My very first job after leaving university was to work for HSBC on its graduate senior management development programme… Well actually I was employed by Midland Bank, but HSBC bought the company in the time between my offer acceptance and my start date…

I did not really enjoy the experience… As a green, naive 21-year old I was quite astounded by a lot of the people I met in the banking world. They were smug and arrogant beyond belief, but they didn’t seem to have the intelligence to back up the way they looked at themselves in the mirror. I didn’t like it, so two years later, with my uni debts repaid, I scooted off to work in Africa for a few years with people who were slightly less “up themselves.”

It’s funny that 16 years later the world is starting to come to that view too… people are starting to realise that the high-flying overpaid banking giants had got into their positions by good fortune and dogged determination, rather than because of some degree of intellectual superiority.

Last year was the year that investment bankers proved to the world that they are not as clever as they think they are… Will this year be the year when central bankers prove the same..?

Investment bankers thought they had solved one of the biggest issues in investing… They thought they had eliminated risk. As US mortgage lenders gave massive cash handouts to people to which my granny would not have even lent a cup of sugar, they devised a cunning plan.

The cunning plan was to chop up these loans that had been given out to inhabitants of various trailer parks and make them into really small pieces. They then set up a stall in the local market and dished it out to anyone who would buy them. Problem solved…

I want some gravy

Many banks wanted a share of this new profit pie - and they filled their boots. Was this a silly thing to do..? In hindsight, yes, but they did not think so at the time. After all that venerable institution (my ex-employer) Standard & Poor’s had told them everything was fine.

But everything wasn’t fine… things weren’t fine at all…

Now, I am going to have to be careful how I phrase this, but that has never stopped me expressing my view.

I spent four-and-a-half years working for Standard & Poor’s on a service called European MarketScope. This is no way related to their credit-rating business and I am not bitter about my time there either. I have no axe to grind. I am just “picking” on S&P because I know how the place works.

When I was working in its ivory tower in Canary Wharf I always found the credit rating people a little bit “snotty” and “sneery”. Indeed, this side of the business was the cash cow, so it was easy to see where that attitude came from.

Talk around the company when I worked there (2000-2005) was that the credit rating side of the business had margins of something like 50%. This is impressive; very impressive. You can see why the senior managers from the credit rating side of the business used to strut around like cocks in a farmyard.

However, there was one thing that always surprised me when I was working there, relying on my equity background to get me by.

Look to the future

When I am making a decision on a particular share, one of the most important things to consider is what is going to happen in the future. Forecasting future earnings is the key to everything as far as listed companies are concerned. How many times have you read the phrase “past performance is no guide to the future”? Quite a few times I suspect.

With that in mind, here’s a quote from the Financial Times in September…

“The agencies have changed their methodologies in response to the rapid rise in sub-prime mortgage payment problems. But they say downgrades follow once evidence has accumulated that mortgages or other assets are underperforming rather than on a speculative basis.”

Make sure you understand that for a moment.

What it is saying is that they do not change a rating until something happens. They think forecasting the future is speculative. They make decisions using historical information and not intelligent assessments of what is going to happen in the future. Do you see what I see? Do you not think that is a daft way to go about things?

No wonder the credit ratings business is such a cash cow. Forecasting is a difficult and expensive business, particularly when it comes to staffing expenses.

So, the nice guys and gals at S&P, Fitch and Moody’s said that all these debts were fine because if you look at the history of house prices they have been going up for a while. Frankly, my slightly retarded crossed-eyed cat could have produced better analysis than that.

So, the bankers of the world thought that is was all alright because S&P had looked at house prices for the last few years and “discovered” that they had gone up. Give me strength…

Bankers are to blame too

Then there’s the bankers listening to the ratings advice. They are also short termists…

Why? Because they cannot see further than their next bonus cheque. They are paid huge bonuses on the basis of short-term performance in a system in which negative bonuses are impossible. Whenever I see failure being rewarded I despair.

So, now we turn to central bankers… That rare breed of very high flying public figures… Where banking meets showbiz and even the most physically unappealing characters can get their faces on TV… Will 2008 be the year when they prove they are not as clever as they think they are?

For all our sakes, I hope not… but I am not holding my breath.

Alan Greenspan tried to get Americans to spend their way out of the dot-com bust… but all that did was create problems for a later date…

That later date appears to be now, as uncontrolled credit precipitates a debt crunch. Ben Bernanke is trying to do the same thing. I was astounded at his 75-basis-point cut in the Fed Funds rate yesterday. I spent 10 minutes humming the old Smiths song “Panic” in my head…

The US Fed has been playing with fire since 2001. Today’s sell off is a vote of no-confidence in the Fed’s actions yesterday… the stock rally was just a flash in the pan. With food inflation creeping higher and higher, most central bankers are stuck between a rock and hard place… and it is a position that they created for themselves. Can they fix it..? Let’s hope so, but the cynic inside me is still listening to Morrissey. P.S. If you enjoyed this article then sign up for Smart Commodities UK. It’s dedicated to searching out the investment trends that could provide our biggest profit opportunities for the next decade…

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