(James Saft is a Reuters columnist. The opinions expressed are his own)
By James Saft
April 8 (Reuters) - It isn't true that the asset management industry is too big to fail but it may well be that it is too lame to be tolerated.
Noting the rocketing growth of the global asset management industry, which is on track to more than quadruple in size by 2050 to $400 trillion, Bank of England executive director for financial stability Andy Haldane argued that funds may require closer and tighter supervision by regulators.
"Their size means that distress at an asset manager could aggravate frictions in financial markets, for example through forced asset fire sales," Haldane said in a speech last week in London.
"It is possible to identify a set of market-wide conventions or regulatory practices which have the potential to drive common behaviour among asset managers and their institutional client base. These have the potential to turn idiosyncratic market frictions into systemic market failures." (http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech723.pdf)
The idea that asset managers are too big to fail, that their sheer size makes them a particular threat, is at best unproven, as Haldane acknowledges. Not only do asset managers employ far less leverage than banks, they mostly play with other people's money, making those that flame out more a source of private grief than public strife.
And though there have been notable instances of large asset managers causing market distress and malfunction, there is little doubt that they are not immune to the consequences of their actions in the same way as the very largest banks.
As a thought experiment, imagine an asset manager which had made as egregious a series of mistakes and miscalculations as has Citigroup over the past 15 years or so. You can't, because such an institution would have ceased to exist, several times over. Or at best, sunk into insignificance.
Citibank was bailed out by the U.S. government in November 2008 with the government taking a 36 percent equity stake, a $45 billion credit line and a guarantee covering losses of more than $300 billion.
This is not at all to say that asset managers don't represent a threat, of sorts; much less that they do a good job allocating capital in a way which helps the economy and secures retirements. Quite the opposite, in many ways.
Asset managers, and their clients, tend to chase returns, exacerbating market mispricings like the ones which brought on the last two recessions and which now threaten a third.
I'd argue that this is mostly the result of a mix of human frailty, self-serving career management by fund mangers and poorly thought-through existing regulation producing perverse results.