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Financial Times, March 8, 2008 column


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Wanted: ideas to head off a regulatory backlash

By Francesco Guerrera

Published: March 8 2008 02:00 | Last updated: March 8 2008 02:00


What a difference a few thousand years make.

Back in classical times, ancient Greeks and Romans loved to hark back to a "Golden Era" lost in the long-gone past.

For them, the best times were always a tantalisingly distant memory.

Fast forward to present-day Wall Street and the tables have been turned.

Bankers, private equity executives and many investors are fervent believers in a brighter, richer future. When stock markets break records, pundits dream up new "paradigms" and forecast fresh highs.

As takeover activity reaches fever pitch, smart bankers make coherent arguments on why it will continue unabated.

Every time a buy-out fund launches a multi-billion dollar bid for a listed company, their self-assured executives swear that an even bigger deal is around the corner.

Recent events have shown just how inaccurate those predictions can be.

But the secret of all-weather optimists is that, just like their counterparts - the perennial Cassandras - they will eventually be proven right.

In the current turbulence, it pays to listen to the Street's forward-looking confidence.

The cyclical, competitive nature of modern capital markets virtually guarantees that this crisis will be followed by a rebound.

For every troubled monoline insurer, there is a Wilbur Ross willing to buy $1bn-worth of bargain-price municipal debt at achingly attractive yields.

What look like insurmountable challenges to cash-strapped companies and consumers appear as mouth-watering opportunities to "value" investors.

And although disasters happen (wheat futures, anybody?), Wall Street's self-preservation instincts are already laying the ground for the next rally. But as today's billion-dollar writedowns begin morphing into tomorrow's eye-popping year-on-year profit rises, it is easy to overlook a chink in this Panglossian armour.

For all the pain experienced by borrowers, investors and banks, the more durable repercussions of this turmoil may not be financial.

The real legacy of this credit squeeze could be a deep-seated public mistrust of the business world accompanied by a wave of regulation.

Yesterday, three hitherto financial titans - Chuck Prince, former chief executive of Citigroup; Stanley O'Neal, former head of Merrill Lynch; and Angelo Mozilo, the current boss of Countrywide - were verbally spanked by Congress as poster boys for Wall Street's pay "excesses".

This week, the FT reported that an association of leading banks was discussing radical measures such as not paying bankers bonuses until the full effect of their deals had become apparent (i.e for years).

And only a few days ago, senior private equity figures vowed to bypass banks and fund deals directly from sovereign investors and hedge funds.

Whatever the merits of these last two ideas (I, for one, found them misguided and impractical), they do signal growing unease at the "moneymen" (and women) of downtown New York.

Such negative feelings could, of course, melt away when market conditions improve. Politicians and public opinion have been shown to have goldfish-like memories, but past experience also suggests they have cheetah-like reflexes.

The post-Enron era has shown that high-profile crises can lead to knee-jerk, all-encompassing regulation.

And as the howls of pain from middle America grow louder - and the presidential election grows nearer - Washington's temptation to "do something" could prove too hard to resist. Proposals floated so far have included a $10bn fund to help distressed borrowers buy their homes (from one Barack Obama) to a five-year interest rate freeze (the brainchild of a certain Hillary Clinton).

If trouble continues to spread through America's heartlands, pressure for wholesale reform of the mortgage market - and the securitisation binge that created the mess - will get stronger.

As the crisis deepens, new regulation may become inevitable. But we are not there yet. If Wall Street really hates politicians telling it what to do, it should lift its head from the trading screens and make a positive case against the mounting backlash.




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