It's amazing how bankers and others don't learn from history. The stock market's had an unprecedented boom for almost a decade, which everyone knows, and most people--including many bankers--had come to believe it would go on forever.
Even those who thought they didn't believe the impossible, in their hearts and in their actions, they did. That's what led them to invest heavily in asset management businesses. And despite the severe market declines at the end of 2000, many remain pretty convinced that asset management is where it's at.
Not very surprising. Asset management seems like a fairly risk-free and low-cost business on a continuing basis. But in recent years, that's not been particularly true. Because of the frenzy to get into the business, it has become extremely costly to buy fund managers or attract top-notch advisers.
To the extent that such investments were made, they represent risk. Will the investor (in this case, the bank) get its money's worth?
Key to the business is constant growth. Experience of the past decade has lured most people, bankers among them, into thinking that wealth will continue to grow forever at a rapid pace.
Such thinking is not warranted by history. Wealth cannot grow indefinitely at more than 20% a year. In fact, it stalled in 2000. At the time of this writing, in mid-December, the Dow Jones Industrial Average and the Standard & Poor's 500 had barely moved during the year, and poor Nasdaq was down about 30%.
And there's nothing to assure that conditions won't deteriorate this year. The declines in high-flying technology stocks could rattle a lot of people and discourage them from putting more money into the market. On top of that, there's a lot of talk about the economy moving into a recession.
In this sort of atmosphere, many people may start looking for safe havens. Banks may profit from that, as more money will move into FDIC-insured accounts. We're seeing the start of that already. Merrill Lynch & Co., the giant brokerage, already has amassed more than $80 billion in federally insured accounts in banks that it owns.
If investors in bank stocks lower their earnings-growth targets, things may work out okay for banks that have plunged into asset management. But if the market continues to demand rapid earnings growth, banks that have invested heavily in asset management could be hurt. Outflows of funds would mean declining profits for their sponsors and marketers, and stocks that had been the darlings of analysts could quickly fall out of bed. Anyone who studies history shouldn't be surprised about that.
A story in this issue of U.S. Banker shows that some banks already are thinking about getting out of managing mutual fund companies.
We expect others that have focused strongly on asset management may come to similar conclusions.