Three years after cracks first appeared in financial markets, we praise six stars of this crisis.
Having looked at 6 Villians of the Credit Crunch, it's now time to turn to the heroes...
Long before the credit crunch started to bite and banks began falling like dominoes, a few wise owls started to hoot warnings of an imminent financial collapse. Some warned of a credit crisis as early as 2005 or 2006, while others made billions by betting on a collapse.
Here are my favourite heroes/heroines: six people who correctly predicted the chaos to come and emerged from the credit crunch clothed in glory...
1. Dr Richard Bookstaber, risk expert and author
Rick Bookstaber received a PhD in economics from MIT before heading for Wall Street. In the Eighties and Nineties, he worked for US investment banks Morgan Stanley, Salomon Brothers and Citigroup. Later, Bookstaber would work for hedge funds Moore Capital Management and Ziff Brothers Investments before running his own equity hedge fund.
Bookstaber's brilliance at predicting the 2007-09 hurricane comes from his thirty years of expertise in risk management. Having been at the heart of the 1987 stock-market crash and the implosion of hedge fund Long-Term Capital Management, Bookstaber has a healthy suspicion of market booms.
Bookstaber's work of genius is his book A Demon of Our Own Design. The cover depicts the fall of Icarus and inside he warns of inherent market instability and complexity due to a combination of rising interconnectedness, leverage, illiquidity and losses.
I received a review copy of this book in March 2007 and, having read it, I agreed that financial firms were courting disaster and faced a systemic collapse. Afterwards, I sold my financial stocks, such as HBOS, Royal Bank of Scotland (LSE: RBS), Legal & General (LSE: LGEN) and RSA Insurance (LSE: RSA) and became one of Dr Bookstaber's biggest fans. More than anything else, his book saved a lot of my personal wealth from the credit crunch.
2. Gillian Tett, Assistant Editor of the Financial Times
Armed with a PhD in social anthropology from Cambridge, Gillian Tett started studying one particularly strange 'tribe': investment bankers. Tett has been with the Financial Times since 1993, most recently covering capital markets.
In line with the FT motto ("Without fear and without favour"), Tett began warning of problems with mortgage securities, derivatives and leverage as far back as 2005/06. Her subsequent masterpiece, Fool's Gold, is the definitive guide to the credit crunch. If you haven't read it, then you don't really know what went on inside investment banks during the Nineties and Noughties.
3. Andrew Lahde of Lahde Capital Management
Lahde is just about as far from a typical hedge-fund manager as it is possible to be. Lahde was the manager of Lahde Capital, a small, California-based hedge fund. Using his knowledge of real estate and mortgage securitisation, Lahde expected rising default rates would cause a spectacular collapse in the value of derivatives linked to subprime loans.
Lahde's bet paid off handsomely, as his investors enjoyed a near-1,000% return in 2007 alone. However, having grabbed the 'low-hanging fruit', Lahde closed his fund in September 2008. His farewell letter on retiring at 37 is now legendary, thanks to his slating of "stupid idiot" MBA-educated Wall Streeters, and his pleas to legalise marijuana.
4. Dr Vincent Cable, Liberal Democrat MP
I have to confess a personal connection to this credit-crunch hero. Vince Cable was my MP from 1997 to 2008, when I moved away from his Twickenham East constituency.
A former chief economist for Royal Dutch Shell (LSE: RDSB), Cable spent many years warning of rising personal, corporate and governmental debt. In particular, he forecast dire outcomes fuelled by the housing bubble and lax lending practices. Awarded the Spectator/Threadneedle Parliamentarian of the Year Award in 2008, Cable continues to be one of the most financially astute MPs in the House of Commons.
5. John Paulson, President of Paulson & Co.
Paulson may well be the biggest winner from the credit crunch. From 2006 onwards, the founder of New York-based hedge fund Paulson & Co. shorted various securities and indices linked to the US mortgage market. The rewards for his boldness were incredible: Paulson is alleged to have banked $3.5 billion in 2007. His investors are pretty happy with their $20 billion gain, too.
According to the latest Forbes list, Paulson is America's 33rd-richest man, worth $6.8 billion. For more on this remarkable trader, read The Greatest Trade Ever.
6. Professor Nouriel Roubini
Professor Roubini is an economist at the Stern School of Business, New York University and founder of Roubini Global Economics. In September 2006, Roubini warned the International Monetary Fund that the US faced a huge housing bust and deep recession.
'Dr Doom' proved to be right, as US house prices fell for three straight years and the world endured the worst economic downturn since the Great Depression of the Thirties.
Today, Roubini remains unconvinced that the worst is over for financial markets, as he believes that yet more losses and write-downs to come will bankrupt the entire US banking system. For Roubini, there are more bubbles waiting to burst...
Finally, a bonus hero: Nassim Nicholas Taleb, the trader-turned-author of The Black Swan and Fooled by Randomness. Taleb warns us not to ignore low-probability events at the 'long tail', as the effect of these 'Black Swans' can be catastrophic. Also, he urges us not to confuse good outcomes (such as bumper trading profits) with sound processes. Where we see patterns, Taleb correctly identifies randomness!
Who were your heroes of the credit crunch? Sound off in the comment boxes below...
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