Here’s an alarming thought about the current turmoil in financial markets: what if the drivers of the crisis are so complicated that central bankers don’t actually understand what’s going on? That was the charge laid yesterday by Jon Moulton, head of private equity firm Alchemy, who was interviewed by the FT:
The private equity investor said the Bank was hampered in its efforts to manage the crisis by its sketchy knowledge of such important debt vehicles as collateralised loan obligations (CLOs). These are securities backed by leveraged loans, which can include US subprime mortgages and whose creditworthiness may be questionable.
Mr Moulton said that during a breakfast meeting with Bank officials “it became clear they did not know what a CLO was. I had to show a senior man [by drawing a diagram] on the back of a napkin.” Speaking ironically, Mr Moulton said: “It was really reassuring to see they did not know what was going to explode on them.”
The power of the Bank to control debt markets had been significantly reduced by the proliferation of securitised debt, according to Mr Moulton, who is the senior partner of Alchemy, a mid-market buyout firm. He said the Bank had “no weapons to control CLOs”. The Bank declined to comment on Mr Moulton’s criticisms.
