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2015 Financial Crisis Predicted at Davos by Lone Bearish Analyst, Blogs React

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While the world’s most influential politicians, economists, and bankers enjoyed a week of skiing and chocolate in Davos, one analyst there warned of another impending banking collapse. His name? Barrie Wilkinson.

Via Bloomberg:

In the caste system of the World Economic Forum’s annual event in the Swiss ski resort, Wilkinson was at a bottom rung, with an identification badge that denied him access to most sessions and soirees. His message clashed with the optimistic tone of many at the center of the meeting, who were eager to emphasize the progress made after two years of hand-wringing in the wake of the 2008 financial crisis.

Wilkinson’s report, titled “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, or ROEs, 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 returns of the past are unsustainable and that they need to do a better job of monitoring risks, especially in areas that produce unusually high profits.

Scary. But before we all panic, a basic question must be asked: Who is Barrie Wilkinson?

For starters, Wilkinson appears to have an engineering degree from the University of Cambridge. Since 1993, he’s worked at the London-based consulting firm Oliver Wyman. Bloomberg reports that Oliver Wyman consulted UBS during the financial crisis, advising the firm to invest in US mortgage securities and CDOs, investments that turned out…well, not so great.

Bloomberg describes Wilkinson as a “lonely.” But our research shows that he’s anything but. He’s got close to 200 friends on Facebook and quite the social life. We also know, thanks to Facebook, that on July 7th, Wilkinson lost his phone. Which, you know, sucks, and we’re very sorry to hear that.

In any event, Wilkinson’s report has certainly struck a chord.

Reactions on the blogosphere

Over at Americablog, Chris in Paris writes: “Whether it's 2015 or a few years later, this sounds like a fairly likely scenario. The financial reform was gutted by the bankers who threw money at lobbying to limit the extent of the reform. The Democratic reform was mild but now we have Republicans in the House who want even less oversight. Of course this can't end well.”

On Benzinga, Gary Cassady writes: “Though most experts disagree with Wilkinson, including Canadian Finance Minister, Jim Flaherty, who believes the regulation reforms are adequate to prevent another crisis of this scale, according to the article.
Wilkinson's report said that bank executives and shareholders alike are accustomed to the high returns of the past, returns unlikely to have been earned without the significant risks that were taken. He advises that the banks need to do a better job of risk-monitoring.

Have the regulations in place actually solved the many issues that set the stage for the previous financial crisis? The Dodd-Frank Act created many new commissions and regulatory agencies in response to the crisis. How exactly will the new reforms prevent other loophole-mining or sneaky ways around the rules? That remains to be seen.”

Ryan Chittum at the Columbia Journalism Review takes a slightly different approach: “Wilkinson’s point about tougher banking regulation sending risk-seeking into the shadow banking system seems somewhat overdone. The bank regulation isn’t exactly punitive. Still, his point is that the shadow-banking system is still almost entirely unregulated, despite being a major cause, and perhaps the major cause of the financial crisis. Good for Bloomberg for seeking out and giving a platform to a guy saying things the powers that be don’t want to hear.”

And lastly, a rosy analysis from FT Alphaville: "The good news is, if Wyman’s predictions prove true, we’ve got four years of an inflationary commodities super-cycle to look forward to. What fun!"
POSITION:  No positions in stocks mentioned.