"If you have a star performer in your business, you have a temptation and a tendency to let him go on, even if he is not completely within his business limits... What should be at the heart of a good business is discipline, not performance for its own sake".
To be sure, Morgan Grenfell was a British bank taken over by the German giant. But it has been under the fold of Deautsche Bank long enough (about seven years) for it to have imbibed the German virtue of discipline. Indeed, Deutsche Bank had been so happy about Morgan Grenfell that only recently had it transferred all its investment banking to London from Frankfurt "" much to the annoyance of at least some of its German staff.
Be that as it may, Mr Breuer was right in emphasising discipline as being at the heart of management of any speculative activity. I am deliberately using the adjective "speculative" to describe the activity of managing mutual funds investing in equities : fund management or asset management is a more respectable name for what is in its essense, speculation on equity prices. The dictionary meaning of the word speculation is "to buy or sell an asset in the hope of profiting from price movements" "" which is exactly what a fund manager is expected to do. Indeed, you and I are also speculating when we apply to buy shares in a primary issue "" after all, we are hoping to profit from price movements. Whoever buys equities for an (unknown) dividend yield?
While on the subject of speculation (and leaving the Morgan Grenfell affair aside for the moment), I am surprised at the way our regulators frown upon selling bonds or equities short "" i.e selling what you do not, at the time of selling, own. If it is legitimate to profit from long positions "" which is what every fund manager would like to do, buy shares at low prices and sell them when prices go up "" why is it considered a sin to hope to profit from short positions? That is, selling a share you do not own, and buying it back at a cheaper price. Surely the two are sides of the same speculative coin and equally moral or immoral? (To be sure, there is a minor, if theoretical, difference between the two. In long positions, the maximum loss you can suffer is what you paid for creating it; in short positions, the loss can be much larger than the price you sold at. This is because the price of a share, or currency, can never fall below zero; in theory, there is no limit to its rise.) This apart, short selling of bonds is an inherent part of managing the interest rate risk, a subject the Indian financial system needs to learn to cope with in the era of deregulated interest rates.
Turning back to Morgan Grenfell, the discipline failed when internal control systems were not adhered to by the fund manager. Indeed, he went out of his way to circumvent them. And, even when the infringements came to the notice of senior management back in April, all that they did was to ask the offender himself to reduce the investments in unlisted securities to permitted levels. Perhaps they were afraid of annoying a star performer by taking more drastic action at that stage. After all, until then he had delivered an enviable performance in managing the fund. The worry may have been that any action showing a lack of trust may well tempt him to go elsewhere. And nobody suspected mala fides of a man his colleagues describe as modest and softspoken. By now, his investments have already cost the parent Deutsche Bank hundreds of millions of pounds : how much more will not be known for several months. To save its t centres.
