The Evening Standard’s Paul Waugh reveals today that G7 finance ministers were warned about the dangers of US subprime loans and shaky banks back in April 2007. Famous hedge-funders Jim Chanos and Paul Singer sounded the alarm but were completely ignored.
Chanos has now revealed that the pair of them warned of “radioactive” securitisations held by banks – and even named those his firm was shorting. But they were “officially ignored” by the G7 ministers.
Chanos picks up the story (forgive me quoting at length but it’s worth it):
“It was the April 07 G7 Finance ministers meeting in Washington. It was a rotating chair and the Germans were rotating the meetings. And at the time if you recall the Germans were quite concerned about hedge funds and private equity as being a future source of problems in the market place.
“And Bob Steel, who was the Under-Secretary to the Treasury, who was fighting these German efforts at the time, felt that it would be helpful if two hedge fund managers came down and address the finance ministers and central bankers on the last day. So I was invited along with Paul Singer, who has gone public now, he was the other manager.
“Paul got up and proceeded to give a tour de force presentation on the coming crack-up in structured finance, how all these structures were very unstable and triple A [the ratings given to the securities] was not going to be triple A…”
The meeting was just five months before the run on Northern Rock and more than a year before Lehman Brothers collapsed.
Chanos and Singer pointed out that HSBC had announced that January that its US sub-prime loans were going bad at ‘an alarming rate’.
“So there were some canaries in the coal mine by April 07 and Paul pointed them out,”
“I then segued into my presentation which told the assembled regulators that in fact if Mr Singer was correct and I believed he was, that the problem would not be hedge funds it would be the regulated banks and brokers who were leveraged 30-1, many of which held glowing, toxic radioactive pieces of securitisation which they could never sell.
“The German finance minister who was chairing the meeting thanked me politely and then thanked Paul and said ‘so what do you think about Hedge Funds?'”
So despite having received this stark warning, the only response from the politicians was ‘yeah, yeah but what about tightening up regulation on you guys?’
Mr Chanos, founder of Kynikos Associates, said that immediately after the presentation, the G7 ministers issued a statement continuing to insist that their economies were strong and made no mention of the warnings. Check out the G7 Communique of the time – you won’t find a clearer example of the complacency of world politicians and regulators.
“We were completely and officially ignored,” said Chanos.
The quotes are from a radio show. You can hear the key section HERE (the key section is at 12 minutes and 40 seconds.) So far, this has received very little attention. We expect that to change.
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