Saturday, October 11, 2008

Somewhere ...

... in the back of my brain is an old quote (and I can't remember the source) to the effect that "a sound banker is not one who sees disaster coming and takes effective action to save his bank. A sound banker is one who, when disaster strikes, goes bankrupt with all the rest."

Only two or three years ago US and UK banks were declaring record profits - built, as we can now see, on highly optimistic accounting assumptions made when valuing assets and risk.

So what would have happened to a banker with foresight ? A bank head eschewing such practices would have lower profits, a lower share price, and would probably have been sacked. Such a person would probably never have made it that far anyway. You can't be too far out of step with the herd. The thing is to be in front of them - but only just in front of them.

Anyone remember the late Tony "Dr Doom" Dye ? His shade must be enjoying this.

" stock markets continued to soar, driven by the technology boom. But Dye stuck to his guns, avoiding the high-growth, high-risk internet stocks, maintaining large positions in cash, and consequently ensuring that Phillips & Drew's funds significantly underperformed their rivals. By 1999, the firm was ranked 66th out of 67 for performance amongst Britain's institutional fund managers, and was haemorrhaging clients – and in February the following year, just weeks after the FTSE had broken through 7,000 points for the first time, Dye was sacked.

Days later, his prophesy finally came true. Markets collapsed, and settled into a three year slump, which saw more than 50 per cent wiped off the value of global stock markets."
He was right - but he was sacked. He was just right a bit too early.

Although his last years at P&D were mired in controversy, Dye's predictions of a market crash nearly came true much sooner – as first the Asian tigers crisis in 1997, and then the collapse of the Long Term Capital Management hedge fund in 1998, rocked the world's markets. But on both occasions, central banks slashed interest rates and delayed the inevitable, leaving Dye to wait until 2000 for his vindication.

After leaving P&D, Dye continued to court controversy. Towards the end of 2002, he wrote a letter to the Financial Times predicting an imminent housing crash in the UK, on a similar scale to the house-price slump of the early 1990s. He predicted that at least 30 per cent would be wiped off the value of the average residential property – a prophecy that he never saw come to pass. However, he may yet be proved right on that one too.


Anonymous said...

Booms and busts are part of the cycle. I can sit here and predict a boom in house prices and shares, one day it will happen.

Dye may have been right, he was always going to be so - eventually.

Of course there may be those amongst his detractors who somehow believed that the good times could roll forever.

Im amazed the housing/stock market has got as far as it has without a crash.

TDK said...

Anon is correct. Logically the clever person was the one who recognised the internet bubble was based on nonsense but invested when the price still had some way to rise and then sold near the top.

Now it's often been said there are no clever investment bankers only bankers who have been lucky. The others get sacked.

Rob said...

30% drop in 2002. I wonder what the drop will be now, with six more years of expansion in the bubble? Let's hope for 50%.