Many a money manager tried to sound the alarm ahead of the banking implosions of 2008.
As early as 2006, some of them could see the collapse of firms like Bear Stearns and Lehman Brothers in the near future, and had the conviction to bet on it, earning billions.
But not all of those hedge fund managers literally went to Washington to warn the government about the massive losses that were about to hit stalwart Wall Street firms.
Ray Dalio did. And he was apparently ignored.
According to a profile of Dalio in this week’s New Yorker, Bridgewater recognised how ugly the sub-prime mortgage crisis could get once it expanded to the credit markets, which, in the hedge fund’s opinion, it would.
So the firm’s research team assembled “detailed histories of previous credit crises, going back to Weimar Germany” and “also went through the public accounts of nearly all the major financial institutions in the world and constructed estimates of how much money they stood to lose from bad debts.”
Bridgewater came to the conclusion that banks could lose up to $839 billion.
So, “armed with this information,” John Cassidy writes in the New Yorker, Dalio went to Washington.
[He] visited the Treasury Department in December, 2007, and met with some of Treasury Secretary Henry Paulson’s staff. Nobody took much notice of what he said, but he went on to the White House, where he presented his numbers to some senior economic staffers.
“Ray laid out the argument that the losses he foresaw in the banking system were astronomical,” a former Bush Administration official who attended the White House meeting recalled. “Everybody else was talking about liquidity. Ray was talking about solvency.”
As the crisis deepened, Dalio continued to assess it far more accurately than many senior policymakers did.