Tuesday, December 9, 2008

Knowing The Rules

Here's a link to an interesting article about fund manager Bill Miller. After years of record-breaking returns, he lost everything by betting it all on companies like Bear Stearns, AIG, Freddie Mac, WaMU and other firms who were on the verge of collapse. 

Miller made a career and a fortune out of going against the market, but this time the market was right. There is an interesting quote in the story from Miller where he explains finally selling AIG shares because "we don't know the rules."

In fact, it seems to me that not knowing the rules was a big part of the problem here. Inasmuch as this is a crisis in confidence, the confidence has been lost because the rules of the game have changed. And the biggest culprit here may have the government, which arbitrarily picked winners and losers, nationalized Fannie and Freddie, and promised to buy mortgage-backed securities one day before switching to capital injections the next. Investors and lenders, after all, require predictable rules. When arbitrary decisions are forced on the marketplace from without, as was the case with the Treasury interventions, then predicting the future becomes far more difficult and risky, as does lending or investing. This, of course, leads to frozen credit markets, as lenders find themselves as deer in the swerving headlights of government.

Maybe we should have a plan ready for the next time. You can believe there will be a next time.

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