Bailout

Schwab?s YieldPlus: The denoument

By Felix Salmon

The LAT’s Walter Hamilton makes a good point: with all the brouhaha over Goldman Sachs, how come the Charles Schwab news is considered positive for the company? Schwab’s stock rose by 1% after it said it would pay $200 million to settle a class action suit over its YieldPlus fund, which imploded after the company filled it up with toxic mortgage assets.

Schwab did not admit wrongdoing as part of the settlement, but there was certainly no “big boy” defense here: Schwab’s customers thought they were getting a safe short-duration bond fund, not something which could drop dramatically overnight. It’s hard to see how Schwab’s reputation seems to have been barely damaged as a result of this episode, while a much more recondite disclosure issue has wiped billions off Goldman’s capitalization.

There’s a separate lesson here, too: it’s never too late to sell a falling asset. When I last checked in on YieldPlus, a couple of years ago, it was down 24% year-to-date in 2008, and that was bad enough. But if you decided to hold on and pray, you ended up losing much more: YieldPlus finished the year down 35.4%, and then contrived to lose another 10.5% in 2009. I’m not sure how many bond funds were down by double digits in 2009: that’s really quite an achievement.

This is also depressing for those of us who are worried about the duopoly that Pimco and Blackrock have on bond funds. I don’t think it’s healthy that those two giants are so big while everybody else is so small — but at the same time you can’t argue that they’ve managed to perform well, while smaller bond fund managers can turn in absolutely gruesome performances. If I had a large amount of money to devote to fixed income, I think I’d choose Pimco or Blackrock, too.

Full post as published by Macroprudential on April 26, 2010 (boomark / email).