Where the next financial crisis could come from

After 21 years of writing my weekly column for FT, I decided to move on. When I started in February 2001, Enron’s “smartest guys in the room” were on their way to the biggest engineering crash of the young century. We are now on the road to another recession and I have the feeling that the deviation of our time can only be resolved with another dramatic institutional failure.

Not the big banks this time, at least not the big American banks. My guess is that it looks like an unexpected failure of a private capital company, sick of hidden leverage, and without a central bank willing to take sole responsibility for the mess.

When I worked at an investment bank in the early 1980s, one of the partners told me “find a company worth more dead than alive”. There were a lot of American zombie corporations back then, old names that expanded far beyond their initial industrial capability. They were treated with medieval trust by the CEO, who had little reason to fear the Securities and Exchange Commission or shareholders. Unsurprisingly, most of them were not competitive in the world and had little focus and poor internal reporting.

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

Within a year or two we would arrange to close or sell the irrelevant parts, sell the chairman’s private golf course, and grab an improvement in the market to flood our new Reagan outfit, the new logo and everything. Another deal trophy for the office.

We would not be so arrogant as to say that we do The work of God – After all, we were not Goldman Sachs. But “shareholder value” straight was the way corporation America recovered from the wasteful and bureaucratic mess it became in the 1970s. We have benefited from economic recovery and interest rates that have fallen over the years.

It was a good business, running out of a handful of offices in a cheap Rockefeller Center complex. We have never had the illusion that we and a handful of other private equity firms can create our own weather. And motivated us from capital gains, not commissions.

Now, however, global private equity firms are doing it for commissions. They collect assets, do not cut back on bureaucracy and rationalization of product lines. Private equity firms have developed their own bureaucracies and the founders are no longer hungry outsiders, but Palm Beach croquet players. They became a small group of self-employed oligarchs.

The public sees this and resents it, especially when its rent or house prices rise to unreasonable levels.

A related group are the CEOs of asset management. I watched one of them do “stakeholder presentations” for a period of six months.

Well, if pride goes before a fall, many in private capital will have a very long fall. If they are truly the “universal mind,” then they need to run for office. Settled in one of their homes and took to the streets and malls to talk to their people. If it’s under them, they can shut up.

Even when Citigroup was in trouble in March and April 2009, I was in favor of an orderly decision. Did not happen. After the financial crisis, we did not eliminate enough of our leverage and paid for it with low growth.

A recession is a time to clean up excess loans and the inconceivable mighty. These days, these will be between the private equity firms and the huge asset managers. We do not need oligarchs here.

I am grateful to my readers and I greatly appreciated your thoughts and comments. I may occasionally contribute to FT. And if you want to find out what I will do in the future, contact me.

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