Friday, October 24, 2008

PEU Boys Stunk Up Davos

The World Economic Forum, held annually in Davos, Switzerland, confessed their role in the global financial meltdown. Bloomberg reported:

Davos organizers also say they failed to play tough with the financial-industry bosses, opting to accept their funding and let them turn Davos into a rave-up for Wall Street excesses.

"The partying crept in,'' says Klaus Schwab, the 70-year- old WEF founder and executive chairman. ``We let it get out of control, and attention was taken away from the speed and complexity of how the world's challenges built up.''

The fallout has left the WEF riddled in buyer's remorse, with officials throughout the organization asking what they have wrought and, like Wall Street, whether they offered too much of a good thing.

Schwab says the delegates treated him like ``Cassandra'' whenever he questioned the logic of their wisdom on asset-price bubbles in housing, stocks and other financial instruments.

But the warnings did come. Concerns over leverage began in 2003. Bubbles and excessive risk taking were also topics.

In 2007, former U.S. Treasury Secretary Lawrence Summers warned of complacency. He returned to the village in 2008 to say "a cascading loss of confidence'' threatened to paralyze the global economy, comparing the market mood with the economic sentiment that prevailed just before World War I.

Such advice was swatted away by American confidence salesmen such as Michael Klein, co- president of Citigroup Inc.'s investment-banking unit, and David Rubenstein, managing director at the Carlyle Group buyout firm.

"I warned them all about global risk and the abusive nature of their actions, but they had no incentive to change,'' says Kaufmann, recalling his seven years as a global leader at Davos.

The Bush administration's plans reduce leverage. Markets are risk averse at the moment. However, the "too big to fail" problem grows with mergers and combinations.

Greed remains, fueled by executive incentive compensation plans. And the con men mentioned above are posited as major players in saving the financial sector. David Rubenstein believes private equity underwriters (PEU's) are entering their "finest hour." One Davos veteran said:
"An exercise in moderation is something the private sector doesn't do very well."