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Was Crowell Weedon's misadventure with credit default swaps really that big a deal?

Ayn Rand is a heroine to some libertarians — and at least one former bond investor in L.A.
Ayn Rand is a heroine to some libertarians — and at least one former bond investor in L.A.

The L.A. Times has an interesting story today about Crowell, Weedon & Co., which reporter E. Scott Reckard characterizes as a "regional brokerage based in Los Angeles" that "has preached old-fashioned stock and bond picking to its clients since the depths of the Great Depression." The impression at the paper that Crowell Weedon is seriously old-school goes back a ways: Tom Petruno wrote about the firm in 2007, under the headline "They make money the old-fashioned way," a reference that anyone who paid attention to investment marketing in the late 1970s will get.

Here's what happened: In 2008, the firm's head of bond trading, Robert Gore, set up a sideline operation to play the housing downturn. Gore was a housing bear as early as 2006, and the LAT points to his website as proof. The trades he was running were proprietary, meaning the firm basically set him up with funds drawn from Crowell Weedon's own accounts to establish his positions — positions that used the now infamous derivatives known as credit default swaps to short mortgage-backed securities. 

If Gore's positions paid off, the firm would pocket the gains itself, rather than simply transferring gains to clients.

When the housing market was melting down in 2008, Gore's bets were paying off. Fast-forward a few years and, as the LAT reports, Gore lost money. The apparently shocking figure was something like $3-4 million, on a total position of $6 million. The man has now decided to retire at 54 and write "libertarian" novels in New Mexico — not surprising, as the intro to his website, "Straight Line Logic," provides a shoutout to novelist (and Paul Ryan favorite) Ayn Rand, as well as excerpts from his own previous and forthcoming literary efforts, which seem pretty Randian themselves.

Reckard raises two points of concern:

•Are CDS trades really consistent with Crowell Weedon's conservative investment philosophy? (Answer: Of course not! This is a marketing debacle for the firm.)

•Will the loss hurt the firm? (With $28 million on hand, and $8 billion under management, probably not, but a $3 million loss would represent a 14 percent hit to capital reserves, and so it can't be casually dismissed.)

These are legitimate concerns, but then again, Gore has been up to this for several years now. And on its face, betting against the housing market for the past four years seems...well, brilliant. In any case, the justification for engaging in this kind of trading is to offset losses for clients in other areas — and given that Crowell Weedon is investing long-term, there are going to be periods when sustained losses and the simple difficulty of making money on stock and bond trading are going to panic clients.

So in the end the firm's loss is really more out-of-character than it is something that might bring down the business. Comparisons in the LAT story to JP Morgan's recent multi-billion-dollar trading loss — in its London office, featuring a flamboyant trader nicknamed the "London Whale" — come off as maybe just overstating the case a bit.

But only a bit. 

What's fascinating is that, in the context of a firm with a reputation for playing it safe, you could have a senior partner of more than 20 years tucked away in the operation, freely espousing some extreme views about the financial future of the world (and, importantly, being correct), writing about the dangers of the CDS market back in 2008, and penning this sort of thing, in his other line of work as a writer of fiction:

He was alone, and that is the state of human existence. One can have a spouse, a family, and friends, but one is still one. Sensations, emotions and thoughts are communicated, but never shared; they are sensed, felt and thought by the individual. Others hide from themselves that they are alone, hoping to belong. They make friends, take lovers, have children; they join clubs, corporations, governments and churches. But they die as alone as the day they were born.

I've written before about how friendly L.A. is to libertarians, a group that these days seems to be commanding more and more national attention. Who knew you'd find one as steadfast in his views as Robert Gore in a Los Angeles investment firm that was designed from the ground up to bore people to sleep by staying away from anything that smells of risk?

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