2009 – but which way will the markets go?

In 2008, the FTSE and the DOW both fell by 28-29%, falls which were exceeded by the smaller markets which all tumbles by upwards of 35% with Oslo and Shanghai leading the plunge with 65%. Oil, shipping and copper prices all crashed and even gold failed to improve over the year. For the UK all is compounded by the pound sterling crashing 26% from its 2008 high against the US dollar.

Governments across the world have responded by pumping money into the banks and, in the US, the motor industry, which has raised government borrowing levels to highs not seen since the 1940s. US Government debt is expected to rise to $13 trillion this year – which presupposes the world capacity to buy these extra bonds at a time when private and other government investors are having to tighten belts and look for cash to fund their own problems. Governments have also slashed interest rates and we anticipate zero or even negative rates (how will this impact all the models and computer systems out there?).

The fallout from the Madoff fraud continues. On New Year’s Eve the fraudster complied with court requirements to give an account of all his current assets. These accounts have not yet been disclosed but little if any of the missing $50 billion is likely to be recovered – it just was not there in the first place.

Christopher Cox at the SEC is facing Congressional questioning on his actions during the past three months and will be fighting to preserve his hitherto excellent reputation before he leaves office later this month and hands over to Mary Shapiro. Equally Tim Geithner, the incoming Treasury Secretary under Obama will be looking at what Hank Paulson has left him. Challenging tasks for both of the newcomers.

And across the world, risk managers are wondering what the future holds (and it is probably not in their models!) and how they can get that extra bit of knowledge, that extra bit of influence in trying to avert the next crisis – or ensure the current one is not getting worse. Unfortunately being the bearer of bad news never helps a career and it is hard to see any risk manager being the bearer of anything other than bad news this year. There are still problems lurking out there.

Two good articles came out in the holiday period – a three part history from the Washington Post on the history of AIG’s foray into complex financial products which brought about its failure, and another from the New York Times on the part that risk models have played in the crisis. Both good reading, if you have the time now, that is.

Happy New Year – with a heartfelt wish that it is true for all of us.