Where could the next financial crisis come from?


After 21 years of writing my weekly column for the FT, I’ve decided to move on. When I started in February 2001, the “smartest Enron guys in the room” were on their way to engineer the biggest crash of the young century. Now we are heading into another recession and I feel that the excesses of our time can only be resolved with another dramatic institutional failure.

Not the big banks this time, at least not the big US banks. I guess we will see the unexpected failure of a private equity firm, sick of hidden leverage and without a central bank willing to take sole responsibility for the mess.

When I worked for an investment bank in the early 1980s, one of the associates told me to “find a company that is worth more dead than alive”. There were plenty of zombie American corporations back then, old names that had expanded well beyond their initial industry competence. They were treated like medieval fiefdoms by the chief executive, who had little reason to fear the Securities and Exchange Commission or shareholders. Unsurprisingly, most were not globally competitive and had little attention and poor internal reporting.

And their stocks were cheap. You find the weak parent who just wanted the money now so he could start his croquet career in Palm Beach, stop by a compliant bank (we had them on tap) and close the deal.

In a year or two, we’d arrange to shut down or sell the irrelevant bits, sell the president’s private golf course, and catch a market updraft to float our newly revamped outfit, snappy new logo and all. Another deal trophy for the office.

We weren’t arrogant enough to say we were doing God’s work – we weren’t Goldman Sachs, after all. But pure and simple “shareholder value” was how corporate America recovered from the wasteful, bureaucratic mess they had become in the 1970s. We were helped by the economic recovery and the interest rates that declined for years.

It was a bargain, run by a handful of offices in a cheap maze of Rockefeller Center. We never had the illusion that we and a handful of other private equity firms could make our own time. And we were driven by capital gains, not costs.

Now, however, global private equity firms are in for the fee. They pool assets, don’t reduce bureaucracy, and streamline product lines. Private equity firms have developed their own bureaucracies, and the founders are no longer starving strangers, but Palm Beach croquet players. They have become a small group of self-centered oligarchs.

The public sees this and takes offense to it, especially as rent or house prices rise to unaffordable levels.

A related group are asset management CEOs. I was watching one of them give “stakeholder presentations” over a six-month period. He posed as a “high priest of global governance,” instead of someone who hired a few good operations people and a great lobby group.

Well, if Pride disappears before a fall, many private equity players will indeed experience a very long fall. If they really are the “Universal Spirit”, then they should run for office. Settle into one of their homes and hit the streets and malls to talk with their people. If it’s below them, they can shut up.

When Citigroup was in trouble in March and April 2009, I was in favor of an orderly resolution. Didn’t happen. After the financial crisis, we did not sufficiently liquidate our leverage and we paid for it with weak growth.

A recession is the time to clean up excess borrowing and irresponsible overkill. These days, these would be among the giant private equity firms and asset managers. We don’t need oligarchs here.

I am grateful to my readers and have greatly appreciated your thoughts and comments. I can occasionally contribute to the FT. And if you want to know what I will do in the future, write to me.



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