What is “normal” in financial markets?

By wpcomimportuser1 | September 4, 2007 | +

The FT has an intriguing interview with Jean-Pierre Mustier, chief executive of Societe Generale’s corporate and investment banking division:

Mr Mustier reckons that credit conditions will normalise at around the level they were late in 2004. This means that private equity groups will be able to borrow to finance leveraged buy-outs, but at one or two multiples of cashflow less than the average level earlier this year, he says.

Similarly, he believes that credit spreads for senior debt instruments will ultimately end up at about 60 basis points higher than they were at the market’s peak.

“We have to go through the rationalisation, leave behind the irrational mistrust and move to a more rational and a more normalised view of what the world should be,” he says.

“And the normalised view is not June 2007.”

I would agree with that last point. But how can the man be so sure late 2004 was normal?

Related Topics: Economy & Policy

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Henri Tournyol du Clos

Back in 1998, SocGen were very insistently rumoured on the bond market to have been caught by the LTCM turmoil with a huge portfolio of credit bonds, doing leveraged “positive carry” on a grand scale. Yes, ceteris paribus, that is basically the same kind of thing that has recently sent lesser outfits like IKB, Sachsen LB and others belly up. Maybe that sheds a light on what might be considered “normal” market conditions in their corporate culture?
Anonymous

What would be normal is that Banks and or prima facie lenders be required by contract with the assets sub lenders/purchasers to maintain in their own books at their own risk a percentage of the assets securitised and this throughout the life of the loans.
It would be then difficult for them to add insult to injuries(It is the banks job to be a professional lender).
Henri Tournyol du Clos, Paris

Justin, this seems to have been a somewhat visionary post. By now, ie nearly five months later, and with hindsight from the amazing Kerviel fiasco, it indeed does look very much like the management at SocGen had all along fairly proprietary ideas as to what is “normal” in financial markets, on top of a fairly idiosyncratic pricing of risk.

What is rather funny is that for the last twenty years, those guys thought extremely highly of themselves and their industrial mastery of the business, especially its risk profile and procedures. They looked down on everybody else, for reasons which were never apparent from the outside because, quite frankly, taken individually they were not particularly intellectually impressive. Indeed I once witnessed merger talks with them nearly ten years ago and it was like they were setting foot in some savage country to which they would soon be bringing civilization – although we were technically more advanced and profitable than them, just smaller.

Oh well, sic transit gloria mundi, I suppose.