The Billionaire vs. The Bank

Published on 15 October 2010 by in Uncategorized


Too Tough Too Call

For Joe Nocera, of the NY Times, it’s an easy one.  He’s rooting for the billionaire — even if the billionaire is not “someone for whom one’s heart instinctively bleeds”.

According to Mr. Nocera’s most recent column, A Billionaire Army of One vs. a Bank, Mr. Blavatnik, a Russian born American citizen, gave JP Morgan $1 billion to manage in a short-term cash portfolio.  A sizable portion of the portfolio was invested in tranches of mortgage-backed securities, as well as securities backed by home equity loans. This was all in the spring of 2006, flash forward to July 2007 and the securities begin loosing value.  All in, by April 2008, Mr. Blavatnik lost $100 million.

Mr. Blavatnik naturally sues JP Morgan.

Mr. Nocera admits in his conclusion that he is “looking for ways for banks to pay for their sins”.  This quest for retribution, however, quite possibly glosses over some complicating facts or questions — which in my mind makes this case too close to call.  Admittedly, my perspective is informed (or maybe clouded) by the fact that I am a lawyer, and I worked for a financial institution which reported that it settled similar types of claims with institutional investors.

My position in short:  there’s more than enough blame to go around.  It’s not so clear that the Billionaire comes to this dispute without bearing some significant responsibility for his own actions.  We must leave it to the judge to determine how much.

In 2006, interest rates were low, very low — “miniscule” — according to Mr. Nocera. At that time, Mr. Blavatnik along with scores of investors (major institutions: pension funds, endowments, and super high net worth individuals) were looking to increase their yields.  In other words, they wanted above average yields.  Specifically, Mr. Blavatnik wanted “just a quarter of a percent more than a typical money market fund”.  While Mr. Nocera downplays this stretch for yeild, by referencing an expert who suggests that this investment goal was “unambitious”, 25 basis points, in an environment when yields are “miniscule”, might not be so unambitious.

With these unambitious investment goals in mind, and supposedly directing JP Morgan that the account had to be “no-risk”, Mr. Blavatnik nonetheless signed investment guidelines (negotiated by “Mr. Blavatnik’s executives”) which authorized an allocation of 20% of the portfolio to mortgage-backed securities and 20% to asset-backed securities.

What?  Wait a second — here’s the rub — if Mr. Blavatnik was truly risk adverse, why would he have agreed to allocate 40% of his portfolio to non-traditional, or alternative assets.  I’m merely a lawyer, but that is not an unambitious allocation of assets.

Furthermore, who were these “executives” who negotiated on behalf of Mr. Blavatnik? Were they investment professionals?  Were they experts in alternative asset classes? What questions did they ask?

Mr. Nocera dismisses the “sophisticated investor” defense rather summarily with a reference to the Goldman Abacus lawsuit and auction rate securities sold by banks.  But, it’s important to be very clear that this situation is not analogous to the auction rate securities where retail investors lost money in no-risk accounts.  Mr. Blavatnik’s executives negotiated very specific and detailed investment guidelines.  With a net worth of supposedly $7.5 billion, the JP Morgan account executives would have made themselves available to answer every single one of his questions.

And, what about the monthly reports which were provided to Mr. Blavatnik, did he read them?  Did he understand them?  If he didn’t understand them did he ask any questions?  Again, what about his experts?  What was their analysis of the monthly reports?

I am not an apologist for the banks.  Far from it. No doubt if JP Morgan breached the investment guidelines, that is very problematic.  Also, no doubt the JP Morgan account executives where deep in a sales mode when presenting this strategy to Mr. Blatnick.  It is critical to understand the representations which were made in assessing responsibility.  Furthermore, I am equally troubled by the fact that a client who purported to be risk-adverse, was nonetheless presented with a set of investment guidelines which allocated 40% of the portfolio to alternatives.  I’d like to hear an unbiased expert on this.

Sins may have been committed by the Banks and Financial Institutions, but investing money on behalf of a Billionaire (absent misleading statements, etc) is not one of them.  Outside of the ear-shot of attorney’s, I suspect that Mr. Blavatnik

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