I was flicking through my archive recently and found the note, written exactly ten years ago today, reproduced in its entirety at the end of this short message.
If you don’t have time for the full read here’s the micro-summary.
In August 2007 it was obvious that losses banks were taking and inevitably heading into would have a profound balance sheet effect because of the way capital adequacy calculations work. A loss of $1 of capital would require a balance sheet adjustment to assets of minus-$12.5 and this would, most surely, lead to lower asset prices and market dislocation; and, it seems, I was on to something.
The purpose of this note today is not (just) to crow about how prescient my analysis was (but it was pretty good, read on, you’ll see) but to wonder that if the destruction of bank’s capital in 2007 was a harbinger of economic convulsion what will be the effect of the world’s largest banks moving into the profitability sweet spot they seem, again inevitably, now headed for? That’s perhaps a subject for a longer follow-up in due course.
Meanwhile, take yourself back in time… to August 20th 2007 when I was still a humble stock-monger at, the then mighty but soon to be laid low, UBS…
