Selected Articles by Christopher Anderson

Sovereign Wealth: It Could Be Good for You

Originally published in Registered Rep, March 2008

Kuwait. Singapore. Russia. China. The government investment funds of these countries, and several others, may have saved our financial system from severe shock. Following over $100 billion in write-downs at the country’s biggest banks due to bad bets on sub-prime and other mortgage-related debt, the titans of Wall Street — the banks many of you work for — had to go hat-in-hand to the petrodollar rich nations to shore up their balance sheets.

It’s embarrassing, and brokers are fielding some tough calls. “My clients have been fearful — there’s some uncertainty about the future of some of our biggest banks,” says one top Smith Barney financial advisor based in the Southeast. “One client was very, very concerned — a very large client, and a long-time Citigroup shareholder — about the lack of risk management.” Other advisors say some clients have called in a panic, worried that the bailouts pose a threat to their portfolios or bank management, while others simply wanted to understand how the foreign-government-backed funds work. “I’m getting a lot of questions,” says one top-tier advisor at Morgan Stanley. “A lot of clients don’t really understand what [sovereign wealth funds] are, so I’m spending a lot of time educating them. Their concern is, obviously, they want to make sure that their money is in a place that is safe.”

Brokers can take some cheer in market researcher Strategy One’s recent study of public opinion about Citigroup and Merrill Lynch: People wealthy enough to have assets managed by wealth managers have a better opinion of the banks than the population in general. Still, the study did reveal some anxiety: As of mid-January 2008, some 40 percent of so-called “opinion elites” were less likely to trust Citigroup or Merrill as a result of hearing or seeing news about foreign investments in these companies (See table “Sub-Prime Bailouts”).

What’s worse, there may well be more write-downs, and bailouts, to come. In January, UBS announced that it would write-down an additional $14 billion, several billion more than it had anticipated just a month earlier, and $2 billion of which is linked to the distressed monoline insurers, MBIA, AMBAC Financial and ACA Capital Holdings. Other banks may end up doing the same. As of this writing, regulators were trying to cobble together a bailout of the bond insurers to prevent a further hit to the financial system, but such a bailout may come too late — if at all. Meanwhile, German finance minister Peer Steinbrück recently said the G7 now fears that write-offs of losses on securities linked to U.S. sub-prime mortgages could reach $400 billion, quite a step up from the U.S. Federal Reserve’s estimates for sub-prime losses last year of $100 billion to $150 billion.

Alien Invasion

In the meantime, politicians (even presidential candidates), academics, executives and government officials have been doing a lot of hand wringing over what it means to have the funds of foreign governments underpinning our financial system. Concern over the so-called sovereign wealth funds’ (SWFs) recent investments in big global and U.S. banks has focused on the potential political ambitions the funds’ managers might have, as well as the lack of transparency around the funds’ holdings. In a speech to the American Enterprise Institute in December of last year, SEC Chairman, Christopher Cox, issued a directive: “Investors and regulators alike have to ask themselves whether government-controlled companies and investment funds will always direct their affairs in furtherance of investment returns, or rather will use business resources in the pursuit of other government interests.”

As recently as January, at a well-attended panel of the World Economic Forum in Davos, titled “Myths and Realities of Sovereign Wealth Funds,” Larry Summers, former secretary of the Treasury and now a managing director at D.B. Shaw, voiced additional worries. For example, because the SWFs are — for now at least — long-term non-voting shareholders, they are actually more likely to protect the management of poorly run companies than to get in the way of good management, Summers said — possibly of equal concern considering the colossal errors in judgment made by Wall Street management where sub-prime is concerned.

These are valid fears. But there are some very good reasons why they are also overblown, why you — and maybe, more importantly, your clients — shouldn’t worry about the banks’ new alliances with foreign governments. Here’ s what you should tell your clients.

The Best Thing That Ever Happened

Let’s start with the simplest reason: This has happened before. Foreign investors have been investing here for years, and on this particular occasion the big banks had nowhere better to turn. Citigroup, for example, has already been bailed out once by Saudi Arabia’ s Prince Al Waleed. During the early 1990s banking crisis, Waleed injected nearly $600 million into the bank, a stake that is now worth $12 billion. As one Smith Barney broker puts it, “Prince Waleed has been Citigroup’ s biggest shareholder since our shares were worth $4.” He continued, “It’ s no secret that Middle-Eastern countries have a lot of money and want to spend it. They have the money; we want to use it.”

What’s more, sovereign wealth funds aren’t going away any time soon. Morgan Stanley predicts SWF assets will soar to $17.5 trillion in the next 10 years, making them among the most powerful investors in the world. U.S. firms better get used to dealing with them, and the sooner the better.

But here’s an even better reason to support the bailouts: Many sovereign wealth funds have so far been stable long-term investors. Take Kuwait’s sovereign wealth fund, which has been a key and constant investor in Germany’ s Daimler since 1969, and in Britain’s BP since 1986. Plus, if their returns are any indication, making good investments is more important to these funds than attempting to further political interests: Singapore’ s Temasek Holdings, for example, has notched a shareholder return of more than 18 percent compounded annually since its inception in 1974, according to its website. That’ s not too shabby.

Of course, not all of the relationships between companies and their SWF investors have been rosy. You may have heard about Norway’s SWF, which, in 2006, sold short its plummeting shares of Icelandic banks. No doubt the move irritated banks’ management, but it certainly shows SWFs’ independence and market discipline.

As for political interference, all of SWFs invested in our banks have taken minority, non-voting stakes, which means, at the very least, they won’t likely have the clout to run off with corporate secrets, destabilize the U.S. economy or take steps to decrease competition for their own home-based rivals. China’s state investment group actually refused a seat on the board offered by Blackstone Group, for example, which sold the government fund a $3-billion stake last year, according to Blackstone officials.

Meanwhile, the International Monetary Fund is working to draft rules governing the management of the world’s sovereign wealth funds, many of which seem to support the idea. These would include promises to avoid speculative abuses and to keep politics out of their investment decisions. Some funds, such as Singapore and Norway, have already chartered separate (read: semi-independent) corporations to manage the funds in order to foster an investment culture centered on returns, and to protect the investment process from political interference, according to Jennifer Johnson-Calari, director of Sovereign Investment Partnerships at the World Bank Treasury, who contributed to a tome on the management of sovereign wealth funds titled Sovereign Wealth Management.

What Next

Looking ahead, there are other potential, if further afield, long-term benefits for U.S. companies of accepting SWF investments. For one, it should help emerging markets gain insight into good business practices and global legal norms, according David Marchick, Managing Director for Global Government and Regulatory Affairs of the Carlyle Group, who testified on the subject before the U.S.-China Economic and Security Review Commission. And that’s good for the global economy in general.

It could even help the U.S. position itself for reciprocal investments in emerging markets. To wit: In September of 2007, Blackstone managed to overcome China’s traditional resistance to major foreign investments when it bought a 20-percent stake in a state-owned chemical maker for $600 million. But that happened only after China’s CIC bought a 10 percent in Blackstone for $3 billion in June of that year.

As the SEC’s Cox himself has observed, SWFs could be viewed as having a stabilizing and modernizing effect on global finance, as well as providing a new source of liquidity for U.S. capital markets, and opening up state-run corporations to minority stakes by U.S. investors. While he’s not ready to commit 100 percent to that being the case, advisors and investors should take heart.

WALL STREET STOCK: BARGAIN BASEMENT

You certainly can’t claim the world’s sovereign wealth funds are doing bad business by buying the stocks of Wall Street’s biggest banks — they want to make money. The mortgage crisis has taken its toll on the stocks, making them relatively cheap.

Bank Stock symbol Stock price 8/01/07 Stock price 02/20/08 % Decline p/e* 2008

Citigroup C $45.19 $25.49 44% 8.8 Merrill Lynch MER 72.17 51.84 28 10.5 Morgan Stanley MS 63.76 43.55 32 7.4 UBS UBS 54.06 33.76 38 7.8

* Estimated Source: Yahoo Finance

SUB-PRIME BAILOUTS

Last year sovereign wealth funds invested $59.4 billion in banks with large U.S. operations, which were reeling from the sub-prime debacle. Singapore, Kuwait, the United Arab Emirates and China made some of the biggest investments.

INFUSION
Company                                                                                                          ($bln)       Investors                                 Stake

Citigroup

$6.8         Government of Singapore                     3.7%

7.7           Kuwait Investment Authority;                4.1 
                Alwaleed binTalal; Capital Research
                Capital World; Sandy Weill; Public                                                                                                            Investors

7.5           Abu Dhabi Investment Authority           4.9

Merrill Lynch

6.6            Korean Investment Corp.                      10-11
4.4            Kuwait Investment Authority;               9.4
                 Mizuho Financial Group;
                 Temasek Holdings
1.2            Davis Selected Advisors                        2.6

UBS

9.7             Gov. of Singapore Investment Corp.   10.0
1.8             Unidentified  (Saudi Arabia)                  2.0

Morgan Stanley

5.0             China Investment Corp.                        9.9

Barclays

3.0             China Development Bank                      3.1
2.0             Temasek Holdings                                 2.1

Canadian Imperial Bank

1.5              Li Ka-Shing, Manulife Financial;          6.1                                                                                       CDPQ; OMERS                                          
1.2              Public Investors                                     5.0

Bear Stearns

1.0               Citic Securities Co.                               6.0

TOTAL INFUSION $59.4

Source: Bloomberg/SWF Institute data as of January 26, 2008

HOW YOU CAN BENEFIT FROM SWFS

Sovereign wealth funds used to invest almost exclusively in Treasuries. Now they are diversifying into U.S. equities and other assets. That could raise the market risk premium.

What do sovereign wealth funds do with the dollars their countries earn from indulging our appetite for oil and cheap consumer products — other than bailout banks? More and more, they are moving their greenbacks out of treasuries, and into equity and other alternative asset classes. Makes sense, right? Diversification is the name of the game for any smart investor, and that’s especially true for emerging markets that are dependent on smaller numbers of industries. “Diversification,” as Deutsche Bank analyst Steffen Kern notes, “is to some extent the very raison d’ être of these institutions, especially in oil-dependent economies.”

The reason this might matter to you is this: As sovereign wealth funds diversify their assets into riskier asset classes, research analysts say that asset managers, investment banking operations, local government debt, emerging market corporate debt and securitization operations are set to benefit.

On the one hand, the SWFs are presumably going to need help managing their mountains of wealth as they take on more risk, which will kick up demand for asset management and investment banking services, they say. On the other hand, as they collectively shift the trillions they manage into high-yielding securities and debt, it means increasing demand for those assets — and rising prices.

In the most general terms, this shift should raise the overall market risk premium, says Morgan Stanley analyst Stephen Jen. “If a group of investors decides to start to release a part of the U.S. $5 trillion worth of assets currently invested primarily in sovereign bonds issued by the U.S., European countries and the U.K., and instead invest in equities, corporate bonds, private equities, commodities and real estate in a wider range of economies, the balance between sovereign bonds and risky assets must change,” writes Jen in a recent report. “In other words, risky assets will likely trade higher than suggested by the economic fundamentals.”

How they invest can’t help but have an impact. SWFs are set to become among the world’s biggest investors over the next five years or so. Already, estimates of total assets under management are in the $3 trillion to $5 trillion range, and are projected to rise to between $10 trillion and $15 trillion in the next 10 years, depending on who’s doing the estimating. Meanwhile, Merrill Lynch projects the global share of SWF investment in riskier markets to double or triple over the next five years to somewhere between $3.1 trillion and $6 trillion.

James Grant

Originally published in the Brooklyn Heights Press & Cobble Hill News, May 2005

While many New Yorkers pursue their hobbies with as much ardor as they do their proper vocations, few see the fruits of their night and weekend efforts gain the acclaim that Brooklyn Height’s own James Grant has. Grant, who by day is editor of Grant’s Interest Rate Observer and a renowned financial authority, moonlights as a biographer. John Adams: Party of One, just published by Farrar, Straus and Giroux, is Grant’s second biography. Like his first, Bernard M. Baruch: The Adventures of a Wall Street Legend, it has been well received by the critics, in no small part because of his limpid prose, extensive research, and knack for showing human failings in a judicious light.

Grant’s impetus for writing the biography of Adams was in part a response to his misgivings about the bullish last half of the 90s. “The markets and I were hardly on speaking terms,” Grant relays. “I wanted to write about something, or someone, not connected with what was going on at the corner of Broad and Wall.” In Adams Grant found “an agrarian who was suspicious of banks and finance—but this same noncapitalist negotiated a succession of life-saving loans for his government in the European money markets.” Throughout his life, as Grant masterfully shows, the ever-principled Adams displayed a flexibility and persistence that enabled him to rise from his beginnings as a struggling schoolteacher and lawyer to a diplomat and president.

Was Adams’s voracious appetite for legal scholarship what helped temper the Puritan severity and Royalist tendencies he might have inherited from his forbears? Grant is not so bold as to make this claim, but the evidence is there in the book. While Adams was a faithful believer in virtue and divine providence, supporting the rule of law and establishing a system of checks and balances claimed the greater part of his attention.

Generous excerpts from Adam’s correspondence with his wife Abigail, from whom he was separated for much of their married life, help to bolster Grant’s claim that the Founding Father was a “foul-weather patriot”. Adams weathered dangerous trips by horse to Philadelphia to help draft the Constitution and harrowing journeys across the sea to France to bolster economic support for the new nation, all the while expressing his longing for his farm in Braintree. Adams was never at a loss for words when it came to attacking his political enemies or describing his physical ailments, and Abigail is no less notable for her fortitude and candor. It appears that her calls for abolition and women’s suffrage fell on deaf ears.

Grant does not shy away from Adams’s deficiencies, including his hypochondria and his tendency to borrow from others’ works in his own writings without acknowledging them.
And while Grant largely resists the temptation to compare Adams’s time to our own, where he does, it’s refreshingly tart. In describing Adam’s successful journey to Holland in order to borrow enough money to keep the new nation solvent, Grant notes: “Almost two hundred years would have to pass before the United States would achieve that pinnacle of financial privilege at which its obligations could be discharged in the currency that it alone can create on a high speed press, or indeed by the touch of a computer key.”

Prickly comments like the above will come as no surprise to readers of Grant’s writing in Forbes and The New York Times and books on financial history, and to those who have seen him on programs such as “Wall Street Week” and “The News Hour with Jim Lehrer”. In using the economic theory of the Austrian school, to which he was first introduced while pursuing his Bachelor’s degree at Indiana University in the sixties, he has frequently found himself at odds with market trends and the machinations of central bankers. A particularly useful insight of the Austrians is that, as Grant puts it, “Interest rates are the traffic signals of a market economy. Central bankers like Alan Greenspan tamper with them at their peril. Push them too low, as I believe the Federal Reserve did in 2003, and you wind up with a lot of distortions—as you would if you flipped a switch and turned all traffic lights green.”

Grant has frequently been bearish about financial markets, yet he sees himself as willing to take risks. He founded Nippon Partners with Kendall Shirley in 1998, taking advantage of a situation in which stock prices of many Japanese companies were less than their cash holdings. The partnership currently manages $130 million dollars. But Grant’s biggest gamble of all, perhaps, was when he struck out on his own, after a promising beginning as a financial journalist for The Baltimore Sun and Barron’s, and created Grant’s Interest Rate Observer. Forgoing a salary for three years, Grant’s family relied on the income of his wife Patricia Kavanagh, then an investment banker and now a doctor. The struggle paid off. Grant’s, a biweekly now over twenty years old, is a standard feature of the financial horizon, offering a special blend of analysis and opinion that investors have come to rely on, both for its serious number-crunching and Grant’s terse wit.

Like many of sound financial mind, the Grants have long been resident in the Heights. Initially moving to the area thirty years due to its affordability, Grant observes, “We’ve stayed and stayed because we love the people, the neighborhood, the institutions. I never return to the Heights, even from a long weekend, without ogling its beauty.” When asked what he has tried to teach his children about finance, Grant responds with an aphorism that would have made the Yankee John Adams proud: “To be self-sufficient and to value money for what it is—the residue of work.”

Diana Fortuna

Originally published in the Brooklyn Heights Press & Cobble Hil News, February 2006

On the last Sunday in January, a grey and rainy winter day whose mildness befitted London or Seattle more than New York City, Citizens Budget Commission President Diana Fortuna lent her voice not to a chorus of those excoriating state legislators for another late budget, but to one bent on singing the Lord’s praise. While the Grace Choral Society—of which she is also President—is a secular chorus (as is its current collaborator, St. Ann’s “Spiritus et Animus”), the choristers’ program of Psalms stirred the souls of those who had packed the pews of Brooklyn Heights’ Grace Church.

Responsibility for approving conductor James Busby’s idea of combining the choruses lies with Fortuna, who thought of it as “a natural marriage” that has “reenergized” both choruses. Fall’s rehearsals clearly paid off, as the roughly eight-five members present smoothly navigated challenging musical territory that showcased settings of Psalms by modern composers such as Ernani Aguiar, Lili Boulanger, Benjamin Britten and Charles Ives.

Assistant Conductor Jason Asbury’s accompaniment on the organ shone through on the gorgeously melancholy setting Psalm 42 by the British composer Herbert Howells. The marriage of two of Brooklyn Heights’ treasured choirs is proving to be a promising one, and Fortuna is looking forward to this spring, when Brooklyn Symphony Orchestra will join the combined choruses in a performance of Franz Joseph Haydn’s The Creation.

Weekdays, Fortuna is found across the East River, consulting with Citizens Budget Commission (CBC) trustees and government officials, managing its researchers, and presenting its position papers on concerns ranging from containing Medicaid costs to reforming school finance. The nonpartisan commission, originated in the 1930s by a group of business leaders concerned about New York City’s finances, added the entire state’s budget to their focus in the mid 1980s. As the Commission explains on its web site www.cbcny.org, a valuable source of information for any New Yorker concerned with the city and state’s fiscal health, CBC sees its work as combing the roles of a watchdog, research organization, monitor of implementation and disseminator of information.

Fortuna’s many years serving in the Office of Management and Budget in the Koch and Dinkins administrations has prepared her well for her current role, as has her experience in federal government in the Clinton administration, where in her last position in Washington D. C. she served as Senior Policy Analyst for the Domestic Policy Council, concentrating on welfare, health disabilities issues, and the national service organization AmeriCorps.

The way Fortuna articulates CBC’s stance on the issue of state employee pensions is an indicator of her ability to see the bigger picture beyond New York. Regarding what CBC calls a fringe benefit package for New York State employees “more generous than [that] provided by large private employers, the federal government and most other states and localities,” she is adamant: “We don’t want New York to become an island.” Last April, the CBC published a research report entitled “The Case for Redesigning Retirement Benefits for New York’s Public Employees.” A key argument for revamping the benefit package includes CBC’s finding that “Generous pension benefits for City and State workers can no longer be justified on the ground that these workers’ wages are lower than in the private sector, because for most occupations (mangers and professionals are the notable exception) wages in the public sector are higher than in the private sector.”

At least two of CBC’s recommendations for redesign—make employees pay a 50 percent of their premiums, switch pensions from defined benefit to defined contribution plans—are not intended to curry favor with the politically left of center. Then again, CBC’s position paper on prison reform does not seem to have been created with the desires of the right wing in mind, suggesting as it does that shorter terms of incarceration, coupled with alternatives such as house arrest and intensive parole for violent offenders and residency in drug treatment facilities for drug offenders, would offer the state a viable way to save money.

Part of Fortuna’s strength lies in being able to advocate for what she—and the CBC—considers sound economic policy, regardless of its political popularity. Her steadiness in the face of political whirlwinds is due to face another test as the race heats up for Brooklyn’s 11th Congressional District’s open seat: her husband, City Council Member David Yassky, is running. But one not need imagine it’s all grimaces and noses to the grindstone at home. For however dry yet another dinner conversation about good governance might be to their two children, those policy discussions have the potential to remind the couple of their first encounter, at an OMB meeting concerning rent exemptions for senior citizens. “The perfect setting for two policy wonks,” as Fortuna recalls.

Wealth Moves East

Originally published in Registered Rep, January 2008 

Last year ushered in a new titleholder for the wealthiest man on earth: Mexican telecom tycoon Carlos Slim took that honor, knocking Bill Gates and Warren Buffett into second and third place. And the two American icons of wealth could fall further in the ranking if they don’t watch their backs: Close behind them are India’s Mukesh Ambani — who controls the Reliance group of companies together with his brother Anil — and Lakshmi Mittal, also from India, who sit in fourth and fifth place respectively. Sure, it might not mean much to Buffett or Gates exactly where they fall in a ranking of the world’s top billionaires from one year to the next, but the shuffling of positions does highlight an important point for Wall Street: The United States no longer has a monopoly on the richest of the rich.

In fact, emerging-market countries are now minting new millionaires and billionaires at a much faster pace than the United States. Just take the emerging-market four — Brazil, Russia, India and China — so famous for their runaway growth that they earned their own acronym (BRIC) four years ago. According to the Merrill Lynch/CapGemini 2007 World Wealth Report, China now leads the world in sheer number of millionaires — 345,000 at the end of 2006, with 8-percent growth over the year prior. And, as of October 2007, the country had 106 billionaires — seven times the number it had the year prior — according to Shanghai’s Hurun Report.

India’s population of millionaires, meanwhile, grew 21 percent in 2006 to 100,000. In the same period, Russia’s population of high-net-worth individuals (defined as individuals with $1 million or more in liquid assets by the report) rose 16 percent to 119,000, and Brazil’s climbed 10 percent to 120,000. At the very top of the list of countries with the fastest growing high-net-worth populations is Singapore, with Indonesia, the United Arab Emirates, South Korea, South Africa, Israel, Czech Republic and Hong Kong also featured in the top 10. So who is managing these individuals’ newfound wealth?

Not surprisingly, the financial titans on Wall Street and in Europe aren’t letting the new classes of gliteratti elude their embrace. Most of these firms — UBS, Merrill Lynch, Citigroup — have had wealth-management operations in the Middle East and some parts of Asia for 50 to 100 years. Morgan Stanley has been operating in emerging markets for several decades, but has been mostly focused on offshore wealth, and is making its first push in onshore operations this year. But all of the major firms are making new investments and new hires, adding investment offerings and redoubling their efforts at courting these new rich. Indeed, Wall Street’s retail-brokerage executives say their wealth-management operations outside the U.S. generate the greatest opportunities for growth. Morgan Stanley’s Chinese wealth-management business, for example, has the fastest revenue-growth rate of any of their markets, according to James Gorman, co-president of the firm and head of the Global Wealth Management Group. The firm has increased its investment representative headcount in the private wealth-management business 25 percent over the past two years — five times faster than recent financial-advisor growth in the U.S.

BRINGING HOME THE BACON

That’s not to say that the major firms have any intention of neglecting their U.S. operations. In fact, in most cases, these emerging-market investments are good for U.S. financial advisors. They allow the firms to gain access to (or develop greater expertise in) investment opportunities that can then be made available to U.S. clients. It also makes it easier for U.S. advisors to cater to clients who do overseas business or have family in multiple countries.

Federal and state or local regulations and tax treatments in the U.S. can make it difficult for U.S. investors to invest directly in foreign equities, says Robert Miller, vice president of Business Development for Raymond James International Holdings, Inc. But some firms are working to make certain foreign securities available on their U.S. platforms. (Of course, there are always U.S. listed ADRs, as well as mutual funds and ETFs that hold or track foreign stocks.) But, perhaps more importantly, having offices in rapidly growing developing markets can allow firms to offer interesting private equity, real-estate and foreign-exchange opportunities to U.S. clients.

“The knowledge transfer and sharing is quite important,” says Sallie Krawcheck, Chairman and Chief Executive of Citigroup’s Global Wealth Management division. “Most broadly, U.S. clients benefit from Citi’s global presence in private-equity offerings. Sourcing deals in Asia, for example, requires a local presence, which we have.” She points specifically to the firm’s CVC Asia private-equity offering, as well as other CVC private-equity offerings that the firm has had historically, “which have been very successful for our clients.” Another global benefit is in foreign exchange, she says. “Our clients often run businesses with global operations. Being a part of Citi allows them, for example, to enter currency contracts with us and thus stabilize their costs on facilities or labor overseas. We also have many clients who take opportunistic positions in currencies.”

Morgan Stanley offers another example: Because of the firm’s positioning in China, it was recently able to offer U.S. investors their first-ever access to the China A Share market (typically limited to Chinese investors) through a closed-end fund, as well as some “unique international real estate investments,” according to Jim Wiggins, spokesman for Morgan Stanley Global Wealth Management.

As for Merrill Lynch, the firm has been working over the past few months on allowing Turkish Lira cash and securities on its platform. The firm also has cross-border teams that serve the needs of international clients who may need access to multiple financial advisors on different continents, or where the skill set required to serve the clients requires a cross-border partnership.

Krawcheck says Citigroup uses the same approach: “A particular example might be a private bank real-estate client from Hong Kong with children who were educated and are now living in the U.S., and operating parts of the [family] business from the West Coast.” Generally there will be one lead banker for the family, but this banker will split the business with his teammates, she says. “A Smith Barney example could be a U.S. client who is relocating to Asia, and we would team the client with a local professional for services.”

Krawcheck also notes that Citigroup’s operations abroad have allowed the firm to offer special perks to certain clients, like organized trips. “One thing that we did for some of our most significant clients was right after Labor Day. We took a group of those clients — no more than 40 from all over the world, including the United States — to China where they met senior leaders, senior regulators, senior government officials that we at Citi, given our presence in China, were able to access — which had enormous impact for the folks who were there.”

Morgan’s Wiggins offers another indirect benefit: The growth opportunities in wealth management are overseas, and “U.S. financial advisors benefit from a business that is profitable, growing and thriving. When this is the case, there are more resources to invest in technology and other infrastructure, product development, and of course, employees benefit as shareholders,” he says.

INVESTMENTS ABROAD: BRICKS AND HEADS

Merrill Lynch’s current wealth-management investments in Asia are heavily concentrated on India, where it plans to hire more than 300 new advisors over the next two years. The firm is on the ground in New Delhi, Mumbai, Chennai, Bangalore and Kolkata, with offices slated to open this year in Jaipur, Hyderabad, Chandigarh, Ahmedabad and Pune. UBS is also planning a domestic presence in India “subject to getting the necessary regulatory approvals,” says Allen Lo, deputy head of UBS Wealth Management. Morgan Stanley is planning to become a serious presence in India this year as well, starting out in Mumbai, Delhi and Calcutta, and focusing on clients with assets of $1 million or more, according to Leslie Menkes, a Singapore-based managing director for the Wall Street bank’s private wealth-management arm. It will be the firm’s first “onshore” wealth-management operation. Morgan is seeking to hire 100 private bankers in the country over the next four years, and to grow assets under management to $1 billion in the next three years, Menkes told attendees at a Reuters Wealth Management Summit.

India is a hot spot for investment in wealth-management operations for a number of reasons. First, it is one of the highest growth countries in terms of high-net-worth individuals. Second, it has more local talent than some other emerging markets, according to Ted Wilson of the wealth-management consultancy Scorpio Partners. “There’s an enormous middle class in India, and they have an excellent education system and they study extremely hard, so there’s a massive pool of highly educated English-speaking talent available,” Wilson explains. It is also a good place from which to serve Middle-Eastern clients, because it has more Shariah-compliant products listed on its Bombay (BSE Index) and National (NSE Index) stock exchanges than do most Muslim countries combined, according to local media reports, including the Asia Times online.

But some of the big firms have opted to manage their Asian and/or global emerging-market retail clients from established operations in Singapore. One private bank with a strong commitment to the possibilities in Singapore is Citi Global Wealth Management International. In April of 2007, Krawcheck nominated Deepak Sharma to head Citi’s worldwide operations from Singapore. Sharma was formerly Citi’s head of wealth management for Asia and the Middle East. Goldman Sachs also recently relocated David Ryan from Hong Kong to Singapore, from which he will oversee the firm’s investment banking, wealth management and private-equity businesses for the Asia region. One reason Singapore is popular with the financial firms is because many very wealthy Middle-Eastern and Indian investors use the city-state as a tax-free haven. But more importantly, Singapore’s government is making a huge play for wealth-management businesses, looking to turn the country into a wealth-management hub for Asia and the world akin to Switzerland. It has even created a private-banking training program at Singapore Management University — launching a Master of Science in Wealth Management in 2003.

So far, growth in the other two BRIC countries — Russia and Brazil — has been somewhat slower going. Recently Merrill acquired 10 percent of Russia’s TRUST Banking Group, and is considering launching new offices in Moscow and Kiev over the next three years. Prior to that, UBS opened up an onshore wealth-management office in Moscow in the summer of 2006, and Deutsche Bank did the same in 2003. This is partly because Russian wealth is still held largely offshore, according to a white paper titled, “The Private Banking in Russia Survey,” by PricewaterhouseCoopers, which predicts Russia’s private-banking sector will grow from 30 to 50 percent annually over the next several years. “As of fall 2006, only between $10 billion and $12 billion in private funds were being managed in Russia, with another $250 billion to $300 billion parked offshore,” according to the PricewaterhouseCooper’s study. In general, banks seem to be directing their focus in Russia to establishing corporate and consumer banking and trading operations. Many are waiting for the political climate to improve before establishing private-banking offices.

Likewise, Brazil is at the forefront of a shift toward onshore-private banking in Latin America, but it may take some time. “The onshore trend in Latin America depends on political stability. Brazil and (to a lesser extent) Uruguay will become hubs given their relative political stability,” says Wilson. Raymond James, which has an Argentinian affiliate based in Buenos Aires, is looking to enter the Brazilian marketplace, and is evaluating multiple opportunities and forms of entry. In the meantime, firms like Morgan Stanley have invested in Miami as an offshore base for Latin-American clients. Recently Morgan poached Ernesto A. de la Fe, managing director and head of Latin America; Jon Mallon, regional sales manager; and Eric Newman, Colombia specialist, from Lehman Brothers. It also hired a team of five investment professionals to serve high-net-worth Brazilian clients and institutions in the Latin-American market. They are headquartered in the firm’s Miami office.

ROUGH SAILING OVERSEAS

Perhaps, not surprisingly, firms are struggling to hire wealth-management talent on a global scale much as they are in the U.S. At a banking-industry conference in July 2007, Justin Ong, a partner at PricewaterhouseCoopers, estimated that private banks would need to hire 5,000 to 8,000 new client-relationship managers (Read: financial advisors and private bankers) in the Asian region alone over the next three years, according to published reports. To deal with the fierce competition for talent that has led to rampant poaching, UBS and Credit Suisse have set up their own training programs, but these aren’t keeping up with demand. “UBS has had the most foresight,” says Wilson. “It has the stablest position in Asia/Pacific, and realized the only way to stop cannibalization is to produce its own talent. But it’s hard to say who will be lured away from UBS.”

A 2007 PriceWaterhouseCoopers white paper on global wealth management puts it bluntly: “The key to wealth managers achieving their aggressive growth targets is their ability to recruit and retain quality CRMs [client-relationship managers], since the demand for CRMs significantly exceeds their supply. Alarmingly, only 26 percent of CEOs claim to be very confident that they will be able to recruit enough CRMs to fulfill their growth ambitions over the next three years,” write the authors of the paper. As Wilson sees it, for firms looking to gain critical mass in these emerging markets, “The way forward is through acquisition. In terms of timing, no one has the luxury to build up a presence organically.”

Still, executives are largely upbeat. “We do feel the impact of increasing compensation,” says Krawcheck. “But what typically happens is that compensation goes up when the business is good. So a rising-cost environment is also a rising-revenue environment, and that results in growth for the business. The business overall is very, very healthy.”

And barring a global recession brought on by U.S. credit and mortgage trouble, that should continue to be the case.

EMERGING MARKETFAT CATS

NAME: ROMAN ABRAMOVICH

Age: 41 Net worth: 18.7 billion Country of origin: Russia Country of residence: UK & Russia Company name and position: Millhouse LLC /Founder; Chelsea Football Club/Owner How he got rich: Oil and metals, initially, though now his holding company Millhouse LLC has diversified. Made a reported $13 billion by selling Sibneft to Gazprom in 2005. Biggest mistake: Caught cheating. His wife Irina Abramovich divorced him to the tune of £155 million. However, because they divorced in Russia, he saved himself from Ms. Abramovich having a claim on his future earnings, as stipulated by British law.

NAME: MOHAMMED AL AMOUDI

Age: 60 Net worth: $6.9 billion Country of origin: Ethiopia Country of residence: Ethiopia & Saudi Arabia Company name and position: MIDROC/Owner and Chairman; Corral Petroleum Holdings/Chairman How he got rich: Construction, real estate, oil refineries in Sweden and Morocco Biggest mistake: Risking antitrust charges given his extensive investment in Ethiopia, where he owns over 30 different companies.

NAME: JULIO BOZANO

Age: 71 Net worth: $1.9 billion Country of origin: Brazil Country of residence: U.S. Company name and position: Bozano Holdings Ltd/Owner How he got rich: Dubbed “Warren Buffet South” by Business Week in 1996, investment banker Julio Bozano excelled at turning around overstaffed, spendthrift companies, and gained a commanding position during the privatization of the steel business in the early 1990s. Biggest mistake: Failed to grow his financial conglomerate Meridonal to the size at which it could compete with the foreign players, who became very active in the Brazilian market in the late 1990s.

NAME: SUNIL MITTAL

Age: 50 Net worth: $20.9 billion Country of origin: India Country of residence: India Company name and position: Bharti Enterprises/Founder, Chairman and CEO How he got rich: Outsourcing telecom-network operations and IT in order to expand Bharti Airtel, the family mobile-phone business he runs with two siblings, and then launching a successful IPO. Biggest mistake: Not enough work selling the idea of Walmart to Indians, in particular to its small-scale retailers who feel threatened by an influx of box stores. News of a joint venture between Walmart and Bharti Retail provoked protests in cities all over India, and Mittal was burned in effigy.

NAME: ZHANG YIN, ALSO KNOWN AS YAN CHEUNG

Age: 50 Net worth: $3.4 billion Country of origin: China Country of residence: China; holds a U.S. green card Company name and position: Nine Dragons Paper/Founder and Director; American Chung Nam/Founder and Director How she got rich: Recycled paper. She founded a company in America that imports scrap paper to China in the early 1990s. Ten years later she was a giant corrugated-cardboard manufacturer on the Chinese mainland. Biggest mistake: According to the South China Morning Post, naming her 24-year-old son Lau Chun-shun to the board as the company’s non-executive director.