This year will be marked indelibly with the stamp of the unheeded warnings, in both the capital markets and the political economy.
In the financial markets, sophisticated investors faced disastrous financial losses, even in some cases ruin, from the collapse of David Askin's $626 million in hedge funds to Orange County's $2 billion debacle.
In Washington, many of the most experienced and astute politicians lost their offices in November as voters exercised their disenchantment with issues from the Clintons' health-care nationalization proposal to the continuing profligate spending and taxation.
In both cases, ample warnings to avert these losses were ignored because money managers and politicians forgot how tough it is to move against the sentiments of the marketplace, whether of finance or of voters.
Lately, some of the survivors in finance and politics - especially President Clinton by his address to the nation Dec. 15 - are finally, to their credit, beginning to grasp the lessons of the tumultuous 12 months to put them to use in the new year.
But their moves might be too late. There are two problems. One is many money managers and politicians, including the president, aren't drawing the right conclusions from the lessons in their respective spheres. The other is the solutions to the problems of 1994, whether good or bad, are falling out of their control: Investors face potentially stiff new regulations, while the president now faces a Congress with his party in the minority and even many of these members, such as Rep. Richard Gephardt, trying to usurp his leadership on issues like taxation. The Republicans control the votes in Congress, making it likely their tax plan, not the president's, will pass.
That's how the year has wound up after beginning with auspicious warnings.
In the financial markets, 1994 began with a bang with the ruin of Askin Capital Management Inc. and its $626 million in hedge funds; and the year ended with a kaboom and the bankruptcy of Orange County and more than $2 billion in losses from risky uses of derivatives and leverage to make interest rate bets.
In fact nearly every month brought another crisis in the financial markets. Among a few of the alarms were the spectacular losses at Procter & Gamble Co. and other companies. Piper Jaffray Inc. and other mutual fund companies had losses that risked the $1 share value in their money market funds. Harris Trust & Savings Bank and Mellon Bank, among others, had unprecedented losses in what was supposed to be "riskless" securities lending portfolios of their clients.
Still, these investors and many others failed to grasp the disaster looming from the worst bond market in the last two decades. Orange County is only the most egregious example because of its spectacular losses and because it seemingly had so much time, with so many warnings, to mitigate its impending disaster.
Now, many people are pointing to derivatives as the culprit and calling for regulation, meaning restriction, of their use. But that would be a mistake. The lessons in 1994 in the capital markets call for greater choice, better disclosure, and more management oversight.
Internal management, consultants and investors, despite warnings from the Group of 30 international bankers in 1993, failed many investors during the year. Let's hope 1995 is better.
