A risk manager's 5 funds moves now

There's no going back to the pre-crash economy, says Satyajit Das. Today's winning investors should do exactly the opposite of what was commonplace before the crisis hit.

There is no polite way to convey what Satyajit Das is saying regarding the world investors will face for several years, but it must be said: The unwinding of the international debt crisis will make some people extremely wealthy, but we will have to live with less -- in a few cases, far less.

Das, a risk consultant in Sydney, Australia, has for years been an expert on the use as well as abuse of credit derivatives. Thus while viewing the world's governments, businesses as well as consumers binge on cheap, borrowed revenue -- as well as seeing central bankers as well as financial regulators doing little to stop it -- Das understood that this party would definitely end badly.

Soft-spoken and matter-of-fact, Das told anyone who would definitely listen that the international economy was on the precipice of a credit crash that would definitely trigger a worldwide deleveraging as well as the mother of all bear markets for stocks.

That was in 2006. Five many years as well as you international crisis later, those same governments, businesses as well as consumers are hamstrung.

"People wasted trillions of dollars, that now has come home to roost," Das mentioned in a recent telephone interview.

Put just, at this wee hour of the global economy's morning, partygoers are too hung over to have a coherent conversation about cleaning up the mess, let alone pour more drinks to get the festivities started again.

The problem child in this debt crisis and credit crunch is Europe, mentioned Das, the author of "Extreme Money: The Masters of the Universe as well as the Cult of Risk."

European leaders dallied so delayed the day of reckoning, Das said. "The real problems have been not dealt with. If we not really deal with the problems, then obviously they come back to haunt we."

Now, Europe's meisters and ministers are trying to orchestrate an orderly default for Greece, you that also recapitalizes weak European banks exposed to troubled Greek debt and props them up enough to deal with an anemic global economy that will affect even China.

"In Europe the steps are extremely straightforward, if they would like to do them," Das mentioned. "Greece, Ireland and Portugal have to restructure their debts. That will cause losses of between 35% as well as 75%" on bond principal, he added.

"Whenever that happens we trigger massive losses in the banking program," he continued. "And if Greece and Ireland as well as Portugal go, then companies in these countries whose debt we don't talk about will also be problematic. Economies will go into deep recessions. The losses will be substantial."

The amount of cash needed to shore up this crumbling wall will be enormous as well as can even require the recapitalization of the European Central Bank itself through money printing to funding from other central banks, Das said.

His reality check for Europe (as well as the big U.S. money-center banks additionally exposed to eurozone woes): "Allow the countries fail, recapitalize the banks, put German and French balance sheets at risk and gain competitiveness. Then at least you've got a chance."

In an overly indebted world, this is just what passes for "orderly" default. In a disorderly event, Das said, "self-interest dominates."

Financial markets at the moment are priced for such an orderly default, he noted, though more on the order of a 20% haircut than 50% to worse. Mentioned Das, "They're assuming the people in charge will manage to muddle their method through."

Das said he's certainly not convinced. "The vested interests and divisive positions that everybody has make it far more difficult to engineer that orderly crash landing," he said.

Yet at some point this financial crisis too will subside and allow a healing process to evolve, Das mentioned. But it will require patience and cooperation from political as well as business leaders as well as average people in Europe, the United States, Asia as well as elsewhere, who neither welcome compromise nor are happy regarding a new reality that looks absolutely nothing like the old.

"Economic growth is not going to go back to high levels," Das mentioned. "I don't know precisely why this surprises anybody. The growth was debt-fueled. If you can't have debt, which is just what deleveraging means, you'll see a huge decline in growth."


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