Benedicte Gravrand, Opalesque London: Nigel Blanshard, portfolio manager at London-based fund of hedge funds Culross Global Management, believes the credit crunch’s origins can be found 26 years ago (in the Reagan-Thatcher era) with the ascent of home ownership, financial deregulation and free market.

All this went out of control, partly due to greed, misplaced confidence in risk control, governments’ overconfidence and lack of management. “There were no systemic risks put into the system,” he added.

Securities exchanges There was a very rapid growth in CDOs and an explosion of CDSs from nothing in 2001 to a multi-trillion market by end-2007. And regulators should start caring “when an activity becomes big enough for it to be called a market place,” he argues. Once this activity is identified, it should come on to an exchange, and issue standardisation of contracts for transparency and liquidity.

In Europe, exchanges were monopolies until Mifid deregulated and allowed the creation of new exchanges. “And so we go from famine to feast,” he noted. There are indeed numerous talks of creating exchanges for CDS, debt derivatives.

Government intervention “back with a vengeance” Governments should control competition so that there is enough but not so much that the market becomes fractioned.

“We can look forward to a market that is very fractioned with a Darwinian law of survivorship that eventually squeezes out some of the exchanges and consolidation... that’s five years on, for all we know,” Blanshard said.

Seeing the consequences of the credit crunch, namely the disappearance of liquidity and massive deleveraging, government intervention is “back with a vengeance.”

According to Blanshard, the two problems that would stem from government intervention are, first, if the government thinks intervention is working, it becomes confident, continues to intervene and does not know when to stop. The second problem is, the more interfered-with markets are, the harder it is to define fair-value. Consequently, investors become more risk-adverse.

Long term consequences It is said that bank lending will not recover to the 2006-07 levels. “UK chancellor A. Darling is arguing that it is not the standard of borrowing that we’re going to go back to, but the quantum of lending,” Blanshard said. “It cannot be true.”

Banks, even if they were willing to lend, are not able to do so. Blanshard believes the GDP slowdown will be “very severe”, not like 1929, as governments have a different mind-set, but in other ways very like it, as stocks markets could de-rate far more than is imagined possible. Equities have become the most “despised” asset class and the public will feel misled about their prospects.

Most of the bottom-fishers have been wiped-out because the market keeps falling. “You can see it with hedge funds when they lifted their shorts between February 08 and October 08,” he noted. “Every manager that did that has suffered a collapse of performance.”

Blanshard predicts a more fragile social stability, a greater contrast between the haves and the have-nots, not only on the individual level but also internationally, between countries that have balance-sheets and wealth and those that are heavily indebted – which may lead to further geo-political tensions. So Russia, China, Japan and India may reappear on the world political stage and this ......................

To view our full article Click here