LOS ANGELES Institutional clients are cautiously following the web of problems surrounding TCW Group Inc.s parent and Frances second-largest bank, Societe Generale SA.
Huge trading losses, billion-dollar structured-debt write-downs, faulty control systems, allegations of insider trading, and talk of takeover at the Paris-based bank have cast a cloud over the Los Angeles money manager, which runs $153 billion in assets.
I have not heard of anybody putting TCW on watch. But theres a lot to be discovered about what was going on at Societe Generale, said Julia Bonafede, senior managing director at Wilshire Associates Inc., Santa Monica, Calif.
Our research group is aware of and watching the developments with Societe Generale. A lot of the information coming out is troublesome, Ms. Bonafede said.
According to a financial industry source, TCW has been in close contact with its main clients since the bank familiarly known as SocGen disclosed on Jan. 24 the €4.9 billion ($7.2 billion) trading debacle, which bank executives blame on a single low-level rogue trader that Bank of France Governor Christian Noyer described as a computer genius. The jaw-dropping loss dwarfed the bank's €2 billion write-down related to collateralized debt obligations disclosed the same day. As a result of the losses, SocGen said it needed to raise €5.5 billion to shore up its capital position.
TCW has a long-standing history of open, honest dialogue with our clients. Our clients remain supportive of our firm and understand the difference between our extensive asset management platform and the activities carried out at the separately managed investment banking subsidiary of Societe Generale, said Michael Utley, vice president for communications at TCW, which SocGen acquired in 2001. TCW has continued to operate mostly independently and has retained its culture and brand, Mr. Utley said.
Tax-exempt institutional funds account for nearly half of TCWs assets under management.
TCW is in no way involved in any of the fraud due to rogue trading. TCW is an autonomously managed, indirect subsidiary of Societe Generale. We use separate risk management, compliance, trading and back-office systems and controls, Mr. Utley added. We posted strong results in 2007, we have a well-capitalized balance sheet and we remain on a solid growth trajectory. We expect that the developments at Societe Generale will have no direct impact on our business.
There is no evidence so far that TCW or other Societe Generale Asset Management SA units in Europe and Asia might be tainted by SocGens woes or that clients are mulling moving portfolios to another firm. But consultants agree the situation bears watching.
At this stage Im not concerned, and Im watching this, said Michael Rosen, chief investment officer at Angeles Investment Advisors LLC in Santa Monica, Calif. If the concern is that the financial stress at the parent company has some bearing on TCW, its management or its ability to operate, I think those worries are unfounded, because the losses at the bank have no impact on TCWs management or operations or their ability to perform.
But the $7.2 billion loss has turned SocGen into a takeover target. Officials at BNP Paribas SA, Frances largest bank, already have stated their intention to pursue the wounded rival anew after a failed hostile bid in 1999. Other European banks also are in pursuit, prompting European Union officials to warn the French government that it must let foreign banks compete for SocGen.
For investors, this is raising questions about TCWs future under a possible new ownership although a senior aide to French President Nicolas Sarkozy reportedly said, The state will not remain a bystander and leave Societe Generale at the mercy of any predator.
Mr. Rosen added: In the U.S., TCW is easily the largest, most prominent asset management group among the French banks. SocGen has been, I think, assiduous in promoting TCWs independence. Its management has enjoyed complete authority and independence from the parent, which proved a very successful strategy for SocGen. It would seem illogical for that relationship to change, whether its under the current ownership or a different ownership structure.
Jeff Nipp, director of investment manager research at Watson Wyatt Worldwide in Atlanta, declined to comment on the specifics of the SocGen-TCW situation but said the issue of the relationship between an asset manager and its parent company always is a factor to consider.
You always want to look at the relationship between the parent and the subsidiary, what is the impact of the success or the troubles of the parent, how managers are paid If part of the compensation is in stock options in the parent, there is the risk that the asset manager would want to leave the company, Mr. Nipp said. What the client has to ask is whether there is any impact on performance. Clients would want to talk about this, but that does not mean they would want to make any change.
In the event of a SocGen takeover, TCW and SGAM could either be absorbed by the acquiring bank and continue to operate as separate units, be merged with the new parents existing asset management units or spun off all scenarios that Mr. Nipp said belong solely to the realm of speculation at this stage.
It all depends on who the new parent might be: what is their experience with the asset management industry; what else do they have in that area A lot of things come into play, Mr. Nipp said.
The biggest challenge for the TCW management team might be to weather the storm while a complex official investigation proceeds in Paris. Time may be of the essence as new business is likely to shy from TCW until the SocGen affaire is fully resolved.
According to a derivatives trader familiar with the equity index positions that precipitated SocGens fall, the banks account of the debacle stretches the imagination. The rogue trader would have had to bypass five layers of controls, forge authorization from trading to confirmation, reconciliation, settlement, margins , the source said.
Risk management could not have missed $75 billion worth of long positions, even if the rogue trader had tried to offset the exposure by creating fake short positions in the over-the-counter market, the source said.
Finally, Robert Day, TCWs chairman of the board and a SocGen board member, sold large amounts of SocGen stock during the past two months. There is no evidence that Mr. Day knew about the brewing trading scandal when he last sold shares on Jan. 18 the day SocGens management became aware of the problem under a trading window that allows company executives to trade in the stock of their own company at specific times, according to Mr. Days spokesman Josh Pekarsky.
French prosecutors have not filed insider trading charges against Mr. Day, who, according to French market regulator Autorite des Marches Financiers sold for himself and his foundation €45 million worth of SocGen shares on Jan. 18, and a total of €140 million SocGen shares since Jan. 2.
Mr. Day and his familys trusts and charitable foundations sold Societe Generale shares in December and January, which was a window of time where such trades were permitted under Societe Generales trading policies, said Mr. Pekarsky. No inside information was used in any way with respect to these sales. Mr. Day has pledged his cooperation into any inquiries of this matter.