Shareholders and risk


Paul Kagan asks this question:

You won’t find the names of many of these funds in the published lists of banks’ largest investors, because they’re hidden behind the names of the money management firms they retain to make the actual investment and trading decisions. If nationalization destroys the common stock (and possibly preferred shares) of banks, the money managers may feel the pain, but their public service clients will be the ones wiped out. At year-end 2008, according to Bloomberg, the 100 largest of each of the top 10 banks’ institutional owners, held an average 60% of each bank’s common shares.

Take the case of the Teachers Insurance and Annuity Association-College Retirement Equities Fund

(TIAA-CREF).It manages some $800 billion for over 3.5 million members from more than 15,000 academic and medical institutions. At 12/31/08, TIAA-CREF owned 179 million shares of the Big 10 banks. On average, TIAA-CREF is the 19th largest holder of each of the Big 10 banks. At year-end, these shares were worth a total of $3.7 billion (plus $436 mil. worth of Goldman Sachs (GS) and Morgan Stanley (MS), which I did not include in the Top 10). TIAA-CREF may have lightened the load this year, but, encouraged by Washington’s largesse and lower bank stock prices, it may also have substantially increased several positions, putting it more firmly in the crosshairs of the Beltway’s bank bazooka.

Faculty and doctors, whose retirement funds might be seriously impaired by a “wipeout” of bank shareholders, are hardly alone in this crisis. The Vanguard Group, Capital Research, Wellington Management, T. Rowe Price and countless other caretakers of the public’s wealth have also loaded their portfolios with shares of the caretakers of the public’s savings and checking accounts. While the stockholders of broken companies are traditionally made to pay for the mistakes of their managements, a “mistake” of this scale calls for innovative planning. It makes no sense to sacrifice the nest-eggs of ordinary—and some extraordinary citizens in the name of arbitrary accounting rules. Which brings us to the rest of the story…

Somebody loses in the morass of unknowns of the downturn. The question becomes who, and are the assets so inscrutable that the ‘mark to market’ approach (would force or might force) ? Are any of the rules past and present NOT arbitrary in the sense of some mythical best approach and favoring some group over another? Is the choice more a matter of “economics” or more political preferred interests of one kind or another…there is no free in markets, just different rules.