Is it an appropriate moment to be asking some contrarian questions about the ongoing global economic financial situation?
Such as: 'Is the knee jerk reaction being vastly overdone?' 'Are the securities that are thought to be toxic actually going to prove to be toxic in the longer term?' 'Might we see substantial amounts being written back in future years when circumstances improve?'
Earlier this year, when commodities were in overdrive and looking like a one-way bought, I asked in a prominent location (International Securities Financing magazine) if commodities had been overbought, and financials oversold, and was proved right on the first part of the question. Bank shares have continued to struggle, not least in the case of Lehman Brothers, but the US dollar has strengthened considerably, indicating that it had indeed been oversold.
Other questions to ask might include the following. Are we going to see a switch away from complex computer-based trading models to first-hand personal knowledge and gut instinct? Might we see a return to common sense in financial services? If something sounds too good to be true, is it because it is indeed too good to be true? Should Basel 2 be scrapped? Has it helped get us into this nonsense because of its low level of capital requirements for residential mortgages in developed economies? Have we seen the end of the light touch regulatory regime that bankers prize so much, but have quite obviously abused?
Most importantly, perhaps, Should proprietary trading be banned, and banks forced to earn their living from transaction fees and relationship fees, rather than gambling? If a financial institution wants to earn its money from betting, should it not go the whole hog, do the honest thing, and restructure itself as a bookmaker?
I honestly don't know what to make of what's going on, but my gut feeling is that we are overshooting on the way down, just as we overshot on the way up. But then, I've misread the whole thing right from the start. I've seen a number of disasters and meltdowns over the years, starting with the collapse of Johnson Matthey in the first week I was at the Financial Times Group back in October 1984. Even earlier than that, actually, with the collapse of Banco Ambrosiano when I was a graduate trainee at the former Midland Bank International, and then the scandal of BCCI. Barings of course, in 1995, was another, Long-Term Capital Management and the Russia/Asia crises of 1998, and we had a prolonged recession with plunging property prices in the 1990s.
Somehow, we seem to muddle through. But if Merrill Lynch isn't safe, who IS?? One reporter last night said Morgan Stanley when he meant Merrills, and I thought that might be enough to spark a run. Is Goldman Sachs safe? If not, it could be in for a rough time, because of the way it has neglected press relationships in recent years. I always advise companies to work on managing their relationships with the press when times are good, to build up a bank of goodwill, that they can draw on to give their side of the story when things go wrong. Goldman Sachs just hasn't done that as an institution of late.
All we can really do in the current climate of fear and uncertainty, as the great French writer and philosopher Voltaire would have advised, is cultivate our own gardens. We can't affect global events, so it's best not to fret too much about them. Another frightening thing, incidentally, is that I don't think anyone in the financial industry knows what to do in the current circumstances. The frantic pulling at the usual interest rate and taxation levers doesn't seem to be having any effect. Maybe it's time to let market forces do their very worst. Just a thought or two...
