Oh dear, Obama

There is no question that hubris, greed and a lack of perspective led to a financial crisis that is still being felt around the world. There is also no question that the banks that caused the disaster have gotten off relatively easy, while the average Joe is still struggling with the shockwaves. But is private equity really to blame?

President Obama’s statement is the first time the government has pointed to private equity funds as part of the problematic risk-taking associated with the global downturn. Are some of the symptoms of over-excitement and leverage consistent across the board? Sure. But did US banks need a bailout because a minority stake in a Chinese manufacturer went wrong? Not likely. In fact, recent reports have indicated that in the last year, private equity funds have achieved a 44% rise in returns, compared to a 27.9% increase in the MSCI World Return Index.

Even those in favor of a tight clamp-down on Wall Street were surprised. Lord Myners, London City minister,r said after the announcement, “The argument is that hedge funds, private equity and proprietary trading are a source of risk – that is not our general view… In the UK, the three activities, prop trading, private equity and hedge funds, were not responsible for RBS, HBOS or Northern Rock, who, on the whole, failed in the rather classic way of making bad loans.”

Banks have been quick to organize meetings and take stock of their individual positions in light of the cloudy announcement. It has been reported that Goldman Sachs – the bank most exposed in this capacity – may even sell or spin off its banking unit as protection against the proposed measures. The group has $14.1 billion in private equity and merchant banking assets on its balance sheet, part of a $145 billion portfolio of alternative assets across private equity, hedge funds and real estate.

A number of banks in the US contribute to private equity funds and/or have their own dedicated arms, and 16 banks operate fund of fund divisions worth about $94 billion, many with global mandates. In the case of the latter, LPs also stand to lose, a likely unintended consequence of a move some are calling “going back to the Dark Ages.”

If banks like JP Morgan, Bank of America Merrill Lynch or Morgan Stanley were forced to sell off their individual portfolios, it would be a long, difficult exercise, and would also be very costly for the US taxpayers Obama is trying to protect. From an industry perspective, it would eliminate some of the larger competitors in the market, but equally would have glaring effects on fundraising.

One can only hope that analysts are correct in their initial reactions and that the timing and the lack of detail are signs of a political move rather than an ambitious and controversial legislative proposal.

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• Topics
• Regulation
• Performance
• North America