The end of disintermediation?

Extraordinary times. In case I ever forget, remind me never to invest in investment banks! Having had direct experience of the "old" Barings back office many years ago I could write loads about rogue traders. Unfortunately Kerviel will not be the last. And who indeed would be central banker in these conditions? But I have just bought Alan Greenspan's autobiography which might provide some useful insights.

My biggest economic fear at present is actually imported inflation (oil and commodities) and falling tax revenues leaving the Government powerless to apply stimulus. I am still optimistic that the recession will be short lived, and not as bad as some share prices suggest, but I haven't yet worked out the implications for the capital markets which, besides everything else, are only now starting to react to the downgrade and possible demise of the monoline insurers.

A few years ago the story was all about "disintermediation"; rather than investors depositing in banks whom in turn lent money out, debt has increasingly being securitised and distributed direct to those investors. Traditional banking credit skills became less relevant since business was based on clever packaging, the co-operation of rating agencies, credit enhancement and aggressive sales. Thus the "old fashioned" banking model was replaced by fancy investment banks whom took fees rather than put their own capital at risk (apart from big underwriting). It appears that is all shot to pieces.

What will the world be like without all that debt capacity and credit enhancement? Certainly a lot of business models need to be rethought.

Yesterday I made my first ever direct investment into a US company. This was ConocoPhillips being part of my oil & gas theme. Fair enough I was originally drawn to COP by Warren Buffett but ultimately what appealed was a low valuation compared to proved reserves, good reserve replacement, strong cashflows and importantly a management team clearly committed to shareholder value: For 2008 they expect to buy back $10bn of shares which represents around 8% of the market capitalisation.