The curious amnesia of investment bankers

Surely the one and only rule of banking is that you lend money to people who can pay you back?

LONDON - SEPTEMBER 02:   (EDITOR'S NOTE: A TILT AND SHIFT LENS WAS USED IN THE CREATION OF THIS IMAGE) City workers sit in front of the Bank of England on September 2, 2008 in central London, England. The Paris-based Organisation for Economic Cooperation and Development (OECD) has predicted that the UK economy will fall into recession during the second half of this year.  (Photo by Daniel Berehulak/Getty Images) *** Local Caption ***  GYI0055607156.jpg
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If investment bankers are so clever, how come they can be so dumb? Surely the one and only rule of banking is that you lend money to people who can pay you back? Or perhaps this is very old-fashioned; I have always assumed that that is why so few banks have been reluctant to lend me money over the years. In nearly 20 years of reporting on financial markets, I have seen a crisis on average once every five years. The first was the tail-end of the sovereign debt crisis, when bankers queued up to recycle petrodollars to Third World countries in the form of syndicated loans, secure in the mantra that "countries never go bust".

They may not go bust, but sometimes they default and often the loans need to be rescheduled or restructured. South America endured a "Lost Decade" until Nicholas Brady, then US treasury secretary, came up with a cunning plan that involved banks swapping loans for bonds, partly secured by US Treasury bonds. I suspect that it was the success of this programme that encouraged some bankers to determine that never again would they be stuck with syndicated loans, for bonds were safer. Not for everybody they were not.

Then came the British recession in the early 1990s. Partly induced by the conservative government's desire to forge closer links with Europe, the pound had been locked into the Exchange Rate Mechanism. The pound probably went in at too high a level, but that rate proved unsustainable, even though the Bank of England at one point jacked up interest rates to 15 per cent. This had the knock-on effect of crippling anybody who had taken out a mortgage. The end of the 1980s had seen a housing boom. By the beginning of the 1990s, all the talk was of negative equity. Homeowners handed back their keys and in some instances fled the country. The banks were left with massive property portfolios, which they did their best to unload.

The property market in Britain went backwards, then sideways for a couple of years, then in 1995 started an upwards march - with a couple of slight stumbles on the way ? that ended only this time last year. For the most part, Americans sneered at this property boom. "When we want to invest, we put it in the stock market," one banker told me in the 1990s. "You Brits just put it in a row of houses in Fulham."

Rather than property, Wall Street led the world in a stock frenzy, based on the internet boom. Suddenly everybody had a business plan in their back pocket. With the help of a research note from a friendly investment bank, paper millions could be made overnight. A friend of mine worked at Boo, one of the first major European hits. It was an online fashion store, run by a photogenic Swede and her partner who wore a black roll neck sweater and a goatee. The pair hired the brightest and the best, developed an orange website that did not work, and few articles of clothing were either sold or delivered.

"It was my first job, and such fun," said my friend. "It was Concorde and caviar all the way." Dot-com became dot-con. Paper fortunes disappeared like origami swans in a waterfall. Some analysts were accused of collusion, ramping stocks they did not believe in, e-mails were analysed, promises were made to put the house in order. We had the Enron collapse about this time too. A billion-dollar gas and trading company disappeared almost overnight. People even went to jail.

But the markets had found a new game. Property in the US suddenly became as hot as in the UK. The Americans found their Fulham - and liked it. But the British market is markedly different to America's, more like Manhattan's. There is not enough space in London and the south of England. You cannot just build more houses, the Green lobby is too strong. Even though British bankers were reckless - offering 125 per cent mortgages and lifetime tenors - they had a point, misguided as it may turn out. But America's bankers were reckless. They lent money to people with no banking history to buy houses and repackaged the debt, offering a healthy return, to banks around the world, which bought it in huge quantities.

Christopher Fildes, a journalist who covered the City of London for more than 25 years, had a rule of thumb that said crises happen when the last person who remembered how it went wrong last time is no longer around. But these are four major fallouts in less than 20 years - half a lifetime's work, an average of one every five years. While I know that most people that work in the City look like teenagers to me, there must surely be somebody there with a memory that stretches back 20 years? Perhaps not.

Regulators are now falling over themselves to say how bad things have become, as if this somehow makes it better. Alistair Darling, Britain's chancellor of the exchequer, said economic conditions are the "worst for 60 years". If people cannot remember what happened five years ago, how on earth will they know what it was like 60 years ago? Wasn't that during the Second World War when the Germans were bombing the City? Can it be that bad? Or has he got his figures wrong and really meant 70 years ago, when there was the great depression?

My guess is that the Fed, the Bank of England, the European Central Bank and anybody else that Bloomberg or Reuters will listen to will spend the next year outdoing each other in saying how bad things are - "My guess is that things haven't been this bad since the Plague and the Great Fire of London" ? until the markets pick up, we all fasten our seat belts and set off on the next rollercoaster. Meanwhile, most of the City boys have worked out that the only place in the world left with some liquidity is the Gulf. When I said goodbye to friends in London and told them I was coming to Abu Dhabi, one of them, a former Goldman Sachs man with his own investment firm, said that he would probably see me soon.

"I guess I am going to have to join everybody else and make the obligatory visit to all the sovereign wealth funds," he said. Should we be afraid? Maybe not, but we should look carefully at whatever they are peddling.