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October 19th

On October 19, 1781 the most powerful empire on earth was humbled by a ragged upstart nation. Tradition has it that when the British army marched out from the battlements of Yorktown for the surrender ceremony its band was playing “The World Turned Upside Down” –appropriate for a moment when the accepted world order suddenly and permanently changed. One of the Continental Army officers present that day was Colonel Alexander Hamilton, the future architect of the US financial system.

In 1987, 206 years later to the day, the accepted order of the capital markets suddenly and permanently changed when an unprecedented stock market crash revealed a Wall Street populated by emperors wearing no clothes. In the wake of the crash, the perception of systemic market risk had to be recalibrated and a whole new breed of financial engineers began to construct an infrastructure for the new reality. Over the next two decades they would introduce terms like “hedge fund”, “portable alpha” and “market neutral” into the lexicon of investors globally.

Today, as I reflect on the current situation –the wreckage of the markets and the failure of international financial leadership, I draw this conclusion: the rules have not changed, they no longer exist. Your models no longer work, your methodology is no longer relevant and your credit is no longer good. Welcome to the new reality.

This is not a negative. Like a temporary vacuum created by an explosion to put out an oil rig fire, this global meltdown has sucked the oxygen out of the room and created opportunities for those of us who are brave enough to step into the void. This is exhilarating stuff to consider –the opportunity to abandon broken processes and build new ones.

In the coming months the financial media will be dominated by post mortems and witch hunts; the political community will be focused on playing the blame game and the new-old order on Wall Street will try to pretend that they can return to business as usual. Ignore them all.

Reality has changed. The only correct course now is forward.

Andrew Barber