It is possible, to put it no higher, that the tidal wave of investment into Western banks from sovereign wealth funds (SWFs) could prove a serious mistake. Leave aside the immediate specifics of the debt crisis, as the SWFs insist that they are in for the long term. But might the supercharged banking model have finally run out of road?
The supercharging is not in doubt. McKinsey estimates that in 2006, profits per employee in banking were a staggering 26 times higher than the average of all other industries worldwide. McKinsey takes this as a bull point. Others may differ.
But this is not a topic with easy answers. So let us lay out the arguments, starting with the prosecution case.
One risk for the investment banks - the main recipients of SWF largesse - is that the tide may have turned against securitisation. The banks' model of originating and distributing debt, certainly, is under close scrutiny, not least by regulators.
For an example of the harm this might cause, take complex derivatives. These represent a package of risks, which the banks insure individually in the markets. They are also opaque, so the banks can sell them to clients for much more than the insurance cost.
The head of Deutsche Bank called last week for the pricing of these instruments to be more transparent, presumably on the grounds that bruised investors will otherwise reject them. But with that, bang goes the profit....MORE
