Calls for government-owned sovereign wealth funds from the oil-rich Gulf states and cash-rich Asia to submit to a code of conduct that forces greater transparency on their dealings would carry more credibility if the investment banking and hedge fund communities were subjected to the same opprobrium.
Sovereign wealth funds, which control a treasure-chest of nearly $2900bn (€2034bn), are widely regarded as the new “reds under the bed”, who might one day use their stakeholdings for nefarious purposes. Even though Merrill Lynch, Morgan Stanley, Citigroup and UBS benefited from billions in bail-out money from sovereign wealth funds, one respected international journal portrayed these white knights as military-style invaders whose intentions might be benign today, but perhaps not tomorrow.
There is no evidence that sovereign wealth funds have abused their financial clout – or intend to. Indeed, the deputy chairman of Singapore’s Government Investment Corporation recently told the Financial Times that, after ploughing $16bn into UBS, the fund had declined an offer to nominate a board director. And acknowledging the threat of protectionist action, he promised greater transparency in the future.
China Investment Corporation (CIC), the Chinese sovereign wealth fund, is close to agreeing a deal with US private equity firm JC Flowers to put $4bn into a new fund to invest in troubled financial institutions. The indirect nature of CIC’s proposed investment is said to reflect its concerns about a political backlash.
Thankfully, others seem to have recognised that the controls being advocated for the goose are also good for the gander. Global regulators are reportedly looking at compelling banks that deal in complex and illiquid over-the-counter derivatives products to provide more information about them on public stock exchanges. The lack of transparency in instruments such as collateralised debt obligations and credit default swaps caused a rapid loss of confidence in debt markets and fuelled the credit crunch.
And in calling for more regulatory attention to alternative assets, the International Organisation of Pension Supervisors (IOPS) has issued a set of good practices relating to the risk management of such investments by pension funds. IOPS says the potential risks arising from funds’ increased investments in private equity, funds of hedge funds, infrastructure and microcredits “justify specific attention from supervisory authorities”.
Now that’s more like it. While this journalist would argue for full transparency in all financial dealings, it is surely more sensible to minister to fallen angels than to demonise the innocent. Tighten up the regulation of investment banks and hedge funds first and you’ll stand a better chance of winning over the sovereign wealth funds.
All carrot and no stick
When one reads about investment bank employees reaping huge bonuses and pay-offs even when they have contrived to lose money for their firms, one wonders why the system of carrot and stick that operates in the rest of the working world does not seem to apply to them. Of course, some lose their jobs when things go wrong, but others are shuffled into other departments where they enjoy new opportunities to make – and lose – more money.
Pension fund trustees might well ponder the wisdom of committing their precious assets to the care of organisations whose transaction-driven business model raises legitimate concerns about conflicts of interest.
At last year’s Fund Forum conference in Monaco, the consensus view was that investment banks, despite their greater experience in developing structured products, lacked the “fiduciary heritage” to compete successfully in the defined benefit pension fund arena. The ensuing subprime crisis showed that this supposed experience counted for nothing as the value of structured products was wiped out. If investment banks are so poor at protecting the value of their own complex creations, surely pension funds must doubt the ability of these institutions to cultivate a fiduciary mindset.
But investment banks are seen to hold a competitive advantage in the provision of cheap beta in the form of exchange-traded funds. This is the year to press home that advantage, as it might be some time before a moribund structured product market is revived.
Henry Smith, editor
henry.smith@ft.com
