The world economy will not be able to avoid further credit crunches and liquidity crises in the future until the regulation of the investment banking improves, according to the chief investment officer of a fund manager.
“The source of the credit blow ups have been the same for the last 15 years at least and that’s US investment banks,” Platypus Asset Management chief investment officer Donald Williams said.
He attributes the problem to the way investment banks are run which he feels is mainly for the benefit of their employees and not their shareholders.
“I couldn’t think of a worse long-term investment than a US investment bank,” Williams said.
“The more they can leverage the more they [the employees] get paid and until they fix the cause of the problem it will continue.
“It’s a regulation issue more than a market issue.”
Furthermore the required bail out of investment banks like Bear Sterns by the US Federal Reserve may only exacerbate the problem in the future as the risk consequences will continue to build up, Vianova Asset Management chief investment officer Michael Schneider said.
“I think Warren Buffet said if you bail out Bear Sterns at a leverage rate of 40 per cent then when you go into an interview you’ll say ‘Well at 40 [per cent] I know if I’m big enough I’ll get bailed out,” he said.
“So risk appetite may increase because there’s an asymmetry around the consequences,” Schneider concluded.
