Jump to content

Bill Miller Quarterly Commentary Q408


Recommended Posts


  • So, Bill Miller got savaged by this board.  Bad decsions, bad results, lots of piling on by board members counting their FFH winnings :)
  • Miller provides some good points on the current state of financials and points out some of the potential winners in the finance sector (WFC, PNC, etc)
  • I'm posting this commentary since despite his performance woes, he's still an insightful commentator on the current state of the markets.


Full disclosure - I have never owned any Legg Mason funds.


"...The financial authorities seem to think of private capital as, to borrow a phrase from Justice Holmes, some “brooding

omnipresence in the sky.” Private capital is us, it is Davis, it is Dodge & Cox, it is Brandes and so on. That is, it is mutual funds

and pension plans and endowments, and every time we have bought bank shares, either new capital or existing shares, we

have been killed. Until policy becomes clearer and more capital friendly, the chances of attracting new capital to banks is nil,

in my opinion.

Policy has improved. It has moved away from being purely punitive—wipe out shareholders (private capital) if the institution

needs government support, a counterproductive policy if there ever was one when you are saying the banking system needs

more private capital—to one that is opaque and apparently confused.

Coincidence or not, the rout in banks now underway began when reports began to circulate that regulators wanted Citigroup

to sell assets and shrink its balance sheet. Citi has since announced a plan to do just that, and the stock has collapsed. There

are at least two major problems here: first, the regulators are subverting the governance process (if the stories are true) and

making strategic decisions that are the purview of management, and second, who is going to buy hundreds of billions of

dollars worth of assets from Citi in this environment? If the government wants board seats in return for capital, that would be

fine. But to have an anonymous regulator apparently deciding what the right size of Citi is, or declaring that Bank of America

has to cut the dividend to a penny per quarter, leaves investors completely in the dark as to who is responsible for their

capital and what policies the institution will pursue. As to the second issue, no one will buy those assets without the prospect

of earning a significant risk adjusted return, and if the buyer is going to get such a good deal, then it is a bad deal for Citi.

At this point, no one knows what policy is. Is it to shrink the size of the biggest banks so they don’t pose systemic risk, as

Chairman Bernanke apparently suggested in his speech, and as the actions of Citi may suggest, or is it to have them bigger and

more diversified, as the additional capital to Bank of America to complete the Merrill deal suggests?

Attracting private capital to banks requires, first, that there be a reasonable prospect of earning a good return on that

capital, and so far the record is that there has been the opposite: capital committed has been capital lost. Second, policy has

to be transparent and not opaque and ad hoc. Third, the accounting rules need to be sensible instead of idiotic, as is now the

case with so-called Fair Value accounting.


The problem with credit, by the way, is not that banks are not lending, a statement one reads almost every day in the Wall

Street Journal or the Financial Times, or hears from some politician or other. The facts are, according the Federal Reserve4,

that bank lending has grown 5.7% since the recession began in December 2007, and consumer loans grew 8.9%. Only home

equity loans actually declined.

The problem with credit is that it is far too expensive to make it economic to use it to grow. With investment grade debt having

yields greater than the growth rate of nominal GDP5, the cost of new debt in the system exceeds the ability to earn enough to

pay for it. Hence, the deleveraging going on. The government on the other hand, can borrow at half the growth rate of nominal

GDP, and hence, it is the government that will, and should, borrow aggressively to invest in the country’s future.






Link to comment
Share on other sites

    * I'm posting this commentary since despite his performance woes, he's still an insightful commentator on the current state of the markets.


It is funny that you are already justifying to post a link to a commentary by Bill Miller. I still like his approach but I dont think he will be able to survive this downturn at Legg Mason.

Link to comment
Share on other sites

I have nothing against Bill Miller. I like his view, especially in the tech sector.


I made some bad investment decisions in my short investment "career" (especially two). These were my decisions and I was wrong. I think the first thing to do is to realize it, and then to do some reverse engineering and realize what went wrong with yourself and then try to learn from it to get better over time.


It is human nature to blame outside stuff when something gets wrong. Bird flu, rain, climate, recession, government, institutional imperative (everybody was doing it, so did I)...you name it. I understand it and we're all human. But there is some limits too. Candor is a very good quality to have, because it help us to gain in wisdom.





Link to comment
Share on other sites

  • 10 years later...
  • 1 month later...
  • 1 year later...

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

  • Create New...