Heed the alarum
This is a very dangerous moment.
The wobbles in credit markets - caused by the difficulties experienced by US borrowers of lower quality or sub-prime loans - could have one of two contradictory consequences.
The many billion dollars of losses suffered by those directly or indirectly exposed to sub-prime could prompt hedge funds, private equity houses and investment banks to take a deep breath and start showing a bit more caution in their deal doing.
That would be a healthy response. And it would mean that the positive conditions in global financial markets would be sustainable for longer.
βMr Marketsβ, Anshu Jain, seems to have learned the right lesson, given his warning in this morning's FT about the dangers of excessive borrowing or leverage.
But the more powerful and primal instinct among bankers and traders is greed.
The risk is they will double up their exposure to other sectors or financial products, for fear that the party is almost over - and if they don't scoop their bonuses or "carry" now, they never will.
I wonder if any of financial advisers had the courage to warn the company that it could be making a risky bet on aluminium at the top of the market with . "Don't do it" is not a phrase often uttered by investment bankers these days.
Markets are always in a state of war between common sense and desperation. And the good guys don't always win.
I'm 
°δ΄Η³Ύ³Ύ±π²Τ³Ω²υΜύΜύ Post your comment
Robert, another fascinating post.
Both your and Evans Davis' blogs are consistenly illuminating, intelligent and interesting.
Precisely what public service journalism should aspire to be.
Many thanks.
Rio's bid for Alcan is certainly on the high side, possibly dangerously so.
But the flip side is this could make a nice arbitrage deal for the private equity and hedge fund managers and help them to make even bigger bonuses.
Sorry Robert, I know how much you hate those guys.
Robert, I think that sentence could be expanded upon: βthe more powerful and primal instinct among bankers and traders AND POLITICANS is greed.β The reason this system of crazy leverage and risk taking is not only allowed to last, but encouraged, is because of the inherent bias in the political system towards monetary inflation. As John Maynard-Keynes said, βBy a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.β
The cozy relationship between politicians, central bankers, and the financial elite relies upon continued credit creation. In the UK we have broad money growth around 13% even though the UK economy has a real growth limit of 2-3% - the rest is dilution of our existing money. Inflation. Confiscation of our wealth. This is the source of many social ills at present such as the clamour for more housing and an ever rising debt burden and the massive polarisation of wealth in society.
The mechanism for this process is even more obvious when you look at the workings of the US Presidentβs Working Group on Financial Markets a.k.a. The Plunge Protection Team. A group whoβs raison dβetre is to stop a forced financial market deleveraging, as we are seeing now, byβ¦erβ¦ a βforcedβ re-leveraging! Chaired by Treasury Secretary Hank Paulson (ex-CEO of Goldman Sachs) working with Fed Chairman Ben βweβve got a printing pressβ Bernanke, their job is to encourage continual monetary inflation, re-leveraging and risk taking. The sad thing is we KNOW they are currently behind the scenes orchestrating a bail-out, providing liquidity, talking up markets and talking down the risks. Lots of lies, in part to protect the capital of the firms that provide the inflation β they can bail out while the little guy gets sucked in to this unfolding financial disaster and take the hits β deliberately spreading the pain wide and shallow to Main Street rather than hitting the overleveraged balance sheets of Wall Street.
Much as I am tempted, I think we shouldnβt blame the bankers and traders though. They are just the little kids following the lead of their political guardians.
If the people in charge at Rio aren't aware of the current state of the market then why are they in those jobs? They shouldn't need their advisors to point out the blatently obvious to them. If they do and these are the people appointed by the shareholders to run their company then basically they deserve what happens to every business person who makes bad business decisions. After all, what is a shareholder other than someone who owns a business, albeit only part of one.
In response to post #4. There is another explanation for Rio's enthusiasm to build a larger company.
Rio's bosses might just want to be bosses of a larger company, pay has some relationship to the size of the company one manages. In addition having managed a large merger integration is a great thing to have on your CEO CV!
There is always incentives for company's bosses to seek mergers. Even though historical data shows that they have a worse than even chance of paying off for shareholders of the buying company.
Robert,
Why are you the ΒιΆΉΤΌΕΔ's business editor, when its clear:
a>) You have at best a crude working knowledge of business especially "high finance"?
b>) You clearly don't like 'business'?
I suppose when you work for unelected body that relies on taxation, it is possible to take this approach.
If you dislike leverage so much, why not campaign to have the ΒιΆΉΤΌΕΔ Pension fund sell its Β£1.5bn of debt securities? There are also Β£5.3bn of equities in there with a projected return of 7.8% (higher than most insurers' assumptions) - hope there are no banks in there! Also I expect, on a matter of principle, your scheme's managers refuse to accept any bids on any companies they have interests in from private equity?
I mean all these evil companies making profits. Let's tax them! of course you might not be able to retire at the scheme's projected age of 60 anymore - but think of the public good!
I am all with you on subprime btw how dare rich investors let poor people buy homes! I mean they relax lending standards, get lied to and lose money. If that wasn't enough they get lectured to by likes of Sen. Kennedy.
Regards,
MM
P.s. Anshu Jain urging caution on leverage is laughable. This is the same Anshu Jain, former derivatives salesman and now in charge of DB's IB business (top high yield underwriter in Europe)?
Talk is cheap. Why not ask him to shut his leveraged, structured finance and prime brokerage businesses for the public good if he is so concerned.
Greed is the motivating factor, though if the investment banks, hedge funds and private equity take an intake of breath it won't stop other companies taking advantage of the situation.
Look at the vulture funds preying on developing countries or subprime mortgagees in the US being tricked into signing over their ownership.
And who owns the debt with all the repackaging under CDOs.
And it is not just those at Rio. Look at RBS and Barclays fighting it out to pay over the odds for ABN. Even the hedge fund investors are asking questions over the wisdom of this take over.
Assets seem generally inflated. Shares, houses even some bonds. I suspect that there will be a re-rating of risk, which had yet to hit the equity markets, and the mega-caps are the only safe place to be.
As a retired dealer I can confirm the base instinct of greed, but that can swiftly be replaced by fear when things start to turn.
rightly said Robert, Market is full of desperation and that led to greedy or short span products i.e. rip off customer as soon as possible.
However, that desperation also applies to end customer, who try to remedy short term problem by selecting self trapping products.
I think it all goes to Retrace eventually.
Rio buying at the top of the market is perhaps an agency problem. The long term good of the firm's owners is trumped by the short term greed of salaried managers, whose bonus schemes gives them an incentive to make a deal and cash out.