DEMAND DUE DILIGENCE

“As I pointed out in my memo, what does the market know in 2016, in real life, things fluctuate between pretty good and not so hot. But in investors' minds, they go from flawless to hopeless. We saw a very strong reaction in this case, Notably, the stock prices of some prominent alternative asset managers were down five to 7% on October 16, close on the heels of the regional bank's disclosures.”

“It's important to note that whereas private credit has been the rage of late, all else being equal, it's great to hold public debt that can be exited more readily if you sour on the credit. We've lived through generally good times in the last sixteen years. The coming period is likely to be more interesting as errors that were made in those good times come to light.”

“Importantly, Oaktree's span and scale provided multiple points of contact with first brands through a number of our strategies, helping us to assemble the necessary mosaic. Further, a thorough job of credit research costs the same whether you're considering investing 50,000,000 or $500,000,000. Greater scale allows an investor to spread the cost of in-depth research over larger holdings. In investing, size has both pros and cons, but here, we're talking about one of the former.”

“The overconfidence, in caution, and inattentiveness that lead to unwise investments in good times also present the perfect conditions for fraudulent schemes. Risk tolerance, FOMO, fear of missing out, inadequate due diligence, and fevered buying provide fertile soil for financial scams. In heady times, rather than say, that's too good to be true, people are more likely to ask, how can I get in on that? The markets aren't crooked per se, but they're full of money, and, thus, they tend to attract crooks.”

“I don't think today's issues are systemic in the sense that there's something wrong with the lending system or that they will trigger other defaults and lead to a breakdown of the system. In simpler words, there's nothing wrong with the plumbing. But imprudent loans and business frauds often occur in clusters for the simple reason that people who make investments and loans are highly prone to error in good times. Investors and lenders are supposed to be risk averse and thus exercise discipline and vigilance, but sometimes they fail in this regard. This isn't part of the plumbing of the financial system, but rather a regularly recurring behavioral phenomenon. So it isn't systemic, but it is systematic.”

“This is summed up most concisely in a great banking adage. The worst of loans are made in the best of times. A good bezel. Charlie Munger and I used to enjoy talking about the economist, John Kenneth Galbraith. Galbraith was the source of many of my favorite expressions with regard to the financial markets.”

“But even in advance of First Brand's bankruptcy filing in late September, Oaktree's research turned up the following red flags, only six years of operating history, but already $5,000,000,000 of annual sales, controlled by an individual with almost no media references or online profile, a significant litigation history, including allegations of misconduct, reported profit margins above the industry average, a large number of m and a transactions creating a web of corporate entities, other aspects of weak controls.”

“In detecting credit defects, the big payoff is for being early. If you reach a negative conclusion at the same time as everyone else, the price you'll get for your holdings is likely to be marked down to fully reflect the negatives. That's market efficiency.”