Moreover, a conflict of interest between professional investment managers and their institutional clients, combined with a global glut in investment capital, led to bad investments by asset managers in over-priced credit assets. Professional investment managers generally are compensated based on the volume of client assets under management. There is, therefore, an incentive for asset managers to expand their assets under management in order to maximize their compensation. As the glut in global investment capital caused the yields on credit assets to decline, asset managers were faced with the choice of either investing in assets where returns did not reflect true credit risk or returning funds to clients. Many asset managers chose to continue to invest client funds in over-priced (under-yielding) investments, to the detriment of their clients, in order to maintain their assets under management. This choice was supported by a "plausible deniability" of the risks associated with subprime-based credit assets because the loss experience with early "vintages" of subprime loans was so low.
How are professional investment managers compensated?
what effect does this have?
did they feel pressure to grow the assets under their control?
who did they have a conflict of interest with?
what decision did they have to make when profits from credit assets went down?
which did many of them choose?
did this benefit their clientele?
what effect did too much global investment capital have?
was the danger with subprime mortgages considered high?
what could they have done instead of investing the client's money?
on the volume of client assets under management
compensated based on the volume of client assets under management
led to bad investments
led to bad investments by asset managers in over-priced credit assets
yes
There is, therefore, an incentive for asset managers to expand their assets under management in order to maximize their compensation
their clients
Many asset managers chose to continue to invest client funds in over-priced (under-yielding) investments, to the detriment of their clients
choice of either investing in assets where returns did not reflect true credit risk or returning funds to clients
choice of either investing in assets where returns did not reflect true credit risk or returning funds to clients
to continue to invest client funds in over-priced investments
chose to continue to invest client funds in over-priced (under-yielding) investments, to the detriment of their clients
No
 to the detriment of their clients
caused the yields on credit assets to decline
caused the yields on credit assets to decline
No
 because the loss experience with early "vintages" of subprime loans was so low
return funds to clients
returning funds to clients