Reader Henri Tournyol du Clos calls to my attention a post I wrote back in September on an FT interview with Jean-Pierre Mustier, chief executive of corporate and investment banking at Societe Generale. The FT wrote:
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. …
“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.”
At the time I asked “how can the man be so sure late 2004 was normal?” Henri now comments:
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.
I don’t know enough about SocGen to say whether that’s right. I do think Mustier’s words represent a pretty common misconception that things will at some point revert to “normal.” There is no normal in financial markets. There is reversion to the mean, but it’s not as if prices are going to stay right there at the mean. They invariably swing past it to the upside or the downside. And if you’re not prepared for that then you’re doing a pretty pathetic job of risk management.