Investment Management Industry Losses In 2008?

The investment management losses in 2008 were large due to a huge drop in the stock market and a global financial crisis in the 3rd and 4th quarter of 2008. Investment managers found their portfolio balances fall by 1/3 to 1/2 in value as stock market values fell and alternative investments were not sufficient to make up loss values.

What to Understand about the Industry

If you are reading this article, it should be understood that there is no simple way to provide the basis for this analysis concerning the investment management industry. It may be argued that taking a complex concept such as mezzanine financing can be done on an 8th grade level but the fact that many highly educated investment professionals missed the boat as to the enormous risks that loomed with these investment techniques should lead you to believe that the information provided at best is an overview of what happened to the industry in 2008.  The jury is still out as to the lasting effects of the financial calamity caused by the financial industry in 2008, which will be analyzed for years to come.

Global Experience

The drop in values for investment managers were experienced on a global basis. European and Asian investment managers experienced as significant drops in values as did U.S. investment managers. Many attribute the huge losses to unsubstantiated risk taking. This risk taking, such as the purchase and resale of unsecured mortgage obligations and other derivatives, fueled much of the growth in private equity and pension funds. This, coupled with the overvalued real estate market, fueled speculation to unprecedented levels, except perhaps just before the great stock market crash of 1929.

Losses May Have Been Predictable

The losses experienced across the industry may have been predictable to some extent.  Many investment management firms such as private equity firms and hedge funds as well as traditional institutional investment managers engaged in a herd mentality with respect to unknown risks. The heavy trading in credit default swaps and collateralized mortgage obligations, overly sophisticated and untested derivatives of underlying mortgage products, added fuel to the speculative fire. As firms reaped huge profits by investing in these “securitized” instruments, no one wanted to head the call for caution and pull back from their positions.

Signs of the Financial Collapse

When banks began to fail in the early quarters of 2008 and all signs indicated that consumer confidence was spiraling low, a stimulus bill was introduced as a stop-gap measure to instill some sense of consumerism. This attempt failed and as oil prices rose and speculation went unchecked, the fears of a pending financial calamity loomed large. When investment banks such as Lehman Brothers and Merrill Lynch reached failure status and banks such as Bank of America and Citicorp were forced to step in, the signs of doom were all too clear. The little known financial derivatives that made investment management firms boatloads of money led to the downfall of a great many investment management firms and banks.

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