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Where the next financial crisis could come from

After 21 years of writing my weekly column for the FT, I have decided to move on. When I started in February 2001, Enron’s “smartest guys in the room” were on their way to the engineering the biggest crash of the young century. Now we’re headed into yet another recession and I have the sense 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 American banks. My guess is that we’ll see the unexpected failure of a private equity firm, sick with hidden leverage, and with no central bank willing to take sole responsibility for the mess.

When I worked for an investment bank in the early 80s, one of the partners told me to “find a company that’s worth more dead than alive”. There were a lot of zombie American corporations at the time, old names that had expanded far beyond their initial industrial competence. They were treated like medieval fiefdoms by the chief executive, who had little reason to fear the Securities and Exchange Commission or shareholders. Not surprisingly, most were globally uncompetitive 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 compliant bank (we had them on tap) and close the deal.

Within a year or two we would arrange to shut down or sell off the irrelevant bits, sell the chairman’s private golf course, and catch a market updraft to float our newly Reagan-ised outfit, zippy new logo and all. Another deal trophy for the office.

We weren’t quite so arrogant as to say we were doing God’s work — we weren’t Goldman Sachs, after all. But straight-run “shareholder value” was the way Corporate America recovered from the wasteful and bureaucratised mess it had become by the 1970s. We were helped by economic recovery and interest rates that declined for years.

It was a good business, run out of a handful of offices in a low-cost warren in Rockefeller Center. We never had the illusion that we and a handful of other private equity companies could make our own weather. And we were motivated by the capital gains, not the fees.

Now, though, the global private equity companies are in it for the fees. They are asset-gathering, not cutting bureaucracy and rationalising product lines. The private equity companies have developed bureaucracies of their own and the founders are no longer hungry outsiders, but Palm Beach croquet players. They have become a small group of self-dealing oligarchs.

The public sees and resents this, particularly as their home rent or house prices increase to unaffordable levels.

A related group are the asset management CEOs. I was watching one of them do “stakeholder presentations” over a six-month period. He made himself out to be more of a “High Priest of Global Governance”, instead of someone who hired a couple of good operations people and an excellent lobbying group.

Well, if Pride goeth before a Fall, many in private equity will have a very long fall indeed. If they really are the “Universal Mind”, then they should run for office. Settle down in one of their homes and go out to the streets and malls to talk with their people. If that is beneath them, they can shut up.

Back when Citigroup was in trouble in March and April 2009, I was in favour of an orderly resolution. Didn’t happen. Post the financial crisis, we did not liquidate enough of our leverage and we have paid for it with low growth.

A recession is a time to clean away excess borrowing and the unaccountable over-mighty. These days, those would be among the private equity companies and the giant asset managers. We don’t need oligarchs here.

I am grateful to my readers and have very much appreciated your thoughts and comments. I may contribute on occasion to the FT. And if you want to find out what I will be up to in the future, drop me a line.

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