Updated, Aug 21. See below.
“I read a private analyst’s note the other day that said: “Some people are partying like it is 1999.” And a successful fund manager volunteered over lunch: “Don’t tell anybody, but we are making money again. Lots of money.”
It’s an appalling article, but that isn’t the point here. The question now is: is this ‘productive’ money that the City is wallowing in again?
Well, perhaps a little of of it is. But now. Take a look, if you haven’t already, at this exploration of private equity and hedge funds, from the New Statesman. It’s an appalling story of unproductive wealth extraction. I was horrified to learn some of this during my research, and I remain horrified by just how bad it is.
Complementing this, I’ve now just listened to an excellent BBC programme, which I hope readers can take the time to listen to. The BBC presents it like this:
David Grossman investigates the ways that savers, investors and consumers pay for the City, beginning with a look at investment management.
The end results are the same as in the private equity and hedge fund industries: legions of insiders creaming fee after hidden fee from their poor unsuspecting end users. I don’t have time to do justice to this programme – do listen to it – but here are a couple of choice snippets.
First, a chart from the True and Fair Calculator, launched in May, designed to help ordinary consumers of financial products to understand the actual fees they are being charged, rather than the fees that are advertised to them. It was set up by Gina and Alan Miller, who worked in investment management for nearly 30 years. You can do this yourself: go there, put in, say, a fund that you or a friend might have an investment in, and see the results. Here’s the first graph I made from this, which I obtained simply by putting in “Barclays” into the search field and taking the first fund that came up, and putting in a 30 year investment period.
Just look at that. The grey (£11,000-odd) is your initial investment. The green (£10,000-odd) is the return to you. And the red (£29,000-odd) is what those nice Barclays folk take out of this. Three times what you earn.
That is truly monstrous. Not quite as monstrous, perhaps, as some of those statistics I found for the New Statesman article, but still.
Update: in another part of this series, the reporter looks at financial derivatives, and the sad case of clients sold swaps that they had no clue about. One such unlucky punter, Des O’Malley, recalled that when he quizzed the Royal Bank of Scotland about a devious little pup it had sold him, a supposed ‘hedge’ that ended up sucking a quarter of a million pounds out of his small business, the bank referred him via a link to a Wikipedia page describing the Black-Scholes options pricing model – presumably this page. The BBC presenter describes this as ‘an explosion in an algebra factory.’ O’Malley had no hope, of course.
The programme also quoted Martin Berkeley, a consultant with a firm called Vedanta Hedging, which advises clients who have been badly treated. He used to work for banks that sold this stuff, and he said one of them used to keep tabs on which clients were clued up:
“One of the banks I worked at, on their client database, they had in big letters written ‘client has screens’ meaning the client actually knows what the markets are doing: these tricks couldn’t be played on them.”
Another complete monstrosity. In fact, an investigation by the Financial Services Industry found that over 90 percent of the products the examined had not complied with regulatory requirements.And then there’s high-frequency trading, skewered in the programme by Professor John Kay:
“High Frequency Trading is plainly ridiculous and the world would be better off without it.”
The bulk of all this gentlemanly nonsense (to use the kindest possible word) really is wealth, or rent, extraction, not productive activity. How do I know this? Well, for starters, basic stock market returns are likely to substantially outperform these monkeys. Chuck your investment into a basic index ETF, and watch it grow much faster. The gentlemen at Barclays are providing what is known as Beta (or perhaps gamma) in the trade, not Alpha. These are returns that have nothing to do with their brilliance, and everything to do with all markets just generally going upwards over time. Second, though, some more specific and startling data, provided by the True and Fair Campaign. Here are a couple of peaches:
- Lipper research finding[s] that among funds that had changed their fees (up or down) between 2001 and 2011, 80% had raised them.
- 68% of money invested in active funds within the UK largest retail fund sector charged an identical Annual Management Fee.
Unbelievable. This is a gentlemanly racket, make no mistake. This is Wongaland. Professor John Kay, also quoted in that BBC programme:
Everything that anyone in the City earns is ultimately money that is made by someone in the non-financial economy: either you and me as savers, that we work for, or that produce the goods and services that we buy. In a sense you could think of this as a tax, some of it a necessary tax, some of it an unnecessary tax, on what we call the real economy.
They are making money again in the City of London: of that you can be sure.
But is this good for anyone else? Absolutely not. The City outgrew its useful functions long ago, and is now serving as a hefty and quite unnecessary tax on the economy. As the BBC presenter editorialises:
“If the shipping industry had developed in the same way as finance, we would see hundreds, thousands of ships, each constantly unloading, loading cargo between themselves, to no-one’s obvious benefit except for tens of thousands of dockers earning fabulous fees: fees earned by and extracted from you and me.”
A fine analogy.
A Finance Curse, anyone?