The topic of most financial conversations changed in early February. Suddenly, all that investors were talking about was subprime lending. The shift came on the heels of announcements by HSBC Holdings and New Century Financial, two of the nations largest providers of loans to home buyers with poor credit, that their bad-debt charges would be substantially higher than had been forecast. Subprime lending hasnt faded from the headlines since and its unlikely anytime soon, though concerns appear to be waning that the problems in the subprime sector could spread.
The stage for the current situation was set, in part, in 2006, when Wall Street was just getting to know new Federal Reserve Chairman Ben Bernanke. The Dow Jones industrial average jumped 16.3%, the SP 500 rose 13.6%, and the Nasdaq composite index increased 9.5%. One might think those gains meant growth for all financial services firms, but investors gambling on riskier investments hurt some firms, such as Ariel Capital Management (No. 2 on the BE ASSET MANAGERS list with $16.1 billion in assets under management), whose long-term approach avoids riskier strategies. Assets under management fell by $3 billion and revenues dropped 18%, making last year one of the firms toughest since the early 1990s.
It was a difficult year because many people looked at their investments on a short-term basis, says John W. Rogers Jr., Ariels chairman and CEO. Several institutional clients shifted money from high-quality stocks into more aggressive, riskier equities, such as those from energy, housing, and other cyclical industries. But since the Fed stopped its barrage of interest rate hikes in August, Rogers says the firm is realizing outstanding performance relative to its benchmark.
Last year, the stock market was propelled by strong corporate profits, relatively low unemployment, and merging economies, says Will Retzer, senior analyst at SNL Financial, a financial information research firm based in Charlottesville, Virginia. The bond market was also bullish, notes Retzerthe yield on the benchmark 30-year Treasury note gained more than 6% for the year.
These days, all financial services firms, not just those that are black-owned, must look at new ways to develop revenue sources, add customers, and nimbly adapt to change while gracefully retaining existing customers. But black-owned banks, investment banks, private equity firms, and asset managers face additional pressures while competing in an unforgiving economic environment. For instance, black-owned banks face greater competition from the nations largest banks and from online financial firms, such as HSBC Direct and ING Direct, which attract customers by offering higher interest rates.
Banks: New Opportunities
Assets at the 25 African American-owned depository institutions on the BE BANKS list increased 7.4% to more than $5.7 billion, and deposits rose 6.9% to more than $4.6 billion last year from 2005, according to the Federal Deposit Insurance Corp.
U.S. banks, including those that are black-owned, faced several challenges last year, including tighter net interest marginsthe percentage difference between what banks earn on loans and what they pay on deposits; the slowdown in mortgage lending; and rising delinquencies on existing loans, says Buddy