Since he arrived in 2004, Mr Dimon has often been disappointed with the investment bank’s performance. And JPMorgan’s chief executive has been characteristically unbuttoned in sharing that disappointment in public.

But JPMorgan’s fourth-quarter figures next week are expected to confirm that it has steered through the credit market turmoil much better than some of its rivals.

The figures will not be pretty, with analysts expecting heavy credit-related writedowns. But JPMorgan will have suffered much less damage than rivals such as Citigroup, Merrill Lynch, Lehmand Brothers, UBS & Morgan Stanley.

Bill Winters, co-chief executive of JPMorgan’s investment bank, says that is down to judgment, not luck. The bank did not have big exposures in the worst-hit areas “because we chose not to”.

For example, JPMorgan gave a pass to structured investment vehicles, the off-balance-sheet funds that have proved such a headache for rival Citigroup.

In 2003, when JPMorgan acquired Bank One, the Chicago-based bank run by Mr Dimon, it inherited a London-based SIV.

“We looked at it. We tried to work out why it was a good idea and couldn’t,” Mr Winters says. So in 2005, JPMorgan sold it to Standard Chartered, which is now being forced to unwind it.

JPMorgan’s relatively good performance during the credit squeeze has surprised many observers who presumed it would live up to its accident-prone reputation.

But Mr Winters, and his co-chief executive at the investment bank, Steve Black, say it has learnt from those past accidents.

The most important single choice JPMorgan made was not to be big in the business of selling collateralised debt obligations based on residential mortgage securities.

It would have been a natural thing for JPMorgan to do. One of the pioneers of structured credit in the 1990s, JPMorgan is a leader in parts of the CDO business. But in the mortgage-backed side, it was second division.

“We saw other firms doing massive business and we put pressure on our people to figure out where we were going wrong,” Mr Winters says.

“We ran the numbers every way we could. But when you factored in the riskiness of what you have to hold, we couldn’t figure out how you would make any money.”

Other banks, such as Citigroup and Merrill, have suffered billions of dollars of losses on the senior tranches of CDOs they retained.

The generous yield provided by those tranches suggested they were much riskier than widely assumed. And so it proved.

Mr Winters says JPMorgan’s experience securitising corporate loans in the late 1990s underlined the danger of such assumptions.

The group later discovered the risks of holding too much of anything when Chase’s exposure to telecoms start-ups cost it dearly when the tech bubble burst.

Those losses, together with the costs of the group’s involvement with Enron and WorldCom, seriously hampered efforts to create a top-tier investment bank from the merger of Chase Manhattan and JPMorgan in 2000.

The banks lost talent after the bubble burst, then again in 2004 when heavy litigation payments slashed the bonus pool. Learning another lesson, the investment bank is expected to pay healthy bonuses for last year, in spite of the downturn.

Mr Winters, a JPMorgan veteran, and Mr Black, who had joined from Citibank shortly before the merger, were made co-chief executives in 2004. They have since changed most of the senior management on the markets side, overhauled the trading businesses in an attempt to reduce volatility and improve productivity, and invested in areas where the bank was weak.

These included commodities trading – which JPMorgan had exited in 1997 – and equities, where neither bank had been strong.

“We have built out most of the gaps we had. Right now, we are a top-three player across every asset class across the globe,” says Mr Black.

JPMorgan’s trading business lagged behind many of its rivals during the boom, which ended last summer, partly because value at risk was kept flat.

This was not because Mr Dimon does not like risk-taking, which Mr Winters insists is a myth, but because he wanted to concentrate on improving productivity of risk capital.

JPMorgan can claim to be the world’s leading corporate finance bank, generating investment banking revenue of $6bn last year, according to Dealogic, ahead of Goldman Sachs, Citi and Morgan Stanley.

Like other Wall Street banks it has been investing heavily outside the US. It remains underweight in Asia, where it generated 13 per cent of its revenue in the first nine months of 2007, though Mr Winters says it is “closing the gap quickly”.

But it is very strong in Europe and the Middle East, which accounted for 40 per cent of its revenue.

Its position in Europe has been bolstered by the tie-up with Cazenove in London in 2004, which has been much more successful than many sceptics predicted.

Mr Winters, who spent a long time courting Cazenove, was always confident but says “it worked a little better than we hoped”.

Mr Winters and Mr Black argue that the investment bank is well-placed to thrive in these more challenging times. It has an enviable client list, a strong brand, and thanks to Mr Dimon’s pursuit of a “fortress balance sheet”, it is part of a very well capitalised group. Some of its rivals are not in such a happy position.

Source: Guardian

Almost a year after surprising everybody by retiring from the firm he founded and which made his name, Sir Ronald Cohen is finally moving out of his office at Apax Partners. “It’s just not big enough,” he says of the huge corner room filled with pictures of the great and the good, and a desk the size of a small bus.

The panelled office may be large enough for a sizeable modern art collection but it is far too small to contain the ambitions of one of the pioneers of the British venture capital industry. “It’s been a hugely intensive year,” he says in a rare interview. “I left [Apax] in order to devote my efforts to social investment, among other things.”

The “other things” include an effort to help the Middle East crisis by funding Palestinian businesses, an attempt to “work out where the investment management business is going”, and a book aimed at helping entrepreneurs avoid common pitfalls. Worth some £250m, he is a major Labour donor. And next week he is set to announce the results of an official review into the £5bn left unclaimed in British bank accounts.

The scope of his activities and flashes of hubris make it easy to be cynical about Cohen in a very English sort of way. Someone who knows him quite well said: “I got a letter from Ronnie when he left Apax announcing that he was going to address the financial problems of the Middle East. A noble and somewhat wide-ranging task.”

Yet it is hard not to be impressed by the “lofty ideals” of a man who came to Britain as an 11-year-old with almost no English and a sense that he wanted to restore his family fortunes and improve the world. After grammar school, he won a place at Oxford, where he was elected president of the Union. He thought of going into politics, only changing his mind at Harvard Business School. “I discovered venture capitalism and saw the progress of some of my colleagues [such as William Waldegrave and Douglas Hogg] in the Thatcher government. I decided politics might not be as exciting as the VC industry.”

He has travelled a lot in the past year and works 12-hour days. “I left Apax with a sense of excitement,” he says in an accent that shows traces of his birth in Egypt 60 years ago. “It was a little like the locomotive being unhitched from the wagons. Instead of being concerned about the minutiae of managing a very large group, I’ve been able to travel the world, think deeply about things and push a number of different initiatives, here and in the Middle East.”

But, he admits, “I’ve failed to spend a lot more time with my family.” Cohen married his third wife, the film producer Sharon Harel-Cohen, 20 years ago and the couple have two teenage children.

Described as ruthless as well as “spectacularly smooth” by one pretty smooth private financier, talking to Cohen is a bit like having a dinner party conversation with a professor, full of thoughtful insights about the world, if not personally very revealing.

Overpaying

His successors at the powerful private equity firms should take heed, however. Among his concerns are the historically high levels of debt being taken on by the industry because of a combination of low interest rates, a benign economy and the large sums of cash invested in buyout funds. “People are overpaying [for businesses] because they are including a lot of leverage,” he says.

Is an industry involved in the UK’s biggest takeovers acting irresponsibly? “I don’t think responsibility is the word I’d use … I’m sounding a note of caution rather than ringing an alarmist bell.”

An “advocate” for venture capital – he calls it entrepreneurship’s “double helix” – he suggests the industry is adapting to its increasingly mainstream role. “The industry can no longer say, ‘I want to ply my trade in private’.”

Under his aegis, Apax invested in start-ups including PPL Therapeutical, which cloned Dolly the sheep, and the computing group Autonomy, as well as the Virgin Radio and Waterstone’s book chain buyouts.

Few have done so much to establish private equity as Cohen, who throws fabulous parties at his homes in Notting Hill, Manhattan and Cannes. Jon Moulton, another founder, says: “People either like him or hate him. But at the very least you have to say that he was the most effective chairman of the British Venture Capital Association.”

When Cohen and three friends set up Apax in 1971, he was just 26 and private financiers were regarded as risk-taking corporate raiders. While vestiges of this reputation remain, private equity – used to buy struggling firms as well as provide seed-financing for new ones – now attracts hundreds of millions in pension fund and other institutional money. As Cohen says: “It has moved from the periphery to the mainstream.”

Cohen now wants to do the same for social investment, funding businesses in some of the poorest parts of Britain. After heading a government task force, he co-founded Bridges Community Ventures in 2002, which raised its second investment fund of £33m two weeks ago.

Similar schemes have disappointed those hoping that hundreds of millions would be pumped into the sector, helped by tax incentives. Yet Cohen, who has put £2m into Bridges, calls it “an innovator in the area of social return”. The fund aims to make an average return of 10%-15% – about half that of its private-equity peers.

“A whole sea change is beginning to start where the values that existed in business are being transported to social activity,” he says. “You can’t expect substantial capital to go into an area unless the returns can be measured.”

He has used the same philosophy to attract investment to the West Bank and Gaza. The Portland Trust, which he calls an “action tank”, has raised eyebrows for many reasons – not least that such a prominent Jewish businessman is behind it. “My interest in the Middle East stems from the fact that I was born in Egypt, am Jewish and am married to an Israeli. I can understand both sides of this conflict. I believe the economic dimension is crucial to keep the peace, just as it was in Northern Ireland.”

Emissary

The trust has allowed European and US agencies to continue to invest in the area despite the election of Hamas. He has reportedly started to take over the role of government emissary from Lord Levy by meeting Israeli leaders, including the prime minister, Ehud Olmert.

He is circumspect on the subject of the Middle East, citing political tensions, and even more reticent about his “investment management”, which he is said to be involved in with some very rich families but refuses to discuss.

His friendships have been crucial to winning backing. Friends said to have attended parties at his London mansion, with its reportedly “colossal” underground swimming pool, include the Rothschilds, Sir David Frost, Lord Browne of BP and the Rausing tycoons.

David Freud, a former banker who is now chief executive of the trust, says: “He is clearly one of the great networkers of our time. And I’ve met a few.”

Colleagues say Cohen treated Apax like a family. “It was an extension of him,” said one. Hugely supportive, he demands loyalty in return. He told one turncoat: “If you catch a provincial train, you’ll end up in a provincial town.”

Why did he leave Apax? It needed a “clear handover of leadership to a new generation,” he says. “I also had the feeling that I was not destined just to be a private-equity investor. I thought there were other things I could do.”

Cohen believes the current wave of philanthropy is the product of an entrepreneurial age. “We are finding a generation of entrepreneurs who started from nothing – Bill Gates is the latest example – saying that they want to give something back. It’s what’s motivated me. There are huge opportunities to be successful now and if you come from humble beginnings you tend to want to do the same for others.”

A Liberal in his youth – he stood in two elections in the 1970s – he changed allegiance in 1996. “I believe in the realignment of the left, getting the Labour and Liberal parties to face the same way,” he says. “Then I met Tony Blair and I thought, ‘this bloke is trying to do exactly what I believe in.’ Labour has managed to establish itself as a centrist party, devoid of ideology but with a philosophy that encompasses taking care of people who do less well.”

Now more aligned with Gordon Brown, whose aides sing Cohen’s praises, he says David Cameron has a “great challenge ahead of him”.

One of the many donors to have given more than £1m to Labour since 1997 who have received a title (for services to the venture capital industry), I ask whether a recent trip to parliament was at all linked to the cash-for-honours inquiry.

It wasn’t. He was chatting to Jack Straw. “I think my credentials are well enough established to be beyond doubt,” he says. And I have to confess that he is probably right.

Cohen on Cohen

What advice would you give a budding entrepreneur?
You can’t learn to swim by doing exercises on the beach

What motivates you
I am a 1960s kid and I suppose I’ve been motivated by lofty ideals, doing something meaningful, making a positive impact on society – not just making money, although I needed to do that

Who do you most admire?
Great leaders: Mandela, Churchill, Sadat

What is your greatest strength?
My wife. And my greatest achievement is making a success of my third marriage

And weakness?
Chocolate

http://www.guardian.co.uk/business/2006/jul/07/1 

The events that followed though, have admittedly left me high and dry. Adrenaline fuelled trading in the first week of the new year was replaced by an acutely bearish sentiment on the major stock exchanges. As I write this post (yes, there is nothing more blissful on a Friday evening!) news comes in of the Nikkei falling to its lowest close in 17 months after a strong yen and record-high oil prices worried investors. Recession fears in the US have also weighed negatively on the main European stock markets. 

SO WHAT’S THE OUTLOOK? 

Leaving that diversion aside, I thought it might be useful to put up a piece looking at European ECM performance since markets were struck by the credit crunch, along with a tentative view on the outlook for 2008.  Popular belief in the wake of the sub-prime crisis was that a shock to the previously dirt-cheap supply of credit would adversely affect the ability of corporates and financial sponsors to pump capital in to businesses. This in turn would force them to downgrade profits forecasts, and would ultimately put a dampener on stocks due to deterioration in investor confidence. Equity issuance was expected to go off the cliff. 

However, the following factors have helped to allay some of these concerns and contribute to my mildly optimistic view for 2008 (I dare not be overwhelmingly bullish now) 

1) Increase in follow-on offering

Indeed, the months of August and early September witnessed nothing more than doom and gloom in equity markets. IPO issuance in Europe tanked in the turbulence of early September, as market uncertainty prompted a wait and see approach.

Interestingly though, the overall ECM new issue market remained robust during this period. This was because the fall-off in IPOs was offset by a significant pickup in follow-on offerings. In fact, year to date follow-ons as at end of September had accounted for more than half of all equity issuance in the EMEA region.  

2) Demand for emerging market equity

With global growth being driven by the BRIC economies, investors’ demand for emerging market equity issuance continues. In EMEA emerging market issuance increased c.70% YoY by the end of Q3. A similar trend was observed in the Americas and Asia, where volumes were driven by Latin America (c.130% YoY) and China (c.240% YoY) respectively.  

Whilst the CIS continued to be a crucial source of supply, it is notable that volumes in the Middle East and Africa also increased considerably (up 30% YTD as at end of September 2007). 

3) Sponsor exits and defensive sectors

Defensive sectors such as utilities, energy and telecoms increased their share in secondary market issuance. And while sponsors continue to contribute a relatively smaller portion of total issuance (c. 10% of total issuance and c.20% of IPOs), I would still expect equity markets to be a relatively more attractive source of liquidity for them as secondary exits and recapitalisation routes dry up. 

Even IPO activity seemed to have revived to some extent in Q4, with most of the activity again originating from traditionally defensive sectors. Equity stories with demonstrable and differentiated growth should continue to attract interest.  

4) Demand for equity-linked convertibles

Activity from equity-linked convertibles (currently a punitive c.10% of issuance in the EMEA region vs. c.30% in the Americas) should also increase as the investor base for these securities has been relatively less affected by the recent apathy in markets.  

Moreover, while widening credit spreads would have made convertibles dearer, this pricing effect should be more than off-set by volatility in equities, allowing investors to secure attractive terms.  

Alright then. I’ve laid out my stall and have tried to explain reasons for my view to the best of my ability. Will be interesting to receive opinions contrary to this – even if it spells more embarrassment for yours truly! Otherwise, I shall let the plaudits roll in… 

Published: August 10 2007 12:23 

Stefan-Michael Stalmann, an investment banking analyst at Dresdner Kleinwort, coined the term ”the great unwind” in a research note. In February of 2007 he wrote a report examining the relationships between the investment banking industry and the hedge fund community in which he warned of the risk posed by leveraged hedge funds should positions unwind. 

”The great unwind” has now become part of everyday market terminology to refer to the implosion of a number of leveraged funds triggered by exposure to the subprime mortgage market in the US. The report, written five months before the collapse of two Bear Stearns hedge funds, contains a frighteningly accurate picture of how things may, and some would argue, have turned out. 

Mr Stalmann answers your questions on the turmoil in subprime and credit markets and the correlation between hedge fund strategies and returns in a live online debate on Monday from 2pm BST. 

……………………………………………………………………………………………………… 

Could you explain in a nutshell, in the sense connected to the credit crisis, why would stock indices fall since many major companies are reporting better-than-expected financial results? Georgi Penchev, Bulgaria 

Stefan-Michael Stalmann: In my view, equity markets and credit markets are interlinked in a number of ways. Most importantly, if investors feel that the credit problems will spill over in the real economy (for instance if individuals and companies will have less access to bank credit as a result and will change their spending or investment plans), then this could adversely impact companies’ earnings in the future and therefore possibly equity valuations. There is arguably also a sentiment link between these two major capital market segments. Finally, there is a technical link, if you will: some investors (for instance some hedge funds) are employing strategies accross asset classes. There could be moments when these investors want to (or need to) reduce their overall leverage, and if credit-related assets turn out to be less liquid, they may decide to sell more liquid equities instead. 

……………………………………………………………………………………………………… 

How strong is the link between subprime mortgages and the buyout pool, and the sensitivity of one to the other?Patrick Ng, Houston 

Stefan-Michael Stalmann: I think there are a number of interesting links between both credit markets. Most significantly, most markets have seen a far-reaching separation between those who underwrite or originate a loan (i.e. the banks or mortgage companies), and those who hold the loan on their balance sheet and hope to recover it at maturity from the borrower. To some degree, this creates a moral hazard, because the originating banks may be tempted to loosen lending standards in order to earn a fee upfront, while the risk of delinquency is borne by someone else (e.g. an institutional investor, hedge funds or insurance companies). Clearly, the underlying credit quality appears to remain sound on LBO debt, while US sub-prime mortgages have already deteriorated a lot. Given the leverage involved in many LBO deals and the lack of contractual controls (covenants), I think the credit quality of LBO debt would suffer quite noticeably as well, if the macroeconomic environment would deteriorate.  

……………………………………………………………………………………………………… 

If statistical arbitrage funds had to liquidate their positions because of statistically unexpected divergences, surely these are only temporary phenomena? Stat arb usually doesn’t say when convergence will happen, it just predicts that it will happen with a calculable degree of probability. So surely stat arb funds will make back these losses in the near future, and this was just a giant margin call on many highly-leveraged stat arb positions?Greg F, New York 

Stefan-Michael Stalmann: There could very well be a good point in what you say here. The problem is that even though your trading positions may be perfectly rational in the medium or long-term, you may still go out of business if you become illiquid in the interim. This risk increases, the more leveraged your strategy is. An investor like LTCM in 1998 has fallen victim to exactly this “temporary” problem, I believe. 

……………………………………………………………………………………………………… 

Are the financing lines committed by banks to hedge funds and investment vehicles accounted for in the calculation of risk weighted capital? How likely is the mortgage market in Europe to experience a crisis as it is happening in US? Marco, Sao Paulo 

Stefan-Michael Stalmann: Yes, they are included in risk-weighted assets. Given that they are generally collateralised, the risk-weighting will tend to be quite favourable, relative to, let’s say, an unsecured corporate loan, though. As far as I am aware, only the UK has a market segment resembling US sub-prime mortgages. That is not to say that you won’t find overextended mortgage borrowers in other countries as well. It appears as if – besides the UK – countries like Spain and Ireland, where you have seen substantial house price appreciation as well (like in the US) could be most exposed. Then again, in countries like France, Italy or Germany, we have not seen either the same degree of house price appreciation and/or the general level of household indebtedness relative to income remains modest. In an nutshell, while there could be pockets of problems reminiscent of the US situation in some places, I would not expect it Europe-wide.  ……………………………………………………………………………………………………… 

Which one will react more to the credit collapse, the credit spread of a CDS or the corresponding defaultable bond? And what’s the reason behind this discrepancy? Z Liu 

Stefan-Michael Stalmann: I am afraid this is hard to generalise. What we have seen in recent weeks is that credit derivative contracts (in particular index derivatives) have seen larger price moves than cash assets, which arguably reflects the fact that many derivatives have been more liquid (ie easier to trade) than the cash assets. I would say that this does not have to be the case under all circumstances, though. 

……………………………………………………………………………………………………… 

What percentage of these hedge funds are comprised of everyday people’s 529 and retirement plans? Especially those retirement plans such as 403(b)s that are lightly regulated and managed by insurance companies?Toni Hagan, Wichita, Kansas 

Stefan-Michael Stalmann: I am afraid I am not close enough to the various savings plan structures in the US and their restrictions. In general, I think it is fair to say that in the US and many other countries, hedge fund investments have only been open to wealthy individual investors or institutions. So the average individual is unlikely to be directly affected by losses incurred by hedge funds. There could be some indirect exposure, via your insurance company or pension fund, if these have allocated some money to hedge funds. While institutions have been raising their allocations to hedge funds lately, I would think that the overall exposure remains very modest. 

……………………………………………………………………………………………………… 

Many pension funds have been including hedge funds as part of their asset allocation in order to get a higher return. Given the current great unwind, do you think it was a wise move on the part of pension funds to venture into hedge funds? Is there a future for hedge funds after this crisis? Peter Koh, Rome 

Stefan-Michael Stalmann: I do think there will be a future for hedge funds. While we seem to see an “unwind” in some corners of the market (e.g. in fixed income arbitrage, macro and quant strategies), many other funds seem to be fine or are actually making good returns. That said, part of the industry may have a public relations problem: if your selling proposition is to provide low-risk steady absolute returns (essentially implying capital protection), then all the current problems in the industry, with hedge funds closing or incurring losses, could be bad for business. I think some investors may start to reassess how much money they want to commit to hedge funds, and banks may reassess how much leverage they will provide to hedge funds going forward. All of this could mean that the hedge fund industry matures from red-hot to somewhere a bit cooler.  

……………………………………………………………………………………………………… 

Since, once again, the source of the current crisis is the toxic combination of risky debt and pliant ratings agencies emanating from the US, do you feel that after the current crisis has run its course and the initial flight to the safety of US treasuries abates, there will be a longer term aversion to US based securities on the part of international investors?Alex Ezazi, Beverly Hills, California USA 

Stefan-Michael Stalmann: I don’t think we will see longer-term aversion to US based securities per se. What I do believe firmly is that once things calm down again, you will find that certain products and certain investment strategies will be much less acceptable than during the last two years, and that things will return to a much healthier level of activity. For instance, I believe there will still be residential mortgage backed securities (and probably even subprime), but the loan underwriting process will become much stricter, and certain complex instruments (like CDS of ABS) may not be structured any more. I also believe there will still be LBOs and thus leveraged debt, but with a reduced level of leverage and with better covenant protection for lenders. This means a more robust system, but it should also mean somewhat less business for the banks involved.  

……………………………………………………………………………………………………… 

Who are the lenders to the hedge funds that are facing losses or liquidation? What is the magnitude of the loans to the losing hedge funds? Stanley Waterman, Alberta Canada 

Stefan-Michael Stalmann: Unfortunately, there is very little disclosure available on which banks provide how much funding to hedge funds. It is fair to assume, in my view, that all the top global investment banks have very active business relationships with hedge funds. In particular those global investment banks which are leading prime brokers (i.e. the key banks to a hedge fund) will tend to be very active providing their clients with funding requirements. We can take some comfort from the fact that banks generally provide only collateralised funding. So far, it seems as if banks have not been hurt by the problems of hedge fund clients. But we do see situations where banks like Bear Stearns or UBS have decided to essentially “help” their own hedge funds, e.g. by providing additional funding or by buying out third party investors. Even collateralised exposures to hedge funds can become vulnerable if market moves are extreme and/or the liquidity in the collateral assets dries up.  

……………………………………………………………………………………………………… 

I fail to understand why the Fed/ECB should step in and bail out the Wall Street sophisticators who dared to make these leveraged bets with other people’s money; should not these experts and their companies literally pay the price themselves, instead of being cushioned by the Fed? The prudent investor, who did not indulge in the casino atmosphere, ends up subsidising them, and indirectly gets penalised. Why not let the market forces, which are usually proscribed in any modern economic discussion, be allowed to play out without government intervention? M. Namdar, Houston 

Stefan-Michael Stalmann: I think you have a good point here. So far, it looks to me as if the central banks are quite willing to let investors lose money as a consequence of market developments. They have not bailed out hedge funds. But as soon as market problems threaten to seriously affect the banking system, central banks and regulators are facing a dilemma. They have to make sure that the banking system remains fully functional (for the sake of the economy as a whole), but at the same time, they have to (or should) make sure there are no moral hazards for the future. I don’t think there is an easy answer to how this can be achieved, and I think it is too early in this current situation to tell in which direction the balance of intervention (or the lack of it) will tilt.  

……………………………………………………………………………………………………… 

How do you believe homeowners and lenders will approach and pass through the interest rate reset in October? Mortgage rates on ARMs are scheduled to rise then. Will we just wait for it to happen and see what blows up, or can something be done in anticipation? Mitch Weaver, Eastchester NY, US 

Stefan-Michael Stalmann: In my view, the reset of mortgage interest rates in general is inevitable. But things can happen or can be done in the interim to alleviate the burden. For instance, the Fed may decide to lower interest rates towards year-end. Borrowers may also decide to tighten their belts in anticipation of a higher monthly mortgage bill, for instance by restricting consumption. While this should help the individual concerned, it would not be good news for the US economy at large. Banks and borrowers may also engage in a dialogue before the repricing happens, e.g. by restructuring the mortgage in question. Finally, borrowers who see a painful repricing coming may decide to sell their home and move downmarket. Again, this may look like an option for the individual involved, but it is obviously a difficult remedy for the market as a whole, as it would result in further price pressure on property prices. 

http://www.ft.com/cms/s/2/d709a4e4-471b-11dc-9096-0000779fd2ac.html 

The PPF’s monthly snapshot of pension scheme finances showed that in November the 7,800 defined benefit schemes in the UK were together £5bn in the red.

That was their first collective deficit since November last year.

The funding position of pension schemes is highly volatile and has been made worse by falling bond yields.

The overall effect of movements in the financial markets was to reduce the value of pension scheme assets and also to increase the value of their liabilities – the amount of money they need now to generate the cash required to pay pensioners in the future.

In October, the PPF’s “7800 index” had shown a collective surplus of £53bn.

The impact of changes in the share and bond markets during November was to push the 6,014 schemes in deficit further into the red, from £48bn to £73bn.

Meanwhile the combined surplus of those 1,736 funds which were in the black shrank from £101bn to £68bn.

Despite falling collectively into the red for the first time in a year, the overall position of pension funds was still better than a year ago when the total deficit was £30bn.

Despite the past month’s deterioration, pension scheme finances have generally been on an upward trend since 2002, when the deficit stood at more than £150bn.”

Source: BBC (10-December-2007)

So he, too, decided to forgo an M.B.A.. Instead, he raised $5 million and started his own hedge fund, Alerian Capital Management, in 2004. The fund now manages $300 million out of offices in New York and Dallas, and Mr. Hammond, 28, enjoys seven-figure payouts.

Like other young people on the fast track, Mr. Hammond has run the numbers and figures that an M.B.A. is a waste of money and time — time that could be spent making money. “There’s no way that I would consider it,” he says.

As more Americans have become abundantly wealthy, young people are recalculating old assumptions about success. The flood of money into private equity and hedge funds over the last decade has made billionaires out of people like Kenneth Griffin, 38, chief executive of the Citadel Investment Group, and Eddie Lampert, 45, the hedge fund king who bought Sears and Kmart. These men are icons for the fast buck set — particularly the mathematically gifted cohort of rising stars known as “quants.” Many college graduates who are bright enough to be top computer scientists or medical researchers are becoming traders instead, and they measure their status in dollars instead of titles.

Many of the brightest don’t covet a corner office at Goldman Sachs or Morgan Stanley. Instead, they’re happy to work at a little-known hedge fund run out of a two-room office in Greenwich, Conn., as long as they get a fat payday. The competition from alternative investment firms — private equity and hedge funds in particular — is driving up salaries of entry-level analysts at much larger banks. And top performers at the banks make so much money today that they don’t want to take two years off for business school, even if it’s a prestigious institution like the Wharton School or Harvard.

The new ranks of traders and high-octane number crunchers on Wall Street are also a breed apart from celebrated long-term investors like Warren E. Buffett and investment banking gurus like Felix G. Rohatyn. What sets the new crowd apart is the need for speed and a thirst for instant riches.

“With the growth of hedge funds, you’re getting a lot of really smart people who are getting paid a lot very young,” says Arjuna Rajasingham, 29, an analyst and a trader at a hedge fund in London. “I know it’s a bit of a short-term view, but it’s hard to walk away from something that’s going really well.”

The shift has not gone unnoticed by administrators at some business schools. Richard Schmalensee, who was dean of the M.I.T. Sloan School of Management until June, chalked it up to the changing nature of money-making. In many banks and investment boutiques, traders with math and science backgrounds now contribute more to the bottom line than the white-shoed investment bankers who long presided over Wall Street. And traders tend to be less likely to go to business school.

“I don’t think you will see M.B.A.’s less represented in executive suites, but you may see M.B.A.’s less represented in the lists of the world’s richest people,” Professor Schmalensee says.

BUSINESS school has not fallen out of favor among the student population at large. The number of students who earned M.B.A.’s in 2005 was about 142,600, nearly twice the level in 1991. But as M.B.A.’s become more common, the degree seems to carry less prestige with people who land top-paying jobs in finance soon after college.

And recent upheavals in the financial markets don’t seem to be changing the thinking of these younger high-fliers and their employers.

Hedge fund managers are unlikely to punish their younger workers for any dip in returns this year, says Adam Zoia, managing partner at Glocap, a headhunter in New York. Management fees charged by funds — typically 2 percent — come in regardless of return levels and can more than cover large salaries for young employees at many funds.

“Most managers say, ‘If I don’t pony up a decent bonus, then I’m going to lose people,’ ” Mr. Zoia says. “It’d be short-sighted of them not to retain their good people.”

At funds that manage $1 billion to $3 billion, people with just a few years of finance experience will make $337,000 this year, Mr. Zoia says, and those with five to nine years of experience will average $830,000, up 6 percent from last year. These estimates include analysts and researchers but not portfolio traders, who can make much more because they sometimes share in profits.

Dozens of young people (mostly male) who want to be, or already are, successful traders said in interviews that they relished the challenge of their jobs, in addition to the lofty paychecks.

But they also spoke as if a money-clock were ticking: many said they wanted to make as much money as fast as they could so that they could live in style later in life while doing less lucrative things like running a charity, working for the government, spending time with their families, or inventing new technologies. Some, of course, plan to stay in finance their entire careers, and they, too, are very focused on earning fat bonuses fast.

“The sales pitch of these private equity funds or these hedge funds is, ‘Come here, and you’ll make a million bucks in two years,’ ” says Gregg R. Lemkau, 38, managing director and chief operating officer of investment banking at Goldman Sachs, who passed up business school to stay at Goldman in the early 1990s when that choice was more rare.

And because today there are more self-made millionaires — and billionaires — than ever before, 20-something traders seem bolder in their monetary ambitions. Business school often does not fit into these plans.

“If you want to make the most money in the shortest period of time, you can’t be away from work for two years,” says Vitaly Dukhon, 30, who recently left the Fortress Investment Group in New York to join another hedge fund.

While in college at Harvard, Mr. Dukhon thought he would go to business school in his mid-20s, but in his first job on the Treasury desk at Deutsche Bank, he realized that the smartest people just a few years his senior were staying put. “I saw that people that had been working for 20 years did have M.B.A.’s, but people five to six years older than me were not going,” he says. “Going to business school is a way for people to try to open the door, to try to get into a company or hedge fund. But if you’re already there, it doesn’t make sense to go.”

Mr. Hammond of Alerian noticed the same trend while he was an analyst at Goldman Sachs. His co-workers who went to business school either wanted to change careers, or they were not doing well in their current jobs, he says.

Part of the shift comes as investment banks like Goldman Sachs and Credit Suisse have changed their tune on business school. Instead of pushing all their young employees into M.B.A. programs, banks are telling the best ones to stay put.

“We are the perfect training ground for people who want to have careers in finance,” says Caitlin McLaughlin, director of campus recruiting for Citi, the former Citigroup. Just 15 years ago, Ms. McLaughlin estimates, 85 to 90 percent of Citi’s analyst classes ended up attending business school. Now, she thinks that figure is closer to 50 percent.

Samir Ahmad, 25, has worked at Citi since college. This summer, he was promoted to associate, an M.B.A.-level position, in the fixed-income, currencies and commodities division. Despite advice from his older brother that he should attend business school, Mr. Ahmad says he cannot see what he would gain to justify the time. “If I were to spend two years at business school, I’d get an M.B.A. degree, but I think learning a different product or a different group here at Citi would be more valuable,” he says.

To be sure, business school can still be a valuable investment, especially for those who want to change careers. Most schools teach a well-rounded curriculum that exposes students to the full picture of the way the business world works. They are great places to make friends and connections that can help throughout a career. And the top business schools serve as a useful filtering system, placing a seal of approval on graduates that can help them find jobs.

“Most banking — and that includes private equity — is about deals and about relationships,” says Timothy Butler, director of M.B.A. career development programs at Harvard Business School. “That will always be M.B.A. territory.”

YET even some students at top schools like Harvard say the decision to go is tougher now than it likely was two decades ago. “We all struggled with it,” says Katie Shaw, 28, who is in her second year of business school there. “It’s not only, ‘Where do I go to business school?’ It’s also, ‘Do I go?’ ”

Ms. Shaw worked in private equity before business school and plans to return to a position in finance. In private equity, she says, an M.B.A. is valued because buying and selling companies involves relationships and company analysis skills. Still, most private equity firms used to require their young hires to leave to go to business school, and some are now letting talented ones keep working instead.

Headhunters for hedge funds and private equity firms say hedge funds, in particular, do not value an M.B.A. “I have some clients that will legitimately say, ‘An M.B.A. means absolutely nothing to us,’ ” says Tim Zack, principal of In-Site Search, a headhunting firm in Westport, Conn., that is a division of Chaves and Associates.

Mr. Hammond of the Alerian hedge fund recently hired someone from Carnegie Mellon’s business school because of that person’s engineering talent, not the skills he learned in business school. While Mr. Hammond says he understands why his new employee went to business school to move into finance, he would look less favorably on someone in an M.B.A. program who had left finance to go to business school.

If he were looking at someone who went to Harvard Business School after the two-year analyst program at Goldman, “I’d be suspicious,” he says. “I’d be saying, ‘What was it you were doing wrong that you couldn’t get a promotion at Goldman or did not pursue an opportunity with a private equity or hedge fund?’ ”

When young people on Wall Street consider the benefits of business school, Mr. Hammond says, the upside no longer outweighs lost salaries and bonuses they would have earned. He calculates the cost of going to a two-year business school to be at least half a million dollars for the average bank employee — $250,000 or more each year in lost salary, plus $50,000 a year in tuition and living expenses. For hedge fund employees, Mr. Hammond says, the number would be considerably higher.

The result, headhunters say, is that many of the best people in finance are no longer entering the M.B.A. pipeline. “If someone is doing well at a hedge fund, they absolutely do not encourage their employees to go off to business school,” says Mr. Zoia of Glocap.

Some young people are pursuing alternatives that can be completed without leaving their jobs. Some take the chartered financial analyst tests or study part-time at night at schools like N.Y.U. that offer master’s degrees in subjects like financial engineering.

“There’s a real shift in assumptions as to what is going to make you a better applicant or a prospect for a job,” says Art Hogan, chief market analyst for Jefferies & Company, noting that he had seen an increased interest in young people pursuing a designation as a chartered financial analyst at night rather than leaving their jobs for an M.B.A.

At the banks, there has been a push in recent years to keep top performers around after their time as analysts, the most junior position, ends. “Strong performers we want to keep at the firm for as long as possible,” says Julie Kalish, 28, head of United States recruiting for Credit Suisse. “The amount of analysts that we try to keep for the associate promotion process has grown over recent years.”

Admissions officers at top business schools say finance firms always try to hold onto their best employees when the economy is good. They say interest from applicants working in finance is not declining and their graduates still land a large number of top finance jobs. What administrators at business schools do not know — largely because their admissions and career placement offices are separate — is whether their students with a finance background are staying in that industry.

Recruiters at banks say a large number of the students that they are hiring from business schools are from an international background or are changing careers. These students are valuable, they say, but they come in with a different background from someone who has been in finance since age 22.

Jeffrey Talpins, chief investment officer at Element Capital Management, a small fixed-income hedge fund in New York, says he likes to hire people fresh out of school so he can teach them himself. Mr. Talpins attended Yale as an undergraduate but did not go to business school. If a young employee asked his advice on business school, he says, he would tell them not to go if they wanted to stay in finance. “I’d say, ‘You already have a great platform for a job in finance,’ ” he says. “If you’re a superstar, and you’re very good, you’ll grow very rapidly in this field.”

Eventually, these young people may want to raise money and start their own fund, suggests Thomas Caleel, director of admissions at Wharton, and that’s where an M.B.A. and the connections that come with it could help. “If you are trying to raise money for a hedge fund, you will need that network,” he says.

Mr. Talpins of Element said he had no trouble raising money for his hedge fund without an M.B.A. After all, he had a track record from Citi and Goldman Sachs to show to potential investors. In his corner of the world, where math equations are likely to be scrawled on white boards around the office and young people hold the purse strings to millions of dollars in investor money, it seems there is no point in going to business school just to punch a ticket.

In 2005, Trader Monthly named Mr. Talpins one of the top 30 traders under 30. “Youth is not wasted on this crop, any of whom could be a billionaire by 40,” the magazine said. “Or, then again, they could be belly up and bust.”

Mr. Hammond of Alerian, who was featured on the magazine’s list last year, said he has seen people go to hedge funds and get fired in six months “because they couldn’t hack it.”

But he says the risk is worth it.

“If you look at the really successful hedge fund managers — the Eddie Lamperts,” he says, “they’re all in their 40s now. They were probably making only low single-digit millions in their 20s.

“That’s why you do this,” he continues. “That’s why it’s so attractive, because the payoff of being the winner, the next Eddie Lampert, is so high.”

http://www.nytimes.com/2007/09/16/business/16mba.html?pagewanted=1&_r=1&ei=5070&en=e40e788bde2c9515&ex=1190779200&emc=eta1