Credit crunch feeds fear of structured finance

GENEVA (Reuters) - A global credit crunch in financial markets has given many of the world's wealthy a lingering distrust of new-fangled "structured" investment products, even though many are no worse off.

Private bankers attending a Reuters Wealth management Summit in Geneva, said they believed the legacy of a liquidity crisis which seized up lending between banks and spooked investors would be to make the wealthy even more reluctant to put their money in instruments they could not readily understand.

The credit crisis was triggered by a meltdown in the U.S. market for subprime mortgage loans -- extended to borrowers with shaky credit histories -- which many banks packaged into complex bundles of securities and then sold on to investors.

"To the extent that things are called exotic, I think there is going to be less appetite for those," said Peter Flavel, Global head of private banking at Standard Chartered Plc.

Demand for mortgage-backed securities, many of which received triple-A ratings from leading credit risk agencies, dried up over fears that exposure to subprime loans had undermined their intrinsic worth.

"My general rule is that if you cannot understand it in the first minute or two it's probably too complex to be selling and we tend to keep to the simpler structures," said Flavel.

One of the features of the credit crunch, which caused outright panic in markets in August, has been the complexity of the financial structures which set it in motion.

Many investors realized belatedly that they had put their money into investments they simply did not fully understand.

SIMPLICITY

Other private bankers agreed that there were virtues in simplicity even in the often rarified world of advising the world's wealthy on how to manage their money.

"We certainly wouldn't be buying or promoting investments we didn't understand or thought they (clients) didn't have sufficient time to understand," said Mark Cunningham, Managing Director private banking at Bank of Ireland.

For many of their more sophisticated clients, the recent market ructions may even provide them with fresh opportunities to make money. "We spoke very regularly to our clients, informing them what was going on. Hopefully with such disruption taking place there will be more opportunities going forward," said Jan Erik Frogg, head of the alternative investments business at Union Bancaire Privee.

Frogg said the market shakedown was a salutory correction after years of cheap credit steadily eroded risk premia and induced a false sense of security among many investors.

Clients who were prepared to sit out the crisis in financial markets were likely to reap rewards before long.

"What we are living today is simply that reality has caught up with everyone," said Frogg.

"It's classic, it's this recreation of risk premia. You should be holding on to what you have and in the next three to six months we will have much better opportunities," he said.

Fears of a recession in the United States, which could trigger a global slowdown, were very much alive and weighing on investors, said Standard Chartered's Flavel.

"Our advice to clients is ... have a heightened sense of awareness about the future but don't make any particular big changes if you're investing for the long term," said Flavel.

"If you're a trader that's a different position all together."