In the financial markets, there seems to be a repeating pattern of related crises and business collapses every decade or so. Could it be because lessons are not being learned from past mistakes? By Chris Skinner.

Have you noticed how regularly the booms and busts in the investment markets take place?

  • 2007-08: the credit crunch and Société Générale Kerviel crisis.
  • 2002: Enron, Worldcom, Parmalat and split capital investment trusts crisis.
  • 2000: dot-com crash.
  • 1998: Long-Term Capital Management (LTCM) collapse.
  • 1997-98: Latin American and Asian financial crises
  • 1995: Barings Bank collapse.
  • 1994: Japanese banking crisis.
  • 1987: stock market crash.
  • 1985: US savings and loans crisis.

The list goes on. Many of these have related and similar patterns, such as the similarities between rogue traders Nick Leeson and Jerome Kerviel, and between the arbitrage risks created by LTCM and the structured investments vehicles that caused the credit crisis.

Between each related crisis there is about 10 years. So what is occurring? My theory is that every decade or so, a new wave of traders and dealers come into the markets, raring to sell, bet, deal and make millions. They create new ideas, pitches, product wraps and technology plays. They then start pushing the boundaries of risk, technology, products, markets and ethics. They should be held in check by management, but management sees the rewards while the risks are hidden. Then it goes horribly wrong.

A market does the opposite of what is expected. A product play is not hedged because the confidence was soaring and so none of the inexperienced traders expected that to happen. Risk has been created but is not visible due to the technology, product and service that the traders have built to fuel it.

Our reaction is to sack the culprits, and demote and sideline the managers responsible for the mess. The market learns its lesson and says that it will never happen again.

Then more eager traders arrive on the scene. They hear about these products and risks, but they think they have a new idea – though it is just a variant of the original. They create a market that goes into orbit with turbo-charged investing and stellar returns, so management are happy again.

No-one listens to the former trader who says: “Watch out”; the side-lined manager who says: “This looks familiar”; or the demoted whinger who says: “You don’t want to do that.”

The markets repeat the mistakes of yesteryear. The pack who created the risks are kicked out. Their managers are deposed, and the market learns its lessons and says that it will never happen again.Chris Skinner is an independent financial commentator. www.balatroltd.com

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