Jeremy Grantham likes to quote Paul Volcker’s observation that the only truly useful financial innovation in the past 20 years is the cash machine. The rest, says Mr Grantham, was only of benefit to the guys who came up with it, and who paid the price when it all went wrong? “We did.”
Mr Grantham, founder and chief strategist at GMO, the Boston-based institutional fund manager, is uncomplimentary about his industry. The bankers, and former Federal Reserve chairman Alan Greenspan, are the main villains of the piece, but the investment industry is not blameless. He made this clear in his last quarterly letter, published in January, and revisits the topic when we meet in late March.
The business is a zero-sum game, he points out, and “we collectively add nothing but costs”. Costs have grown because there is no fee competition, due to the agency problem and the information advantage the agent has over the client. Growing complexity has increased the client’s dependence on the industry.
The increase in fees has been at the expense of long-term growth. “If we raise our fees from 0.5 per cent to 1 per cent, we actually raid the balance sheet. We take 0.5 per cent from what would have been savings and investment and turn it into income and GDP. In other words, you’re taking money that would have become capital and chewing it up as bankers’ bonuses.”
Complete reading the story at FT.Com. ad watch the FT.com interview with Grantham following this link.
Mr Grantham, founder and chief strategist at GMO, the Boston-based institutional fund manager, is uncomplimentary about his industry. The bankers, and former Federal Reserve chairman Alan Greenspan, are the main villains of the piece, but the investment industry is not blameless. He made this clear in his last quarterly letter, published in January, and revisits the topic when we meet in late March.
The business is a zero-sum game, he points out, and “we collectively add nothing but costs”. Costs have grown because there is no fee competition, due to the agency problem and the information advantage the agent has over the client. Growing complexity has increased the client’s dependence on the industry.
The increase in fees has been at the expense of long-term growth. “If we raise our fees from 0.5 per cent to 1 per cent, we actually raid the balance sheet. We take 0.5 per cent from what would have been savings and investment and turn it into income and GDP. In other words, you’re taking money that would have become capital and chewing it up as bankers’ bonuses.”
Complete reading the story at FT.Com. ad watch the FT.com interview with Grantham following this link.
