On February 14th, Eliot Spitzer published an editorial in the Washington Post about the federal role in promoting predatory lending:
“When history tells the story of the subprime lending crisis and recounts its devastating effects on the lives of so many innocent homeowners, the Bush administration will not be judged favorably. The tale is still unfolding, but when the dust settles, it will be judged as a willing accomplice to the lenders who went to any lengths in their quest for profits. So willing, in fact, that it used the power of the federal government in an unprecedented assault on state legislatures, as well as on state attorneys general and anyone else on the side of consumers.”—-
– Eliot Spitzer, former Governor and Attorney General of the State of New York
There is, however, something I don’t understand about Governor Spitzer’s comments. If the large banks and investment banks in New York were engaging in predatory lending practices, New York officials had a much more powerful tool available than the Attorney General enforcement actions that the Bush Administration halted.
New York government agencies could have shifted their deposits from the institutions engaged in predatory lending to institutions with sound lending practices. They could have warned those banks and investment banks engaged in predatory practices that if they did not behave, New York pension funds would sell their stocks, stop buying their mortgage pools and stop generating investment advisory and brokers fees for them and their affiliates.
Now this is where someone will no doubt send me an e-mail and say that the fiduciaries running those plans can’t play politics with that money. My response is that when you use your savings to finance the destruction of your communities and the liquidation of your own infrastructure, you are investing in something that has a negative total economic return. Which means that it is only a matter of time before you start losing money.
Indeed, if you look at how much money the New York pension funds have lost over the last year in Bear Stearns, Citigroup or other stocks, (let alone compared to how they would have done if they had shifted to activities and assets that have fundamental economic value) you will see that moving out of activities that had a negative total economic return might have been a winning strategy rather than blaming the Bush Administration for not controlling the companies that you, in fact, own. A further question is raised if you go back through the portfolios in time. You can’t help but notice how much money the pension funds were making on those stocks. Which raises the question, as Aretha Franklin would say, “Who’s zooming who?”
“Total Economic Return” is the core concept in Solari investment strategy. Most investors focus on an investment’s return to investors. We prefer a systems approach and attempt to estimate an investment’s total return to the enterprise’s physical and financial ecosystem, that is the Total Economic Return. We believe that Total Economic Return has two components: return to investors and return to the network. Strategic investors understand the power of building a reputation for seeking positive returns to both investor and network. The benefit of investing in things which have real fundamental economic value over the long term is that when the bubble is over and the music stops, you are likely to have a chair and your chair will be sitting on solid ground.