But the comparison ends there. Far from staring into the abyss with “suicidal” losses, well-heeled bankers and traders will simply climb from the wreckage, dust off their expensively tailored suits and move on to make a fresh killing on the latest sure-fire financial wheeze. A sense that the next feeding frenzy is just around the corner was heightened when Josef Ackermann, chairman of Deutsche’s management board told the Financial Times that the group saw “substantial opportunities in investment banking after this period of correction”.
That period is already passing as the market’s capacity to forgive and forget has resulted in a welcome change of fortune for the big investment banks. Witness how the revelations of balance sheet pains were swiftly rewarded by boosts in stock market value. Shares in Deutsche, Merrill, UBS, Credit Suisse, Morgan Stanley, Bear Stearns and Lehman Brothers all rose significantly as investors took comfort from the mere clarification of losses.
Certainly, CEOs were humbled and heads rolled. Merrill Lynch parted company with its London-based head of fixed-income trading, Osman Semerci, while CEO Stanley O’Neal admitted his bank could do a better job in managing structured finance and mortgage risk. Citi’s chief executive, Chuck Prince, was called on to resign when the bank lost its footing after dancing for too long in the leveraged loan arena. And it was reported that UBS and Citi would use the subprime fallout as an opportunity to cut staff numbers. Journalists have asked what lessons can be learned from this subprime mortgage crisis.
Those involved make the right noises about tightening up their risk management practices and using leverage more judiciously in future. But memories are short and as a ruthlessly competitive investment banking world converges with the asset management arena, fees and bonuses will remain the chief consideration.
The fiduciary question
The trend towards fiduciary management, whereby an asset manager strikes a deal with a pension scheme to provide risk budgeting advice, benchmarking and manager selection should, in theory, boost opportunities for external managers to win investment mandates. But does it in practice?
Jon Little, vice chairman of BNY Mellon Asset Management, is not so sure. In an interview in this issue, he claims fiduciary managers are hindering his chances of winning mandates in the Netherlands: “The danger is that some asset managers will become the fiduciary manager of a pension fund and then declare themselves to be the best at managing everything in that fund.”
F&C Investments recently launched a fiduciary management service for Dutch pension funds which, it says, allows clients to build a portfolio made up of third-party managers. Of course, it hopes clients will choose some of its own investment strategies too.
Paul Niven, head of asset allocation, admits that, on account of charging lower management fees for in-house funds, F&C might enjoy a “head start” over its external rivals. But he argues that if a third-party manager is charging a higher fee but also generating better performance, the client would be inclined to pick that option.
But turkeys don’t vote for Christmas, so why would F&C, with an established book of balanced mandates in the Netherlands, decide to open its doors to external managers?
To remain competitive is the answer. The worst thing you can do as a balanced manager, says Mr Niven, is to try to protect a part of your investment portfolio that is underperforming. If you do, your credibility and business will suffer. Pension funds are well aware by now that no manager has the best products in every asset class. And if fiduciary managers want to retain credibility, external managers will have to be given a fair crack of the whip.
Correction
An article published in the September issue entitled “Opportunities open up for hedge funds after credit crunch” incorrectly suggested that a quote regarding the liquidity crisis attributed to Babson Capital’s Howard Hill was a reference to current events in the market. In fact, his remark referred to the LTCM liquidity crisis in 1998. We regret the error and any confusion that may have been caused.
Henry Smith, editor
henry.smith@ft.com
