What is certain is that financial institutions will never again allow the creation of derivatives instruments built upon sandy foundations. The securitisation of debt has been a fundamental in the creation of liquidity within markets and has enabled many corporations and individuals to enjoy growth, fulfilling ambitions and life styles that have translated to an extended period of economic growth in the high street. No one could apparently foresee that during the years of prosperity, the boom was actually creating a black hole of unimaginable debt, sucking in some of the industries most historical financial institutions to economic oblivion.

Hindsight is a wonderful thing and is going to be well practiced in the coming years but the truth is, that even those concerned about the possibility of financial meltdown, were either powerless or too greedy to take a stand. It’s not just the banks that should bear responsibility and blame but all those involved in the financial system and I include those commentators, knowledgeable in the markets but always far wiser after the event.

What then of the future? Well, there is a future, although many might be sceptical today with the disaster before us but I can assure you that there will be a tomorrow, but what will it hold for financial markets?

What is sure is that the politicians will not want a repeat on their watch, so we can look for many groups, committees, think tanks and numerous other gatherings of the great and the good, to trawl through the ashes to come up with reasons why this disaster happened and how to prevent it in the future.

New names will be introduced into the industry as they fight to gain personal recognition as the saviour of the industry. Gurus and enlightened ex professional bankers will come up with ideas and papers produced to create a new world order and by the way make a small fortune along the way.

We can expect that there will be new laws and rules and probably new authorities and structures created, with new systems all designed to prevent but not necessary cure.

The banks will revert temporally at least, to a more vanilla style of trading and keep things plain and simple. They will not want to push, too soon, investors into financial products that look to similar to those of 2008. However, after respectable time period has lapsed, we will see invention in the trading room return and the reengineering of existing products but they may be called something else.

We will see that all risk models will have been reconfigured to reflect the latest changes in the financial markets. This is a good thing in terms of management but a bad thing in terms of time to recovery as the investment banks creativity is important in building wealth and in turn growth.

The players will have got smaller with very few financial institutions dominating the global markets. We may see new entrants into the financial markets from large industrial companies looking to disintermediate the brokers.

Buy side firms will become the new intermediaries replacing brokers who have let them down.

We could see a return to single capacity where financial services firms taking proprietary risk are kept apart from those looking after investing clients.  This might be more a voluntary shift than one required by new regulations.

We will see the stock exchanges consolidating, purchasing MTFs that have proved most successful. We will also see consolidation at clearing and settlement level. Prices will come down as a result as counterparty risks become a thing of the past. Cross asset margining will be offered by those clearing houses remaining bringing a new age of risk management.

It is highly likely that central banks will be required to take closer management of the capital markets, leaving the market regulators to concentrate on systems and procedures. Central banks throughout the world will work far closer and there will be closer monitoring of financial products and the capital requirements of the banks dealing in them. Fireside chats with the central bank will return as a quiet method of dealing early on with potentially damaging situations and protect the reputations of the banks concerned.

Confidence in the markets will return as the investors realise that the finance industry is finally getting to grips with it problems.

In the end we return to the beginning and markets will boom and bust as they have always done. The culture of greed that is ingrained within investors and the financial markets can never be eradicated. Greed is good, it builds wealth and growth but it needs a framework that has channels to authorities who must ensure that the results are formed from genuine assets of value, which are priced and recognised by all as worthwhile. Anything less and we will be recreating the past.   

By Gary Wright