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Will new portfolio managers save the banks this time?

In recent years many leading banks have appointed specialist portfolio managers to take responsibility for their whole loan books. If these have done a good job of reducing concentrations of exposure and hedging doubtful assets, banks won’t suffer too much in the credit downturn. The worry is that secondary credit markets have not developed enough for them to reshape their portfolios. And surprisingly it’s a new discipline. Many banks have still not embraced it and even those that have may not have given portfolio managers enough power to do the job properly.

Lucent Technologies, Xerox, Marconi, Swissair, Railtrack, Sabena, Enron - the list of once highly creditworthy companies suffering sudden and precipitous declines in credit quality grows longer almost by the day and no-one knows how many more angels will fall nor how many more junk-rated companies will disappear before the global economy recovers. Moody's Investors Service calculates that in the first three quarters of 2001, 185 rated and unrated corporate bond issuers defaulted on $76 billion-worth of bonds, compared with $49 billion-worth for the whole of 2000.

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