Tuesday, October 28, 2008

The Skim Biz Takes A Hit

From my ultra-cynical perspective, the finance and banking business has always been just a giant skimming operation.

All bankers and financiers do is facilitate large transfers of money so they can skim off a piece of the action. The most palpable example may be the real estate agent. The idea that a $700,000 housing transaction is subject to a $35,000 facilitation fee is, of course, thoroughly disgusting, but also quite illustrative of the lucre involved in the skim biz.

Investment banking with its *underwriting fees* would also serve as a great example.

Anyway this is short post. All I wanted to discuss was *asset management*.

Consider that most asset managers skim a *percent of assets* off every year from investors that they use, ostensibly, to run their businesses. It could be .5%, 1%, 2%, or more. With equity markets down 40% YoY, it follows that - without even counting redemptions - the skim pool, at least on the equity side, will be approximately 40% lower for 2009.

Who does this affect?

Well, it affects all the analysts, portfolio managers, and support staff at firms like Fidelity, Putnam, State Street Bank, etc. - to at least name some large local employers.

How Happy would your New Year be if you had to make do with a 40% salary reduction?


Anonymous said...

One will never be happy with less ... of course I'd be willing to take the challenge of (sic) making $10 million this year and "only" $6 million next.

CaptiousNut said...

They won't cut top brass wages 40%.

No, they'll cut BS divisions and operational expenses. And they'll borrow against the future (perhaps from the gov't like State Street) to deny reality today.

They are too afraid to *lose talent* - even though no one else is hiring.

Oh yeah, they'll pass more fees on to their customers as well.

I figure the skim biz will need to see another lean year before they adjust pay scales in any meaningful way.

Anonymous said...

The best skim bizness is derivatives.

Derivatives (swaps) work by exchanging fixed to floating (or vis versa) at competitive market rates with the big NY banks. At NO cost to the customer! How? And, where does that big fee I earn come from?

Well, it works as follows: the exchange isn't really at the "market" rate. They take a spread as middlemen. Not a lot - but spread out over 10-30 years NPV, its sizeable.

Why take just a transaction skim for 1 year when you can take it upfront for the next 10-30 years?