Examination of Witnesses (Questions 1420
TUESDAY 4 DECEMBER 2007
Q1420 Jim Cousins: Where should the
money come from?
Mr Montagnon: Essentially, from
the banking system if the banks are the ones whose customers are
Q1421 Chairman: Has there been a
change in the profile of hedge fund investors with institutional
investors increasing their presence in the market?
Mr Hitchen: That has certainly
been true over the past few years. My fund has invested directly
in hedge funds for perhaps the past four years, and it may be
Hermes is quite similar in that regard. Essentially, we went to
hedge funds in search of security. Hedge funds provide capital
protection in a way that the equity markets cannot. We have a
need for real returns and that is just one way of getting them
with less downside risk.
Q1422 Chairman: Banks have reported
very large losses on derivative holdings. The question for us
is: how much more has been lost by clients? You referred to insurers
who bought similar products sold earlier by the banks. Do you
have any ballpark figure? Is it a significant multiple?
Mr Pitt-Watson: I think the question
is: where does the contagion start? Do you take just the CDOs
that are absolutely bankrupt, the ones that are marked to model,
or the ones that are marked to market, or do you take the knock-on
effect on the bond market? Do you look at what has happened to
bank shares and then add in what happened to Northern Rock? Do
you then think about what has happened to economic confidence
overall? These were the kinds of issues Mr Mudie explored earlier.
My view is that it could be huge if we do not respond to this
sensibly and with judgment. It affects all savers.
Q1423 Chairman: Do you think that
bonus and option policies in Northern Rock and in general encourage
executives to take too many risks?
Mr Montagnon: Sometimes that may
be true. In the case of Northern Rock the ABI felt that its bonus
policy was too generous and we had flagged it. What that reveals
may also be a system whereby the balance on the board is not necessarily
operating terribly well because the executives are able to persuade
the non-executives to award them too generous pay increases. That
may say quite a lot about the relative balance and the way risk
is approached and accountabilities on the board.
Mr Hitchen: We do always try as
far as we can to promote this, but the basic problem I suppose
is that whereas we are trying to invest over 20, 30 or 40-year
periods and be owners you cannot really expect an executive to
take such a long timeframe into account.
Mr Pitt-Watson: The answer is
yes and it is exacerbated by marking things to market and marking
things to model. Therefore, in the years when things look good
you can take your bonus and hope that that is still in the bank
when things go bad. Of course, the original investment is from
other people's money.
Chairman: I do not think you have any
messages left unsaid. It has been a long session. Thank you for