Worries Grow That Asset Managers Could Trigger Next Financial Crisis

Thursday, 07 Aug 2014 09:18 PM

By Dan Weil

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Asset managers have grown to the point that they may spark the next financial crisis, experts say.

The concern is that multiple asset managers might make an identical mistake, leading a number of them to sell the same asset class at once, as occurred with mortgage securities in 2008, according to The Economist.

Problems could arise with exchange-traded funds, which now control $2.45 trillion of assets, or with bonds, which are less liquid and trade in a more decentralized manner than stocks.

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

"Corporate bond funds are popular at the moment, thanks to the extra yield they offer in a world where cash pays next to nothing," The Economist states.

"But it is easy to imagine a scenario in which prices start to fall, prompting redemptions by clients, leaving asset managers to sell into an illiquid market. . . . Prices could plunge, forcing the corporate bond market to close."

Regulators face a conundrum, according to the publication. Asset managers may well be the next source of trouble, but it's hard to crack down a sector that hasn't yet caused any problems.

Meanwhile the bevy of regulations imposed on banks since the 2008 financial crisis has weakened them to the point that another banking crisis is inevitable, says private equity star J. Christopher Flowers, CEO of J.C. Flowers.

"All the stuff that has happened, and all the rules we’ve introduced have depressed profitability. And that is a real vulnerability," he tells the Financial Times. "Nobody is going to invest in an industry with returns of 5 percent."

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

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