This week TD Ameritrade held its annual institutional advisor conference at Cesar’s Palace in Las Vegas. CEO Fred Tomczyk, pictured on left below, summarized TD’s strong financial position in addition to his belief that money market accounts should be about safety and stability. For this reason, TD has chosen to minimize both duration and credit risk in these accounts. Tomczyk is clearly the right person to be leading TD Ameritrade.
Tom Bradley, pictured on right below, leads the institutional area and was instrumental in successfully advocating against the Merrill Lynch brokerage exemption rule, a rule which allowed investment professionals to avoid registration with either the state or SEC. It is now up to the SEC to take action regarding this rule which has led to such widespread abuse.
I asked the first question of Tom after his presentation. The question was, will TD Ameritrade now aggressively advocate that private equity and hedge funds be required to register with the SEC. This same question was asked of both Karl Rove and General Wesley Clark, in addition to whether or not they are personally invested in private equity or hedge funds. I will mention their responses below.
My sense is that requiring hedge funds and private equity to be registered with the SEC is essential to restore transparency and investor confidence. Bradley responded that he is optimistic and sees the new SEC chair as a reasonable person but stopped short of committing to lead this much needed effort. Bradley also noted that the SEC has had difficulty regarding effective enforcement, as indicated by the $50 billion Madoff scandal that broke in December.
In response to my question directly to Rove and Clark, Karl Rove said “I am too poor to invest in private equity and hedge funds,” but added that he thought that as long as these investors are large sophisticated investors, perhaps there is no need for registration. He added that if he were not speaking at the conference he would be hunting with T. Boone Pickens, one of the nations largest private equity investors.
Pickens spoke the previous day and noted he had lunch with President Bush that week, a lunch Bush requested. Pickens added that Bush asked him straight out, “Boone do you understand all this stuff Wall Street has created.” Pickens replied, I am a geologist and have no idea what they were doing.
What neither Rove or Bush seem to realize is that the biggest investors in these hedge and private equity funds are now tax exempt public pensions, endowments and foundations. What this means is that teachers, janitors and college students financial futures are directly tied to these investment vehicles, making registration with the SEC imperative. Not to mention their interlocks to banks and their government insured deposits.
Clark was articulate in his response, noting that elimination of the “uptick rule” had fueled short selling by hedge funds, perhaps adding to market volatility. He did not however answer the question regarding whether he was personally invested in such funds. Clark also cited the Bush administration as being lax in its regulatory responsibilities. Although perhaps true, Rove repeated several times that it was the Democrats who blocked the Bush administrations efforts to regulate Fannie Mae, a key catalyst to the current financial crisis.
My overall take on the Rove Clark debate is that Rove overlays his economic philosophy with too much politics and not enough basic math, although he was certainly right on the Fannie Mae issue. Clark is a brilliant articulate leader, perhaps able to contribute to solving this mess, yet he is simply naive with respect to the impact of hedge and private equity funds. One thing is for sure and that is the increasing importance of Paul Volcker to the Obama administration. Volcker appears to be the only visible leader who truly “gets” what is needed to stabilize the system. Pictured below is a photo of Rove and Clark responding to my question.
William Poole, pictured below, was also keynote speaker. His presentation was superb, yet like many distinguished economists he is handicapped by not understanding accounting and taxation. His perspective seemed to be that free market solutions are always best and did not seem to understand the importance of adequate disclosure to generate transparency and related investor confidence. I asked Poole after his presentation if he supported hedge and private equity funds being required to register with the SEC and he replied no because they might just move to London. He clearly has no grasp regarding the significance of this vast shadow banking system and how it has destabilized our economic system. Such funds are now receiving most of their funding from US based public pensions and endowments and therefore the SEC or another government regulator clearly has the leverage to generate this needed oversight. It is not likely that these funds will abandon their funding sources.