Despite the world slipping into an ever-deeper recession and the US financial system effectively shut down, one US banking group, State Street Corp. (NYSE: STT), has decided now, of all times, to enter the Israeli market. To this end, John Nugee, head of the group's institutional investor division, State Street Global Advisors, (SSgA) and a veteran banker, visited Israel earlier this month.
Considered the world's largest asset manager, the SSgA manages $1.7 trillion in institutional assets in 27 countries worldwide. Thanks to its conservative approach, SSgA was one of those institutions affected less by the crisis, a status that enabled Nugee to voice cautious optimism about the markets' future.
"Being over-pessimistic about the future of the markets worldwide is the accepted viewpoint today," Nugee says in a special interview with "Globes". He, on the other hand, sees a glimmer of light in the current situation, which, he says, "is making the transition from an unprecedented financial crisis to an economic slowdown that we have experienced before. This means that we are moving from a financial crisis the likes of which none of us are old enough to remember, to a recession that we can cope with," he adds, explaining his perspective. "In contrast to the financial crisis, which no one has ever experienced before, investment managers have experience of asset management during times of recession. We certainly do.
"Identifying opportunities, buying good assets at low prices - these are all part of accepted investment management during times of crisis," Nugee adds.
Globes: Can government intervention in markets across the world solve the crisis?
Nugee:"The truth is that the crisis has reached a point where governments have to intervene. When you reach a crisis of these proportions, the only solution is for governments to inject money. Not through loans against assets of one sort or another, but by buying assets directly. This is already a fiscal measure, so it is the responsibility of finance ministries and governments. These are precisely the measures being taken now, since we're witnessing a global phenomenon where governments are providing securities and capital, and, in some instances, even buying assets."
And what about the often repeated claim that this amounts to using taxpayers' money to rescue the very people who started this fire?
"A fireman doesn't stand in front of a house going up in flames and ask how it happened. He puts out the fire, and then tries to think about how it can be prevented from happening again. There's a difference between the financial system and other industries, because the entire economy works through it. It has special status, since it supplies services that affect every single person in the country. In addition, it is an industry which is based on trust more than any other field, and when that trust is undermined, the system cannot work for the greater economic good. Because of these two factors, the government has to step in, in order to safeguard its financial industry.
"For a long time, people believed that there were banks which were too big to fall, and what we discovered during the crisis was that there are banks which are simply too connected to fall. The Bear Stearns case proves this: it wasn't the largest bank, it simply got too involved in many different businesses. On the other hand, we have the Icelandic banks, which not do fit the description 'too connected' to fall, but are rather 'too big to be rescued.' There are a number of countries in the world which have a small economy and a large banking system, which will take a lot of effort to help put it back on its feet."
It seems that despite government aid, the financial sector is still paralyzed.
"The central banks tried to revive the credit market, and it looks like they have actually replaced it. Instead of the banks lending to one another, they're all interacting with the central bank. This is a problem that everyone everywhere is aware of, but I don't have a clue as to how it will be solved. However, this process has led to a marked drop in the leverage of companies and individuals. The data in the US shows that people have begun increasing their proportion of savings to around 3%, which, regrettably, will come at the expense of consumption."
What, do you feel, will happen to the US economy? Will it indeed be the first to emerge from the recession?
"I believe the US will lead the Western world out of the recession. It's hard for me to say how this will be reflected in the performance of emerging markets, with China, for example, now entering a slowdown, although a slowdown in China means 6-7% growth. So you can't really compare business cycles of economies that are so different to one another.
"It's true that the recession is uncomfortable for many, but this is not something 'unknown'. Markets have slowed down before, and they know how to respond to a slowdown. I think that government intervention can ensure that we don't find ourselves facing the collapse of another big financial institution."
Investment management - not a bottomless pit
Nugee joined SSgA in 2000 after a career in official reserves management for central banks, including spells as the executive director in charge of reserves management at the Hong Kong Monetary Authority (1992-1996), and as the chief manager of reserves management at the Bank of England (1996-2000). He was in Israel to oversee the activity of Global Investment Solutions (GIS), which will represent SSgA in Israel, following the latter's decision to begin offering its asset management services - as the world's largest pension fund manager - to institutional investors in Israel.
You're entering Israel at a time when there is a profound lack of trust in investment institutions in particular, and in asset management in general. What added value does GIS have to offer?
"We offer an accepted form of financial management. It's true that there's an issue of lack of trust in the system today, but you have to remember that investment management is not a black hole that swallows up everything. It has many different elements, and some of them held up well in the current crisis too. What has changed is the average person's view of the financial system. If, until now, he said to himself, 'I don't understand what it's about, but it's good,' today he says, 'I don't understand what it's about at all, and it's bad.'
"As someone managing investments for institutional investors and pension funds, I am not aiming to change the world. Still, it could well be that ultimately, this could be a blessing in disguise and at the very least, this crisis has brought the problems up to the surface, forced governments into taking action, and proved that there are parts of the system that are still functioning.
"As part of my job, I have held extensive meetings with various governments, so our added value is a view from above of what is happening in the world."
Published by Globes [online], Israel business news - www.globes.co.il - on December 18, 2008
© Copyright of Globes Publisher Itonut (1983) Ltd. 2008