In the early days of the sub-prime collapse, in April of 2007 to be exact, hedge fund managers James Chanos and Paul Singer were asked by Bob Steel, then the Under-Secretary of the Treasury, to make a secret and private presentation to the G7 Finance Ministers in Washington.
Singer and Chanos gave very specific warnings about the massive over-leverage and securitization time bombs that permeated the balance sheets of the world's largest and most well-known financial institutions, going to great lengths in an attempt to get the world's top central bankers to take notice.
They were completely and unabashedly ignored. We have the transcript and audio inside.
The BBC's Robert Peston had Chanos on his radio show recently explaining what went down in DC. You may skip to the 12:40 mark for the beginning of the illuminating discussion.
This happy band of G7 finance ministers looked perfectly relaxed as they arrived for their gathering in Washington in April 2007.
But it now turns out that they were all given a secret 60-minute presentation which warned of the dangers of toxic US subprime loans infecting banks across the world - and the risk they posed to the entire global financial system.
Jim Chanos, the hedge fund chief who made his name predicting the collapse of Enron, was invited along with fellow hedgie Paul Singer to brief Gordon Brown (then Chancellor) et al. Hedge funds (along with private equity firms) were being targeted by Europeans as the devil incarnate and so were invited by the American govt to put their case.
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.
When asked if anyone present had subsequently had apologised for failing to heed the warnings, Mr Chanos replied:
“Two people, but they shall go nameless - and unfortunately, nobody still in power today.” That means G Brown was definitely not one of those who apologised for not listening.
Chanos added that he had even named individual banks that were at risk.
“At that meeting I even disclosed that the entities I’m now putting up on the wall are leveraged 30 to one - you should worry about virtually all of them and you should be concerned, but I am betting with my clients’ money that there’s going to be a big problem here. So there was no doubt as to where I stood on the situation.”
I heard Chanos' dynamite quotes while listening to Robert Peston's excellent documentary on Radio 4 "Peston and the Money Men" this week. Pesto is clearly on holiday and no one at the Beeb has spotted the goldust buried in the programme.
You can hear the key section HERE (listen from 12m 40s)
Chanos also makes a robust defence of hedgies, pointing out that many pension funds now act as clients, and says there is no evidence at all that short-selling drove the banking collapse.
A bit of digging shows that on the day of the fateful G7 meeting - ironically it was Friday 13th - Gordon was still blithely confident that the global economy was going great guns.
"We have always wanted the world economy to fly on more than one wing," he said ahead of the meeting, claiming that China and India were doing ok so there was nothing to worry about.
He was also confident America's sub-prime mortgage crisis would be contained, arguing it was "not a worldwide phenomenon".
Ah, how wrong, wrong, wrong he was.
Shadow Chancellor George Osborne has now seized on Chanos' remarks. "We all know Gordon Brown didn’t fix the roof when the sun was shining - and here it appears is yet another example of him getting clear advice at the time that that was a mistake," he tells me.
UPDATE: The Treasury has a response.
A spokesman says: "The reality is, no one anticipated the scale or synchronised nature of the global financial crisis that struck in 2008. There is no doubt it was fuelled by excessive risk taking by many financial institutions around the world. The UK Government acted decisively to avert the collapse of our financial system and through the G20 we are working to ensure we learn the lessons of the crisis and reform the system for the future."
FURTHER (4pm) UPDATE: Vince Cable, the Lib Dems' Treasury spokesman, has now weighed in:
"It would appear that Gordon Brown failed to listen to any of the warnings of the brewing financial storm. Had these concerns been listened to earlier, the situation we faced need not have been so grave."
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