As politicians, executives and financiers networked at parties and panels recently in Davos, Switzerland, Barrie Wilkinson was in a nearby hotel, warning that a financial catastrophe may be looming in 2015
As politicians, executives and financiers networked at parties and panels recently in Davos, Switzerland, Barrie Wilkinson was in a nearby hotel, warning that a financial catastrophe may be looming in 2015.
“The fundamentals haven't been addressed at all,” said Mr. Wilkinson, a partner at international consulting firm Oliver Wyman. “The things that caused the previous crisis — loose monetary policy and trade imbalances — are actually bigger now than they were then.”
In the caste system of the World Economic Forum's annual event at the Swiss ski resort, Mr. Wilkinson was at a bottom rung, denied access to most sessions and soirees. His message clashed with the optimistic tone of many of the elite business executives and political leaders at 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 executives 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'
Mr. Wilkinson's report “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 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 the returns of the past are unsustainable and that they must do a better job of monitoring risks, especially in areas that produce unusually high profits.
“Banks need to be less leveraged,” said Mr. Wilkinson, who focuses on risk management at Oliver Wyman.
“The true test for me of whether they've deleveraged is if the industrywide ROEs come down,” he said. “If they don't, I'm very suspicious that there are hidden risks in the system.”
Oliver Wyman, a subsidiary of Marsh & McLennan Cos., played a role in the last financial crisis.
The firm's strategy consultants advised UBS AG's fixed-income unit, which was lagging behind other divisions in early 2007, to invest in U.S. mortgage-backed securities and collateralized debt obligations, according to a review submitted by UBS to Switzerland's federal banking commission in April 2008. Those investments helped fuel almost $58 billion in losses and write-downs at the bank.
After the 2008 crisis, governments and central banks spent unprecedented amounts of taxpayer money to bail out the financial system. Part of Mr. Wilkinson's concern is that if the system is allowed to return to its old boom-and-bust habits, debt-strapped governments may not be able to handle the fallout of another crisis, either financially or politically.
“If there is another banking crisis, the Western governments are just in no shape to stabilize the system. They've expended their entire arsenal on the last round of fiscal injections,” he said.
'INCIPIENT SOVEREIGN CRISIS'
The same theme pervaded a dinner at the forum at which participants discussed what would happen if a big bank were allowed to fail. The group, which included Nomura Holdings Inc. chief operating officer Takumi Shibata, former Italian finance minister Domenico Siniscalco and ING Groep NV chief executive Jan Hommen, concluded that governments have no choice but to come to the rescue of any failing multinational megabank because there is no system to handle a controlled failure.
If a government were unable to save such a bank, the contagion and damage could be severe.
“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,” Mr. Johnson said.
Financiers at Davos weren't talking much about future returns on equity or potential bubbles; they were holding parties and meeting clients.
JPMorgan Chase & Co. chief executive Jamie Dimon hosted guests, including Bank of Canada governor Mark Carney and Dell Inc. founder Michael Dell, at a reception one night. He was out late the next night with hedge fund manager Louis Bacon and other guests at a party hosted by Google Inc.
Mr. Siniscalco, who leads Morgan Stanley in Italy, said that he had about 35 meetings in Davos this year, compared with 15 last year. The co-head of investment banking at one firm was overheard telling someone on his mobile phone that he had lined up five mandates.
“There's a lot of optimism here, and I'm quite surprised by it, especially from corporate CEOs,” said Tarun Jotwani, chief executive of operations in 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.”
PUSHING RISK TAKING
When bankers weren't trying to win business, they were worrying about governments' fiscal policy in the United States and Western Europe, or reiterating the role that finance plays in economic growth. And they echoed one of Wilkinson's views: A focus on bank rules could push risk taking into hedge funds or other types of financial companies that don't fall under the regulations.
Although German Chancellor Angela Merkel said that too little has been done to prevent another financial crisis, politicians focused mostly on defending their efforts to restore growth, curb inflation and deal with the debts of European countries such as Greece and Ireland. As French Finance Minister Christine Lagarde told a panel, “The eurozone has turned the corner” and “we learned from our mistakes and we learned from the crisis.”
CLOSED-DOOR MEETING
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 managers of hedge and private-equity funds, 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.
When bank chief executives including Bank of America Corp.'s Brian Moynihan, Deutsche Bank AG's Josef Ackermann and Barclays PLC's Robert Diamond held a closed-door meeting with politicians and central bankers, the tone was conciliatory.
The main topics were the need to improve international coordination and to oversee the non-bank parts of the financial system more effectively, said Howard Davies, chairman of the London School of Economics and a former chairman of the U.K.'s Financial Services Authority.
“There was a very positive mood about what had been done so far,” said Mr. Davies, who is also a board member of Morgan Stanley and insurance company Prudential PLC. “It was quite an upbeat session.”
