Monday, April 3, 2017

Admitting you’ve been duped is difficult in investing and in politics

 Admitting you’ve been duped is difficult in investing and in politics

About twenty years ago I learned a valuable lesson; people are reluctant to admit when they’ve been misled or conned.  I’ve been thinking about this lesson a lot lately as my more liberal friends anticipate the defection of President Trump’s core supporters.  I hear the same general phrase over and over again.  How can these people still support the President when his budget proposal takes aim at the very programs they rely on?  How can Trump supporters continue to back him when the repeal and replacement of Obamacare will deprive them of health care?  The continued support of the president isn’t due to ignorance, prejudice, or some other “deplorable” characteristic.   Rather, it’s because the president’s core supporters are in the process of being conned, and human beings, whether they’re rich or poor, liberal or conservative, don’t like to confess that they’ve been duped.

I learned my lesson from the wealthy and very political connected citizens of a major metropolitan area.   At the time, I was Chief Investment Officer of NationsBank (now Bank of America).  One of the bank’s regional portfolio managers had placed very risky mortgage-backed securities into the investment portfolio of the community’s leading endowments, foundations, and hospitals.  Unlike most bonds, these securities fell in value when interest rates declined.  So as interest rates fell, the real value of the securities plummeted.   However, the portfolio manager found a way to override the bank’s accounting system, keep the prices steady, and thereby hide the losses piling up in client portfolios.  A couple of savvier clients realized all was not well in their portfolios and instructed the portfolio manager to dispose of the securities.  Rather than selling them, the portfolio manager simply transferred them to other clients, amplifying the losses in certain accounts. 

On an otherwise quiet Sunday, I received a phone call from my boss that a local bank president (and chairman of an endowment) in the major metropolitan area had called to express concern about the securities and performance of the portfolio managed by the portfolio manager.  Something was wrong because interest rates were rising and the prices of the securities weren’t budging.  It didn’t long to unearth the problem once we’d been alerted.

By Monday morning I was on the corporate jet with a team of people to address the situation.  While a group of fixed income specialists untangled the portfolio manager’s trades, I had the responsibility of meeting with the trustees and staff of every account affected by the fraud.  I had two expectations.  First, our clients were going to be very angry, and second, they were going to fire us.    As it turned out, no one expressed anger and no one fired us.  Instead the trustees who had hired and trusted the portfolio manager were deeply embarrassed that they’d been conned by a thirty-something year old and didn’t want anyone to draw attention to the situation.  Although we had already terminated the portfolio manager, a number of the clients insisted that we shouldn’t seek any kind of formal disciplinary action against him.  The rich and powerful in this community did not want any public acknowledgement that they’d been conned. 

When the New York Times, Washington Post, and CNN go into counties that overwhelmingly supported and ask voters if they regret their decision to support Donald Trump, it doesn’t surprise me that the President’s voters haven’t changed their minds.  If bank presidents and corporate leaders are reluctant to admit they’ve been duped, I’m not expecting rank-and-file voters to act differently.

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