A Pro Takes Stock

And blames buyout firms and governments:

British financier Guy Hands, known for his outspoken views, has sent bankers, investors and journalists a letter of best wishes for 2008 with a Christmas gift of a book -- "The Great Crash 1929" by John Kenneth Galbraith.

As buyout firms such as his Terra Firma Capital Partners brace for possible bankruptcies among their businesses and struggle to raise debt, Hands sent out the book accompanied by a letter pointing to similarities between 1929 and now.

"The most obvious being that complex financial instruments have been invented which no one really understands and have led to a loss of confidence in the banking system," said Hands.

Hands, 48, has very close links with the structured finance market. He made his name in the 1990s at Nomura International where he set up the principal finance group, making extensive use of securitization to finance takeovers.

But late in 2005 he said that he had a less favorable view of securitization as it removed flexibility from companies to make operational changes, as cash flows are so closely accounted for.

..."As we go into a new year, the big question for private equity, and one which I believe will affect the wider economic system, is whether liquidity will return to the broader markets in 2008," said Hands. "It is in this light that I chose this year's book."

The financier added that buyout firms are not the only ones to blame for the rise in debt and liquidity that fuelled the record M&A volumes and debt boom of the past few years and which is now clogging up the arteries of the financial system.

Hands placed part of the blame for the current liquidity crisis on governments, saying that while borrowing by both individuals and companies soared in the last 25 years, loans were allowed to slowly become too generous in their terms.

"Governments have had a vested interest in making everything appear rosy, and thus have encouraged ever increasing borrowing as the alternative would have been a slowdown in growth," said Hands.

And throwing the gauntlet back to governments, he said Western states must, in order to avoid a "great crash" now "find a way to unwind this excess in liquidity without social and economic chaos."