This content is from: Home

INSIDE II - Risky Business

It's hard to identify a bubble until it has burst.

It's hard to identify a bubble until it has burst. So said Alan Greenspan, a man who should know a thing or two about the issue, in the aftermath of the technology bubble several years ago.

Talk of bubbles is once again in the air as bond and stock markets swoon around the world. What seemed at the start of the summer like an isolated problem in the subprime mortgage sector has cascaded rapidly through the credit markets. Collateralized debt obligations and other structured products to which Wall Street gave an investment-grade stamp suddenly have no price, prompting banks to halt withdrawals from growing numbers of investment funds. As fear gains the upper hand over greed in the minds of investors, the risk of greater market turmoil grows.

None of this is particularly surprising, or necessarily unwelcome. Years of abnormally low interest rates, massive reserve accumulation and financial innovation have flooded markets with money and pushed investors to take bigger gambles to maintain returns. Many of them seemed to forget that risk comes at a price, and that price is rising rapidly. Whether this setback represents the bursting of a liquidity bubble or merely a healthy correction will become clear soon enough -- in retrospect.

It was without the benefit of hindsight that Institutional Investor published its first ranking of the top online financiers seven years ago -- just as the technology bubble was about to pop. Hardly an auspicious beginning, and yet even as equity values suffered mightily, the impact of technology on the financial services industry has grown ever more profound. Innovations that were once the province of start-ups and niche players have become critical to mainstream business.

Our latest annual ranking of "The Online Finance 40," beginning on page 27, underscores this transformation. Neither the top two executives -- Craig Donohue, CEO of the CME Group, and Duncan Niederauer, president and co-COO of NYSE Euronext -- nor their firms figured on our inaugural list. But by developing or acquiring new technology platforms, both the CME and the NYSE have turned themselves into powerful electronic exchanges that are forcing the pace of consolidation.

For some institutions, change is harder to effect. Consider Kamehameha Schools. The Hawaiian trust, founded to support a school system of the same name, enjoys one of the richest endowments of any educational institution but saw its returns suffer in the '90s from an opaque and politically driven investment process. As Senior Writer Steven Brull relates in "Aloha Trust," beginning on page 60, court-ordered reforms have strengthened Kamehameha's governance and bolstered returns. But chief investment officer Kirk Belsby still needs to diversify the $9 billion portfolio to ensure that those improvements will last.