What were you doing 10 years ago?

I was working as a credit analyst covering the pharmaceutical sector.

How did you react when you heard the news about the collapse of Lehman Brothers?

Like many of us in the financial sector, I wasn’t entirely surprised by the news. The subprime crisis had been unfolding for months and we knew that US banks and other financial institutions were under intense pressure. The issue was more whether there was going to be a rescue of Lehman or a decision to just let the bank go under.

Letting Lehman fail did show a willingness by the authorities to show that, at some point, people—bankers, investors—had to be responsible for their own actions. It’s a question of moral hazard. Of course, determining which are the relevant institutions that should or shouldn’t be saved—the “too big to fail” problem—continues to loom large. Ten years after the crisis, there are financial institutions in Europe still struggling to justify the measures taken to save them.

What were the stand-out moments for you as the global financial crisis broke?

Working as a credit analyst, what struck me was how fast the original problem of misunderstanding of the risks associated with structured financial products had spiralled out of control, not just infecting the financial sector, but the broader economy too. It’s a lesson we would do well not to forget.

In the ensuing 10 years, what has fundamentally changed?

Politicians and policy makers have done their best to make the system more resilient, whether it is more stringent regulations for banks or other actors like credit rating agencies. CRAs have made important changes. Our research is more active, less passive, and, I would like to think, more sceptical of so-called innovative financial products. A good rule is surely that if you can’t understand a product, you shouldn’t rate it. We are also paying more attention to corporate governance and liquidity.

Fundamentally, however, I wonder how much has really changed. I don’t think there is a high probability we are much better off.

Tougher new regulations inevitably have a technocratic, bureaucratic bias and are a reaction to the crisis that has just happened whereas as the next crisis is almost certain to come from somewhere unexpected, with characteristics all of its own. In the meantime, one thing definitely hasn’t changed, and that’s the human condition. Our motivation always teeters between a desire to excel and naked greed. And as the financial-services sector tends to be a young person’s game, the institutional memory of what went wrong a decade ago can disappear fast.

I’m reading Nicholas Nassim Taleb’s book “Skin in the Game” at the moment. Taleb makes the good point that if individual actors aren’t held responsible for their mistakes, it is very difficult for the system as a whole to “learn” and become less fragile than in the past.

What are the key risks today as you scan the corporate landscape?

Low interest rates are a major problem because they don’t reflect the true cost of risk. The result is that enterprises and individuals have taken on more and more debt simply because it is cheap. In the corporate world, balance sheets have ballooned, M&A activity has been at record highs, there is an epidemic of share buybacks where companies are giving away the money they have earned rather than reinvesting it in their own businesses.

The problem seems to be particularly acute in the US with the aggressive focus on near-term earnings growth and stock-market returns rather than R&D and longer-term profitability.

For now, the private sector’s capacity for innovation in the US and even in Europe remains encouragingly strong. My worry is how long that will last and whether China, with its centralised state-led economy, can ever replicate US innovation on the same scale.

The polarisation of politics in the US has to be a concern given the world’s reliance on a robust American economy. I’m less pessimistic about Europe but we have to acknowledge that the European political system doesn’t work as well as it should, with some degree of harmonisation still lacking.

In these circumstances, it is only a question of time before the next downturn. The next recession, if it is a steep one, will surely see the rapid downgrading of corporate credit.