In 1976 I was rushing to finish business school because I had secured a good job at a large, Money Center, white-shoe bank headquartered on Park Avenue. That was Bankers Trust Company, the sixth-largest bank in the country and one with a very storied past that included being founded by none other than J.P. Morgan, among other financial dignitaries of the day. Technically, Bankers Trust was a commercial bank, which under the confines of the Glass Steagall Act, was quite distinct from an investment bank. The next ten years would change all that financial landscape and distinction and Bankers Trust, I am proud to say, was at the forefront of that change. In many ways, we ere the instigators of that change and I certainly had a hand in all of that. I was out there with a small cadre of folks selling commercial paper distribution capabilities, a service that was right on the knife’s edge of it all since commercial paper was a replacement for bank lending and it was structured a lot like a security, and therefore the province of investment bankers, but got sold to investors forming money funds, just like CDs and Eurodollar deposits, decidedly bank instruments. This marked a big change in the credit markets, which were increasingly becoming disintermediation. What had been a buy and hold game was quickly turning into an origination and distribution game. People like us saw that train coming around the track and were working to get out ahead of it. After that cork got popped, everything else flowed freely from it and helped form the shape of the credit markets we see around us now.
Markets ebb and flow and what was an intensely private realm was being turned into a more public realm and then, when the moment was right, it began reversing again into becoming a private market all over again. The difference was that along the way, firms focused on private equity investing had become market behemoths and as their markets became saturated, it was only logical for them to branch out from private equity to private credit. That market has grown immensely over the last decade or two and those private credit funds are the new bankers of the day, but with one big difference…they are not recognized systemically as institutions that need tight regulation in order to protect the safety and soundness of the financial system. It’s not like any of this happened in the dark, it was there for everyone to see a d understand, but still it wa allowed to happen. This is what happens in financial markets…boom and bust. We collectively swear over and over again that we will not make those mistakes again, but then can’t seem to help ourselves in the heat of the moment.
With the inevitable cracks in the private credit dykes, people are starting to line up their litigation weaponry in preparation for the coming legal battles that always proliferate after a crisis. Those that are most prepared reap the greatest rewards and its hard for market practitioners to ignore the need to prepare themselves whether to sharpen their spears to the attack or gird their loins for the defense. What they all need at this stage is people who have lived through these traumas to help guide them with a combination of domain knowledge and, most importantly, direct experience.
I am flying to NYC at the moment to run five workshops for major law firms on the topic of the private credit markets and where the litigation cracks are most likely focused…what we are calling “The Next Litigation Fault Line.” When I was first asked by my expert witness firm to do this, I was thinking that I was the wrong guy for the job. It seemed to me that there were many more people steeped in the private credit markets that could apply more direct experience to the task. But then I started to get into it and realized I was more appropriate than I had realized and that the combination of my almost fifty years of banking history as well as my last seven years as a leading testifying expert witness gave me a very unique and valuable background to address this very issue. You see, private credit as currently constituted has elements of bank lending, elements of private fund management, insurance and retirement savings investment, and private equity management, all of which I have considerable experience in. in fact, in addition to the first four credit crises that I weathered in my career (the 1980 Volcker Shock, the LDC Debt Crisis in 1982, the 1990 U.S. Savings & Loan Crisis, and the Russian Bond Default/LTCM Crisis of 1997/8), I had been front and center for the most instructive and recent credit crisis with the greatest global impact, the start of the Global Financial Crisis in 2007. Few professionals could claim to have more direct involvement in that debacle than I had, and I spent a decade teaching business school students about it afterwards just to hone my understanding further of what what wrong and what could have been foreseen.
The entire common issue is one of the intersection of faulty valuation methodology, financial opacity, erupting illiquidity and the abundance of leverage, both obvious and hidden. The mix is deadly and, unfortunately, more predictable than it should be. When you layer on top of that experience, my last seven years of developing my testifying expert witness skillset, I feel very well-equipped to help guide these law firms to some degree of understanding about how to prepare themselves for the Armageddon, and more importantly, how to best advise and prepare their clients. They’ve teamed me up with a veteran M&A practitioner and I sense that between the two of us we will have five very active and engaging workshops.
As I consider my long career on Wall Street, I am always pleased when I realize that I’ve both learned a lot over those years and through those experiences, but that I’ve also figured out how to contextualize it into more than just old memories and war stories, but rather into a productive set of lessons and patterns that have value to others that are coming after me. As I see it, that’s how we build and improve our civilization, by not letting what happens go unnoticed and unused. So, this week I will set aside my other endeavors and put my storytelling to use in these workshops, hopefully for the benefit of the next generation of erstwhile professionals.