubbles at their ends.

What all of this means is that our financial system and investment landscape is seriously out of whack and in serious need of restructuring. A simply bailout will not do the trick, even $1 trillion would not be enough, but we may need to get the economy basically limping again before it will be strong enough for serious restructuring.

A failure to perform all of the needed restructuring would be a sure recipe for a depression, but I feel confident that we have enough smart people on the job now to be reasonably confident that we will have a much more sound financial system and investment landscape a few years from now. Still, there is plenty of room for Congress and others to make things even worse than they already are.

-- Jack Krupansky


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