The Float

Monday Reading

We'll get back to our fuller coverage on Wednesday. In the meantime, we wish you a happy and prosperous 2008...

• The Dallas Fed has published an excellent review of how investors turned complacency into crisis. The section on "slicing and dicing risk" (about halfway through the piece) is especially good.
• The Economist combines a concise review of 2007 with a look ahead to 2008--and points to credit default swaps as the next big story.
• No kidding: The L.A. Times on defaults moving beyond subprime.
• Shiller: "This is a much bigger issue than sub-prime."
• Barry Ritholtz has a preview of Doug Kass's 20 potential surprises for 2008.
• More cautionary notes: The FT's Tony Jackson riffs on persistent problems in the banking system (via Yves Smith).
• Over at MartketWatch, John Spence looks ahead to another year of change--and rapid growth--in the ETF marketplace.

Friday Reading

Horizontal snow edition...

• Slick graphic on oil production and consumption across national borders from the Financial Times (via Barry Ritholtz).
• Veryan Allen has a (relatively) new post on the nature and sources of hedge fund returns.
• Indispensable as ever, here's Calculated Risk on this morning's grim new home sales data.
• 2008 may well be a happy new year, but the financial services industry won't exactly ring it in with a clean slate. Read Yves Smith for more.
• We think alpha-beta separation makes sense for individual investors as well as institutions. As All About Alpha reported recently, one of Sweden's leading pension fund managers has seen the light.
• More from All About Alpha: A look inside Bear's new 130/30 mutual fund. Interesting stuff.

CNBC on ETFs in 401(k) Plans

CNBC's Trish Regan just led a very shallow and uninformative discussion of ETFs in 401(k) plans.

The conversation--which involved personal finance author Alan Haft, Adam Bold of the Mutual Fund Store, and Jared Bernstein of the Economic Policy Institute--focused almost exclusively on whether actively managed mutual funds beat their benchmarks, with Bernstein injecting some concern about whether ETFs encourage plan participants to engage in unproductive trading activity.

Those concerns matter, of course, but the conversation seemed strangely disconnected from the operational concerns (per-trade commissions, fractional shares, T+3 settlement, intraday trading, &c.) that have slowed the adoption of ETFs in defined-contribution retirement plans. Similarly, there was no discussion of the operational advantages of ETFs (no sales loads or 12b-1 fees, no short-term redemption fees, minimal implicit costs, &c.).

Unfortunately, CNBC left its viewers with little more than the familiar (and very tired) argument between indexing and active management, which did essentially nothing to improve investors' understanding of the present characteristics and future potential of their retirement plans.

For a fuller discussion of ETFs in the 401(k) world, please see our Chief Investment Officer's recent column at IndexUniverse.com.

Thursday Miscellany

Our holiday posting schedule/pattern continues, with the full treatment returning on January 2nd...

• Barry Ritholtz explains the relevance of today's durable goods data.
• Barry also recommends today's WSJ story on CDOs (and yes, those charts are slick!), but Yves Smith offers some critical perspective on the Journal's efforts.
• The prose here isn't exactly crystal clear, but MarketBeat's update on flagging corporate earnings is worth a look.
• Bespoke has pretty charts of those not-so-pretty Case-Shiller data on median home prices.
• Stagflation fallout watch: Reuters' John Parry argues that the flight-to-quality-driven drop in bond yields could reverse sharply if inflation remains problematic.

Wednesday Reading

At the end of a long day of a travel...

• Asset class corrections are joint functions of price and time. As this post from Calculated Risk illustrates, the correction in house prices--at least in the most bubblicious/overheated markets--has very likely just begun.
• The latest Case-Shiller data show that residential real estate prices continue to melt. We think this is long-term beneficial and short-term painful for the U.S. economy.
• We'll try to do more on this tomorrow, but Jerry Kalish has a good post on the effects of excessive 401(k) fees. But remember: Plan expenses matter--and plenty--but the effects of poor investor behavior often trump investment-related expenses per se. Best-case scenario: Low expenses and good decision-making. unfortuantely, most status quo plans feature high expenses and poor decision-making.
• Here's the Yale Endowment's 2007 Annual Report. (The high points on the endowment's current asset allocation posture can be read in just a few minutes.)
• In the New Yorker, James Surowiecki riffs on the complex roles of remembering and forgetting in the financial markets.

Monday Reading

Until Wednesday...

• Credit card delinquencies: Rising.
• The Super SIV: Historical.
• Northern Trust's Paul Kasriel updates his model's probability of a recession: 65.5%.
• John Hussman is back on the liquidity beat and very much worth reading.
• The FT's Person of the Year: ECB President Jean-Claude Trichet.

Friday Reading

With gratitude to all those sovereign wealth funds...

• Sovereign wealth funds? Today's beneficiary is Merrill Lynch.
• This strikes us as more consequential than the Fed's overhyped repurchase (i.e., rollover) operations: The term auction facility appears here to stay for a while.
• Fed intervention notwithstanding, money market conditions remain deeply strained. 
• On Wednesday we mentioned the effect of Ayn Rand's Objectivist philosophy on Alan Greenspan--and,thus, on the rest of us. As Yves Smith notes today at Naked Capitalism, Paul Krugman has pushed this angle onto the New York Times opinion page.
• Calculated Risk: "One of the greatest fears for lenders (and investors in mortgage backed securities) is that it will become socially acceptable for upside down middle class Americans to walk away from their homes." Check out the full post for some comments from B of A's Ken Lewis.
• Once again, the American consumer keeps on spending in spite of it all.
• In a fairer world, "squeezes" would be replaced by "eliminates" in the title of this Reuters piece.

Thursday Miscellany

Here's another holiday-shortened collection of important stuff...

• Bloomberg's Kathleen Howley has a substantial piece on the very costly farce that was the rating agencies' AAA treatment of subprime-related securities.
• Speaking of subprime, those Bear Stearns numbers weren't too hot...and as Barry Ritholtz notes here, the corporate-to-corporate litigation is now underway.
• And there's more potential difficulty lurking out there for Bear: Shrinking prime brokerage revenues (via Yves Smith).
• What's the difference between deceit, cluelessness, and structurally-induced (and thus somewhat more understandable) ignorance? We expect an HBS case on MBIA within weeks.
• Fortune's Allan Sloan riffs on the Fed's declining clout--which has long been more reputational than operational anyway.

Wednesday Reading

From-the-road edition...

• Here's Barry Ritholtz, channeling the WSJ, on the underlying reality of home prices: falling faster than acknowledged by official statistics.
• Do the bond insurers need a bailout too? Either way, muni's are cheap--and may get cheaper.
• Nice live-blog of this morning's Morgan Stanley conference call by Marketbeat's David Gaffen.
• Here's Yves Smith on Martin Wolf's big "zero-sum" think piece in the FT.
• What was up with Alan Greenspan's indifference to requests for regulatory action in the mortgage industry from people like Ed Gramlich? Bloomberg's Jonathan Weil goes to a key archival source: A 1963 essay by Greenspan himself.

401(k) Fee Disclosure Regs

Here's another short (but important) holiday season item...

Late last week, the Department of Labor issued proposed rules that would govern the disclosure of fees paid to retirement plan service providers (i.e., recordkeepers, third party administrators, custodians, brokers, investment advisors, &c.).

This is important stuff. Here's the DOL fact sheet on the proposed rules. And here's an L.A. Times story that provides a little more background and summarizes the political argument about how much disclosure is enough.

Related news: Senators Tom Harkin and Herb Kohl have introduced legislation mandating enhanced disclosure of fees and expenses. (We wrote about Rep. George Miller's fee-related legislation back in early October.)

We've long believed that more transparency would produce both lower costs and better outcomes for participants, as service providers would be forced to demonstrate real and proportionate value in exchange for their efforts and expertise.

We expect to submit comments on the Department's proposed rules and will post a link to those comments as soon as they become available.