Sunday, 12 April 2009

Inefficient Markets: Have You Been A Beneficiary? Or Why City Executives Make So Much Money...

It is frustrating when we pay for a service that is expensive and adds little value. Often this is due to an uncompetitive market creating inefficiency. Many feel this way about the taxes they pay and the services produced by the state. Closer to home for me, it is hard to believe that the new Terminal 5 at Heathrow, which is in essence a large shed, would have cost £4bn+ if there was a truly competitive market for airports.

It is fun to point at these shocking examples of waste, to groan at the vested interests such as strong unions that push rewards above market rate. But how often do we assess the money we have made ourselves in such a light?

- How come so many people (bankers, lawyers, accountants) have made so much money from M&A advisory work when most studies show that acquisitions typically don’t add value?

- Isn’t it odd that almost all hedge funds and private equity managers charge the same ‘2 and 20’ price? Are there no scale economies in this industry? Doesn’t this look like monopolistic pricing?

- It is well documented that tracker/index funds outperform the typical asset manager, yet the latter are very well paid...

- Independent Company Directors set the pay of Senior Executives; the benchmarks created then set remuneration for Independent Directors in their own Executive roles; does that sound right to you?

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