Egypt is flying apart, China and India are both overheating, and there has been no financial reform that will accomplish anything; nonetheless, it’s party time in Davos.
One analyst with not enough clearance to party had a different message, so did Bloomberg columnist Simon Johnson. Otherwise it was party on dudes.
Please consider Lonely Analyst Warns of 2015 Bank Crisis Amid ‘Upbeat’ Davos
As politicians, executives and financiers networked at parties and panels last week in Davos, Switzerland, Barrie Wilkinson was in a nearby hotel, warning that a 2015 financial catastrophe may be looming.
“The fundamentals haven’t been addressed at all,” Wilkinson, a London-based partner at consulting firm Oliver Wyman, said in an interview at the Hotel Morosani Schweizerhof. “The things that caused the previous crisis — loose monetary policy and trade imbalances — they’re actually bigger now than they were then.”
In the caste system of the World Economic Forum’s annual event in the Swiss ski resort, Wilkinson was at a bottom rung, with an identification badge that denied him access to most sessions and soirees. His message clashed with the optimistic tone of many at the center of the meeting, who were eager to emphasize the progress made after two years of hand-wringing in the wake of the 2008 financial crisis.
“The systemic reforms that have been accomplished are significant,” Canadian Finance Minister Jim Flaherty said as he left a private meeting with finance company chief executive officers on Jan. 29. “We need to communicate better that financial institutions globally are operating on a very different basis today, that they are operating with higher capital and are better regulated.”
‘An Avoidable History’
Wilkinson’s report, titled “The Financial Crisis of 2015: An Avoidable History,” isn’t so sanguine. The 24-page study describes how banks, unwilling to accept the lower returns on equity, or ROEs, that result from higher capital requirements, may fuel a new bubble by chasing high returns in commodities or emerging markets. Regulators, by focusing their restraints on banks, may drive risk-taking into unregulated funds that also pose danger to the system.
The report urges bank executives and shareholders to accept that returns of the past are unsustainable and that they need to do a better job of monitoring risks, especially in areas that produce unusually high profits.
“Banks need to be less leveraged,” said Wilkinson, who has an engineering degree from the University of Cambridge and has worked at Oliver Wyman since 1993, according to his LinkedIn page. “The true test for me of whether they’ve deleveraged is if the industrywide ROEs come down. If they don’t, I’m very suspicious that there are hidden risks in the system.”
Bloomberg Columnist Terrified
“I came into this dinner somewhat pessimistic and worried about the assignment we are here to discuss,” Simon Johnson, a professor at the Massachusetts Institute of Technology’s Sloan School of Management and a Bloomberg News columnist, said halfway through the evening. “I am now terrified. There is an incipient sovereign crisis here mixed in with the bank crisis.”
It’s Party Time
So much for pessimism, let’s consider some party goers.
Financiers at Davos this year weren’t talking much about future returns on equity or potential bubbles. Instead they were holding parties and meeting clients. JPMorgan Chase & Co. CEO Jamie Dimon, 54, hosted guests including Bank of Canada Governor Mark Carney and Dell Inc. founder Michael Dell, 45, at a reception one night. He was out late the next night with hedge- fund manager Louis Bacon, 54, and other guests at a party hosted by Google Inc.
“In Davos, there’s a lot of optimism here, and I’m quite surprised by it, especially from corporate CEOs,” said Tarun Jotwani, CEO of Europe, the Middle East and Africa and global head of fixed income at Nomura. “It is against a backdrop of potentially the biggest macroeconomic public-finance mismatches that I’ve ever seen in my career.”
U.S. Treasury Secretary Timothy F. Geithner, Bundesbank President Axel Weber and Spain’s finance minister, Elena Salgado, also spoke to a private gathering of some of the world’s top investors, including hedge-fund and private equity fund managers, according to two people who attended the meeting. The officials sought to assure the money managers that their policies would lead to growth and prevent a crisis in Europe.
“There was a very positive mood about what had been done so far,” said Howard Davies, a board member of New York- based Morgan Stanley and London-based insurance company Prudential Plc.
Put me in the party pooper column with Barrie Wilkinson and Simon Johnson.
Mike “Mish” Shedlock
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