Against my wishes and better judgment I found myself the part owner, through one of my investment funds, of a financial services company on the verge of bankruptcy. 

How the company got into that condition is a long and complicated affair still being sorted out by the new management.  It could be months or even years before the truth of its balance sheet is finally untangled.  I, along with many others, knew that that would be the case, and therefore argued vehemently against the acquisition.  Our advice was ignored.

One problem with the purchase was that our newly installed Board of Directors, and especially the Chairman of the Board, has little successful turnaround experience.  

Years ago the fund consolidated several failing transportation entities into a single nationwide network.  Even though it now operates as a virtual monopoly, it has only a fraction of the market share it once enjoyed and is unprofitable in every region it still services, thus proving the rule that when you put a bunch of small failing companies together you’re left with one large failing company.  Numerous calls from shareholders and auditors to liquidate the company’s remaining assets have been repeatedly ignored over the years.

Another company acquired at the very beginning of my fund’s existence was once a world leader in transportation and logistics, but it too has been operating at a loss for many years and is also suffering from declining market share in the face of direct competition as well as electronic delivery services.  In recent years its largest revenue source has been tied to a product with declining demand and a decreasing number of loyal customers.  Recent calls to raise prices while cutting back on services are likely only to hasten the entity’s decline and accelerate losses.

Very few members of the Board have actual experience in the financial services industry, which was another reason why so many shareholders argued against the purchase.  Unfortunately, the few who do, were themselves highly connected through outside investments and oversight to the failing company and its associates.  Requests that those individuals step down, or at least recuse themselves from decisions involving the newly acquired entity, have been repeatedly ignored.  The independence provisions contained in Sarbanes-Oxley, they argued, did not apply to their involvement.

In truth, my investment fund, as opposed to the Board members themselves, does have quite a bit of experience in the financial services sector.  It’s just that most of those experiences have been bad.  

The fund’s affiliated nationwide bank, even though it has only twelve branch offices, is the largest entity of its kind in the country.  Its new chairman, however, seems inclined to leave unchanged many of the policies initiated by his predecessor, including, the continuation of loan rates well below the rate of inflation, a plan, I’m certain you’ll understand, guarantees a negative long-term rate of return for its investors.

That bank has now recently embarked on a controversial plan to offer significant loans backed by its own stock it has recently issued to itself.  This has put at risk the value of its stock, the certificates of which are so highly regarded that they have long operated as a de facto currency throughout the world. 

The fund also operates at least two wholly-owned insurance subsidiaries.  One offers a homeowners policy which three years ago found its entire assets depleted because insurance agents wrote too many high risk policies at too low a cost and the company’s actuaries severely underestimated the financial risk of a single catastrophic, though long predicted, event.  The insurance entity went back to the fund’s Board for a one-time cash infusion that restored liquidity, which the Board approved, but which they mistakenly failed to make contingent on changes to underwriting policies that would protect the company from future catastrophic events. 

The other insurance company offers a form of reinsurance to the banking industry.  In spite of the fact that legislation mandates membership in the reinsurance pool, this entity finds itself with only $30 billion in assets while recent audits have warned of a looming $500 billion potential liability.

In the case of both insurance subsidiaries, each is protected by law from competition.  My investment fund’s leadership, apparently, is so inept that even when operating within a monopoly business environment it has so far been unable to avoid major losses with the companies it already operates, much less operate them at a profit.

As for the recently acquired company, while I opposed the acquisition, now that it is in our portfolio I’ve advocated for its responsible management.  Unfortunately, my fund’s Board has only been forthcoming with conflicting guidance.  It hired what it considered to be a top-notch management team to unravel the mess and provided the company with four generous cash advances, which, wisely or not, were given with little guidance.  After the fact, however, the Board has attempted to micro-manage relatively insignificant details while much larger issues go unresolved.  The recent and unprecedented renegotiation of contracts already paid has been the final straw for several top managers.  The very people brought in to right the mess are leaving the company possibly putting the company at risk of defaulting on an amount 2,000 times greater than the sum that precipitated the Board’s interference in an issue it had already once resolved. 

Clearly the leadership of my investment fund is not up to the task of managing complex financial entities, so I’m sure you’re wondering why I don’t sell my remaining shares and walk away.  That’s not so easy.  Among its member services (most of which are of dubious value) is one of those lifetime annuities that you get from your parents that offers cost-of-living adjusted returns in perpetuity past a certain age.  Unfortunately, the terms of the policy are constantly in flux, so I’m not currently able to accurately predict when those payouts might begin. 

Even more unfortunately, numerous analysts have long predicted that the fund is under-capitalized for the long term.  And since so many of the past analyses envisioning worst-case scenarios for the companies operated by my investment fund have been borne out, I’m highly skeptical that the fund will ever be able to meet significant portions of the annuity promises it has agreed to deliver.

Worse still is that the annuity requires a large annual service charge, which is due again to increase next year even as analysts are increasingly concerned about the fund’s long-term solvency.  Furthermore, walking away from my investment is not an option because of the fund’s significant punitive withdrawal penalties.

The only option, therefore, is the wholesale replacement of the investment fund’s Board of Directors.  If you should find yourself in the same investment fund–you’ll know by looking at your social security number; if the last digit is between zero and nine, you’re a fellow investor–I hope you’ll help.

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