Tonight:
4°c
For most of this year, the population at large thought economic prospects were rosy, and suddenly, almost overnight, it all changed. Following the collapse of Lehman Brothers, everything fell apart, and we are still living with the consequences of a near-total collapse of confidence in the financial system.
People were warned but no one listens to people who tell them things they don't want to hear, however true they may be. Tell someone they are too fat, they have drunk too much or they are both greedy and dishonest, and they are unlikely to agree or modify their actions other than to strike you off their Christmas card list in the future.
No more do they agree when you talk about the financial system in such a way when they are making so much money out of its excesses. They prefer to think that their riches flow from their skill rather than their luck in being in the right place at the right time.
Yet, as Investment Management Association chairman Robert Jenkins said a few weeks ago when addressing a class of would-be fund managers at London Business School, there were plenty of signs of trouble to come - going back to 2007 - if people had cared to heed them.
So on this the last day of the year, it may be worth looking back at what he thinks these were before framing New Year resolutions not to be caught out next time - for there surely will be a next time.
The first signal was the meltdown of the two Bear Stearns-sponsored hedge funds. How was it, Jenkins asked at the time, that 100% of investor equity could be lost amid such relatively minor market movements? The answer, of course, was extreme leverage.
That was the warning, but the failure was that it did not occur to him that the same attitudes, same securities and same appetite for gearing might be lurking within Bear Stearns itself - the sponsor of the funds, the prime broker to the funds and the training ground for the managers of the funds.
The second warning was the announcement by private-equity giant Blackstone Partners that it planned to go public. Why was it, one might have asked, that these shrewd operators and refugees from former corporate behemoths, were suddenly so willing to share their vaunted profit stream with outside investors - and, by taking on the responsibilities of a quoted company, also sacrifice their privacy and their flexibility?
The public was being offered the "chance of a lifetime" to pay a multiple of past years' earnings to participate in future periods of performance. Perhaps at the time one should have given more weight to the possibility that the partners who were selling out had concluded that the future for their firm was going to be much less rosy than the past.
The third alarm bell was a similar transaction, but one that involved a hedge fund, when GLG Partners reversed into a listed entity, going public, partially cashing out and creating a liquid exit in the process.
Perhaps, says Jenkins, the principals in this high-flying hedge fund were less confident of their ability to generate earnings in the future than they had been in the past? On the other hand, there is also the possibility that they were just nice guys who wanted to cut everyone in on a piece of the action.
The fourth warning was more subtle. Eighteen months ago, had you gone to any financial conference, you would have found that the topic of risk management was largely absent from the agenda. And if by accident some organiser insisted on putting the topic on the table, you could be sure that it was the least attended and most boring session. It was (in the words of Sherlock Holmes) "the dog that did not bark". The absence of sensible discussion about risk management was the clue to a dangerous complacency.
Jenkins' conclusion was that one need not be a London Business School graduate - much less an investment expert - to ascertain a bubble. But people do have to keep their eyes open and apply common sense.
And a PC New Year...
The following seasonal message came in over the holiday period from Lorna Tilbian, media analyst at Numis. I thought it was sufficiently of our times to merit a wider audience.
“Please accept with no obligation, implied or implicit, best wishes for an environmentally conscious, socially responsible, low stress, non-addictive, gender-neutral celebration of the winter solstice holiday, practised within the most enjoyable traditions of the religious persuasion of your choice, or secular practices of your choice, with respect for the religious/secular persuasion and/or traditions of others, or their choice not to practise religious or secular traditions at all.
“Also wishing you a fiscally successful, personally fulfilling and medically uncomplicated recognition of the onset of the generally accepted calendar year 2009, but not without due respect for the calendars of choice of other cultures.”
