From Stalking Swans to Starting a Firm

Wall Street analyst Ken Posner, who once tracked finance companies, has turned to a startup to validate his ideas on real deals

June 18, 2010

Ken Posner, best known for his work as a Morgan Stanley analyst who tracked various consumer finance companies as well as Fannie Mae and Freddie Mac, has teamed up with a group of banking professionals who have started a firm that will invest in financial ­institutions.

That startup, known as North American Financial Holdings, is based in Charlotte, N.C., but Posner will be based in the firm’s New York offices. The chief executive and chairman of the newly created business is Gene Taylor, former vice chairman of Bank of America.

“I am part of a small company that raised money to invest in the financial services industry,” Posner told IDD this week in a telephone interview.

He said the firm got the proper licenses from regulators to invest in the financial services industry.

Posner said the firm raised money through a private placement. He did not offer details about who the institutional investors were, but a press release  from Crestview Partners, a private-equity investment firm with $4 billion under management, identifies Crestview as one of the backers.

The startup has a bank “shelf charter” so it can — in theory — buy a bank. It has not, to date, made any investments.

In December, North American raised $550 million in a 144A private placement.

“I wanted to validate my skill set on real transactions,” said Posner who worked at Morgan Stanley for 15 years. He left the firm in 2008. “I thought it was time for change of pace.”

Posner added that if “you do the same thing for a long time you get very good in that same thing, but you may miss some of the bigger picture. I thought it would be interesting to take a break from research and see if the skills I developed as an analyst were, in fact, transferrable to the real investment world of putting money to work.”

The 46-year-old, who graduated from Yale University and received an MBA from the University of Chicago, has also recently completed a book entitled “Stalking The Black Swan” (Columbia Business School Publishing).

Posner, who grew up in Chicago, is the son of Richard Posner, chief judge of the United States Court of Appeals for the Seventh Circuit in Chicago. The younger Posner said he didn’t consider following in his father’s footsteps.

“I took one look at the LSATs and said 'Gosh, this is hard.’ ”

After he completed his studies at Yale, Posner served in the U.S. Army; he was an officer and credits his service for giving him management skills.

In “Stalking The Black Swan,” Posner examines his own record as an analyst — he says he gives himself a C-plus — and considers some of the tripwires that felled many Wall Street analysts.

One of those tripwires, he said, is the fact that a professional tracking a publicly traded business can be so in tune with a the company and understand its inner workings that he or she fails to notice broader macroeconomic trends.

Asked if he may have been too narrow in his thinking as a Wall Street analyst, Posner admitted: “definitely.”

“There is a tradeoff,” he said. “The deeper you dig, the more information you have about the question at hand. But the deeper you dig, the less information you have about everything else.”

Posner said that he was tripped up by assumptions tied to securitization.

“One of the mistakes I made was I put too much weight on financial innovation as a technology for dispersing risk,” he said.

“My hypothesis was that the securitization markets would respond to deteriorating subprime mortgage quality through wider spreads. I didn’t think they would shut down.”

Narrow thinking, he added, likely was what surprised Wall Street in 2007 — at that point the subprime mortgage problems were not viewed as a major issue. This was an opinion echoed by central banks and senior managers of leading Wall Street firms.

“As the world grows and gets bigger and more complicated we become more specialized. Everybody made that mistake” ahead of the crisis, he said, noting that a few like hedge fund investor John Paulson were among those who recognized that the credit problems were deeper early on.

“Everybody was using the same kinds of quant models that had very strong powers of discrimination among mortgages,” Posner said. “The models were not really built on the underlying causal drivers of the credit cycle. People were excessively focused on the micro and they missed the macro.”

Asked if Europe’s debt crisis is the next Black Swan to catch Wall Street unaware, Posner said “it is definitely a surprise to people how Greece could spark such a rapid, sudden revaluation of the euro.”

He adds that the best arbiter of whether investors are worried about Europe’s debt problems is the VIX index. (This week the index was at a reading of 31 and in recent weeks it has been at 36.)

“When its above 30, I may not have the right answer about what is going on but the markets are very concerned. That elevated VIX index indicates we may be in the middle of another Black Swan,” Posner said.

“You don’t know for sure until its too late. When the market is this upset an individual investor should be very careful about assuming that they know the long-term future for a company or an industry,” he added. “They ought to be more short-term focused or cautious.”