A Word to the Wise

“Mind the gap,” warns a recent article in the Financial Times earlier this month. FT columnist John Plender offers substantial evidence that “income inequality in the U.S. is at its highest since that most doom-laden of years: 1929.” And, I would add, it doesn’t bode well for the image and reputation of retail and investment banks and hedge fund and private equity firms.

Here are just two of the gasp-inducing indicators Plender cites, which were the result of an analysis of Congressional Budget Office figures by Jared Bernstein of the Economic Policy Institute:

• Between 1979 and 2005, the pre-tax income for the poorest households grew by 1.3% annually and middle incomes grew by less than 1%, while the income of households in the top one percent grew by 200% pre-tax and — even more shockingly — by 228% post-tax.

• The result of this lopsided distribution of income growth was that, by 2005, the average after-tax income for the bottom fifth of households was $15,300; for the middle fifth $50,200; and for the top 1%, just over $1 million.

The subprime mortgage crisis and the collapse of the American housing market has left negative equity in its wake … also anger about a system that gives banking executives huge bonuses when the economy is booming, while taxpayers pick up the bill when banks fail.

This is certainly a public relations challenge, but it’s not just a PR challenge. It’s a fundamental operational issue that also needs to be addressed by the entire financial services industry — including banks, investment banking, hedge fund management and private equity firms and their professional associations — to avoid regulatory backlash … or worse.

Hedge Funds: The Root of All Evil?

According to Paul Krugman, op-ed columnist for The New York Times, in his blog last month, Iceland believes it may be the victim of a conspiracy of “unscrupulous dealers” trying to break the country’s financial system. “They will not get away with it,” says Central Bank Governor David Oddsson.

According to Krugman, “Such things really do happen … According to the Hong Kong Monetary Authority [HKMA] , several major hedge funds engaged in a ‘double play,’ shorting both the city-state’s stock market and its currency.” The nefarious plot in the late 1990s was thwarted when the HKMA bought up a large fraction of the Hong Kong stock market.

Last year, New York magazine asked the question: “Are hedge funds the virus that’s going to make the markets keel over? Are they an evil cabal?”

Clearly, hedge fund PR is a concept that a lot of people managing these funds today dismiss or overlook entirely. It baffles me. The elements of the perfect storm public relations crisis are all about the hedge fund industry: the “elitist” investment profile, the shadowy but enormous impact on the financial markets and the volatility that is the nature of hedge fund investing. We’ve already seen glimmerings that all these elements can come together and create some serious problems for the industry.