HEDGE FUND NEWS
@ Mon 19 November 2007 : GMT

For more than three months, as turmoil in the credit market has swept wildly through Wall Street, one mighty investment bank after another has been brought to its knees, leveled by multibillion-dollar blows to their bottom lines.

And then there is Goldman Sachs.

Rarely on Wall Street, where money travels in herds, has one firm gotten it so right when nearly everyone else was getting it so wrong. So far, three banking chief executives have been forced to resign after the debacle, and the pay for nearly all the survivors is expected to be cut deeply.

But for Goldman's chief executive, Lloyd C. Blankfein, this is turning out to be a very good year. He will surely earn more than the $54.3 million he made last year. If he gets a 20 percent raise — in line with the growth of Goldman's compensation pool — he will take home at least $65 million. Some expect his pay, which is directly tied to the firm's performance, to climb as high as $75 million.

Goldman's good fortune cannot be explained by luck alone. Late last year, as the markets roared along, David A. Viniar, Goldman's chief financial officer, called a “mortgage risk” meeting in his meticulous 30th-floor office in Lower Manhattan...

Goldman Sachs has sent a shudder through the debt markets, warning that sub-prime mortgage losses could force banks to slash lending by $2,000bn (£980bn) and push the United States into a deep recession.

Jan Hatzius, US chief economist for the Wall Street bank, said potential losses of $400bn from the whole debacle did not begin to capture the scale of any squeeze on bank lending.

Traders on the floor of the New York Stock Exchange, Goldman warns of a substantial US recession
Goldman Sachs said there was a growing risk that
US troubles would spread to Britain and Europe

"The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized," he wrote.

"It is easy to see how such a shock could produce a substantial recession or a long period of very sluggish growth," he wrote.

Mr Hatzius said banks would have to shrink their lending by $10 for every $1 in losses in order to maintain capital ratios, vastly magnifying the effects as lending multiples kick into reverse.

"The macroeconomic consequences could be quite dramatic. If leveraged investors see $200bn of the $400bn aggregate credit loss, they might need to scale back their lending by $2 trillion. This is a large shock," he said.

The warning comes as the bank's closely watch Global Leading Indicator - a barometer of the world economy - continued to slow in November.

Goldman Sachs said there was a growing risk that US troubles would spread to Britain and Europe.

This casts doubts on the "decoupling" thesis that the world can pick up the growth baton as America slows, keeping corporate profits buoyant.

Mark Richardson and Neil Walker, two of its most senior credit bankers, left after Dresdner Kleinwort's parent, Allianz, reported a €575m (£411m) write-down earlier this month on problems in the credit markets.

They left after less than a year's service. Mr Richardson, formerly a partner at London hedge fund WMG, joined as head of credit and equity derivatives last November and Mr Walker joined to run credit trading in May this year.

He was co-head of structured credit trading at Merrill Lynch, the US investment bank whose chief "retired" this month after it recorded a £7.9bn write-down in the third quarter.

UBS is axing 350 jobs across its fixed income currencies and commodities division in London, while Merrill Lynch last week denied rumours that it would make a quarter of its fixed income staff redundant.

The job cuts come amid fears that some bankers will see their bonus pools reduced by as much as 50pc.

Alistair Darling will this week set out requirements for any new owner of Northern Rock, including the treatment of £22bn-plus emergency loans from the Bank of England, as bid proposals for the stricken lender continue to trickle in.

Treasury officials are believed to be looking at ways around European Union rules on state aid that require emergency lending to Northern Rock to be repaid by March next year, six months after the lender of last resort facility was set up. The loan is likely to be recast as restructuring aid in order to satisfy Brussels.

The official deadline for bids was Friday, but Northern Rock was still awaiting the last few proposals last night. The Newcastle-based lender is expected to receive between eight and 10 submissions, many of which are unlikely to be structured as an outright takeover of the entire business.

Darling's much-anticipated statement of principles on Northern Rock will stipulate the protection to given to depositor funds once the Treasury removes its blanket guarantee on savings, and the treatment of the £22bn lent to Northern Rock in the past two months. The Treasury will also demand a commitment from bidders on "financial stability", thought to include a pledge on responsible lending and liquidity risk management.

The Bank of England was forced to intervene in September to rescue Northern Rock from funding shortfalls after the short-term credit market dried up. The Bank's loan, offered at a penalty rate of interest, is secured against a range of Northern Rock assets.

The interest of some £2bn is not required to be paid to the Bank until the debt market turmoil has passed. This is the taxpayer's most vulnerable interest in Northern Rock, ranking alongside subordinated debt in the group's capital structure. On Friday, Adam Applegarth, chief executive, and seven other directors resigned.

News that Japaninvest is pioneering an innovative execution platform for the independent research sector is indicative of a dynamic and increasingly competitive research landscape.

A plethora of specialist research providers may be doing their level best to muscle in on what was once the sacred turf of the bulge-bracket banks, but the latter are in no mood to surrender.

Indeed four full-service banks, Citigroup, Credit Suisse, Dresdner Kleinwort and Merrill Lynch, are claiming success with their own joint venture, Trade Ideas Ltd, which takes research ideas one step further and bundles them up into clear trading recommendations.

Others are endeavouring to enjoy the best of both worlds, with Goldman Sachs for example, augmenting its own research by taking minority stakes in a range of independent boutiques, such as iSuppli, the California-based technology house that anatomised Apple's iPhone when it was launched in June, and distributing their wares via its Hudson Street platform.

Even some asset managers are thinking outside the box when it comes to research, perhaps best exemplified by the Grassroots system, developed by RCM, the global equity arm of Germany's Allianz, which sends teams of researchers out on to the streets to determine the success of a new medical treatment or running shoe.

In essence, the research industry is still reacting to the changes wrought by the unbundling of research and execution costs via mechanisms such as commission sharing arrangements (CSAs), which allow an asset manager to pay a fee to a bank to execute a trade, but stipulate that some of this money should be passed to a third-party that gave it the trade idea.

But change has been slow. A recent survey of 1,000 buy-side equity analysts in the US conducted by Greenwich Associates found that the proportion of research purchased from independents has only edged up from 2.4 to 3.8 per cent since 2004, although almost 40 per cent of analysts said they expected to increase their take-up of boutique research in the coming year.

"I think the provision of independent research is gaining ground, but it perhaps has not been quite as quick as some had envisaged," says Niels Aalen, managing director of international operations for the financial research and analysis division of New York-based RiskMetrics Group.

"The quality of independent research has been mixed. Just being independent is not enough, you have to be independent and good. Also [banks] have a large salesforce to sell their product. Independents have struggled to build an effective sales mechanism."

However, Gunnar Miller, co-head of global research at RCM argues that "investors' marginal propensity to use independent houses has gone up because they have found a way to pay them. We feel that we can appropriately and effectively reward the right people."

Richard Kramer, managing director of Arete Research and a board member of the European Association of Independent Research Providers, is similarly upbeat. "Independent research is thriving," he says.

"Research heads at large institutions tell us they are seeking to increase use of independent and non-traditional sources of research, while hedge funds have long been keen to nurture new sources of research."

Mr Kramer believes that buy-side compliance departments, which initially tended to balk at dealing with independent research houses, are now becoming more accepting.

In addition, he argues that concerns remain over the impartiality of investment bank research, with proprietary trading desks taking over from corporate advisory as the main source of conflicts of interest.

"It's abundantly clear that leading banks are continually reducing their investment in research, and it remains conflicted in many ways. Independents must provide first-class research but large banks are getting increasingly less competitive on research quality," says Mr Kramer, who created Arete in 2000 as a global technology research boutique.

Mr Kramer views CSAs as a "big step forward" for the independent sector, but Nick Paulson-Ellis, managing director of Clear Capital, a specialist UK mid and small-cap research outfit with a client list encompassing the likes of Fidelity, Jupiter and Morley, is more equivocal.

"Unbundling has happened and it has definitely been beneficial, but there have been lots of teething problems, such as a complete refusal by the investment banks to put a price on research. A payment mechanism exists, but not a pricing mechanism," he says. "Most people argue that the amount of money spent on research has to come down. We still have massive overproduction and overconsumption because we don't have prices and therefore people are not discerning about what they buy."

Yet, despite this perceived over-abundance, some of the boutique research providers have managed to find niches untouched by the bulge-bracket banks with their potted company and sector summaries.

RiskMetrics' financial research and analysis division is a fascinating example. The team concentrates exclusively on identifying companies that it believes are heading for a fall. It claims to have identified the challenges facing Northern Rock, the crisis-ridden UK bank as early as February this year, and to have foreseen recent problems at Ericsson, Conergy and Zentiva.

"We look for any deterioration of the business model via forensic analysis," says Mr Aalen. "Most of the heads of research that I have sat in front of will tell us that this is what their team does, but few of them have the time to conduct analysis of the degree that we do. We are exclusively focused on getting down to the weeds of the accounts.

"One of the keys to outperformance is avoiding the big blow-ups and there are not that many research providers devoted exclusively to helping you find them."

1. Goldman Held Bigger Level 3 Share Than Citi, Merrill (11/12)
2. Barclays Writes Down $2.7 Billion on Mortgage Losses (11/15)
3. E*Trade Shares Fall; Analyst Says Bankruptcy Possible (11/12)
4. MBIA, Ambac Downgrades May Cost Market $200 Billion (11/15)
5. NYSE Chief Thain to Replace O'Neal as Merrill CEO (11/14)
6. A $45 Billion Writedown Won't Stop Wall Street Profit (11/12)
7. U.S. Stocks Decline; Wells Fargo, Fannie Mae Drop (11/15)
8. Goldman Sees Subprime Cutting $2 Trillion in Lending (11/16)
9. Buying What Buffett Buys on Filings Doubles S&P 500 (11/16)
10. Bank of America, Legg Mason Prop Up Their Money Funds (11/13)

John Hancock Funds LLC said on Friday its flagship stock mutual fund, the $8 billion Classic Value Fund which is managed by Pzena Investment Management Inc (PZN.N: Quote, Profile, Research), is seeing significant net redemptions and sharply lower sales due to poor performance.

"What was our No. 1 selling fund last year has stumbled a bit in performance this year. And as a result, sales in that fund have slowed dramatically," Keith Hartstein, president and chief executive of John Hancock Funds, told Reuters in an interview.

"In fact, that fund is running $2 billion less in sales this year than it did last year. And we reopened it October 1 because the fund had fallen into net redemptions. The net redemptions have continued, and in fact have picked up pace in the month of November," Hartstein said.

"Reopening has helped a little. Sales have picked up a little bit but it's still in significant net redemptions," Hartstein said. (Reporting by Muralikumar Anantharaman; Editing by Tim Dobbyn)

On 31 August, President George W Bush appeared in the White House Rose Garden to urge action to deal with a serious crisis in the US economy.

He was flanked by two of the most powerful players in the global economy: US Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke

The sub-prime crisis - which is threatening millions of families in the US with eviction, has created turmoil in the financial markets, and lead to serious disruption to the US economy and housing market - had moved to the top of the political agenda.

Action was required, so the Fed intervened by providing massive short-term liquidity to preserve the banking system and cut interest rates twice, the first time by half a percentage point.

This was followed, perhaps belatedly, by new and tougher regulation of the mortgage industry, with new limits on sub-prime "balloon" mortgages, whose payments are fixed for 2 years and then rise sharply to a much higher variable rate.

Bush moves to ease lending crisis

Both the Bush administration and the Democrats, which control both Houses of Congress, have been searching for bipartisan solutions that will solve the crisis and provide help to the millions of people - including many victims of predatory lending - now facing eviction.

But deep ideological divisions between the two sides - with the Democrats favouring much tighter regulation of the industry, and the Bush administration looking to private sector solutions - is hampering attempts to reach an early resolution of the problem.

And the two sides also disagree on how severe an impact the crisis will have on the US economy...

The Financial Services Authority has postponed publishing rules likely to increase the number of funds of hedge funds investors are able to buy until early next year.

A decision was made to put off issuing a policy statement on the matter because the offshore fund industry is still lobbying the Revenue to receive more favourable tax treatment.

As it stands, UK investors who buy offshore funds, which do not have so-called "distributor" status must pay income tax, not capital gains tax.

Among the winner of the volatility are the 'hedgies' - but not everyone thinks they are playing fair. Helen Power investigates

They thrive on market volatility and they gamble on failure. Short-sellers, mostly hedge funds, who bet that a share price will fall, have emerged as the biggest winners of the credit crisis.

Short-selling is not illegal and nothing new: George Soros famously shorted the pound in the early 1990s. But in recent months concerns have arisen that some of these speculators have been spreading false rumours about companies in the hope of driving down the share price and making a hefty profit.

Last week, the London Stock Exchange berated them for gambling in shares of Northern Rock, while hedge fund trading helped send Barclays' shares on a roller-coaster ride amid rumours its top management was about to quit over massive losses.

One senior City figure says the ubiquitous presence of hedge funds is one of the factors driving companies to abandon public markets.

"Hedge funds are in and out of share registers faster than you've had hot dinners," he says, adding that even before the credit crunch hit, the share price volatility caused by hedge fund trading was making life so difficult for management teams they were being forced into the arms of private equity firms.

The hedge fund industry itself, of course, takes quite a different view.

Andrew Baker, deputy chairman of hedge fund trade body, the Alternative Investment Managers Association (AIMA), says: "There has been a bit of demonising going on here.

"When a market is in freefall there are always going to be rumours. There's nothing wrong with that. It's when someone tries to pass a rumour off as fact that it becomes collusion," he says.

Some of the world's biggest hedge funds have been involved in the short-selling of bank stocks recently, with Northern Rock the biggest gamble in town.

On one side are Lansdowne Partners, GLG and Marshall Wace, The three are not associated with the rumour-mongers, but have been short-selling Rock shares believing there is no value in the equity and that the bank's share price will fall. On the other are Philip Richard's RAB Capital special situations fund and SRG, the new hedge fund run by colourful former UBS trader Jon Wood, which have been buying up shares, gambling their price will rise.

So far, it is Lansdowne, GLG and Marshall Wace that are winning with Northern Rock shares trading at 132.6p. City gossip would have it there are a lot of zeros on those profits.

But industry insiders argue that the very fact hedge funds are taking positions on both sides of the divide demonstrates that they are doing exactly what they are meant to do - helping the financial markets function by providing them with extra liquidity.

After Northern Rock and sub-prime loans, the consequences of global financial uncertainty are about to hit Britons in the pocket. Anushka Asthana and Ned Temko report on the dramatic effect on prices in the high street: from groceries and petrol to luxury goods, and new mortgages to credit cards

Heading to the petrol pump? Your tank of unleaded may be pricier than usual. Renegotiating your mortgage? Expect a rise in your monthly payments. Time for the weekly supermarket run? Better carry a little extra cash.

Mervyn King, governor of the Bank of England, has sent out a stark warning: the British public should prepare to economise. Next year, the bank's forecasts suggest, will be the toughest in a decade. Economic growth will slow, inflation will rise and share prices could tumble. The central bank will cut interest rates, but it will only work to soften the blow, not divert it - and mortgages may actually still rise.

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But how will all this translate into everyday life? Here The Observer investigates how the cost of motoring, mortgages and food could all be affected. Will retailers have a happy Christmas? And are the boom times over for the housing, art and luxury goods markets? Economists and analysts discuss whether unemployment is on the up and whether banks are keeping depositors' money safe.

Most agree there will be a slowdown. Roger Bootle of the leading London economic consultancy Capital Economics says: 'It is a time for worry and concern.'

Gabriel Stein, of Lombard Street Research in London, agrees. 'There will be a slowdown - in the growth of the economy here and in Europe and in the States.'

And in Britain particularly? 'Also a slowdown in housing. A slowdown in spending.'

But what few people are predicting is a recession or even a housing crash. 'The economy will over time recover,' said Michael Saunders, UK economist at Citigroup. 'It will be pretty painful.'

The main reason for the trouble lies in years of sloppy lending and runaway consumption - principally, but not only, in the United States.

What is happening now, says Hans Timmer, lead economist and manager of the global trends team at the World Bank, is mainly an 'adjustment'. 'In that sense you can even make the point that in the long run, this is healthy for the global economy,' said Timmer, optimistically.

There may be some tough times in between, he added, but in the UK and Europe the World Bank is not predicting anything like a recession. In a reversal of what happened a decade ago, this time the developing world will come to the rescue of the US, said Timmer, cushioning the impact on Britain in the process.

For all the gloomy talk, there are brighter times on the horizon. King's predictions for 'further ahead' are that growth will return to its average rate and inflation will be back on target.

Credit crunch: a quiet Christmas

It all started thousands of miles away, with stories buried far back in the newspapers. But the panic queues outside branches of Northern Rock in September brought America's so-called 'sub-prime lending crisis' home to ordinary British savers and consumers with a jolt.

The sub-prime problem was the practice of giving mortgages to people with such poor credit history they could not get them at normal rates - a high-risk strategy that, in the end, began to fall apart. But, as Roger Bootle, head of London consultancy Capital Economics, said: 'It was not just sub-prime, but part of a more general problem of an over-extension of credit across the whole world economy.' The effect has been for banks to become much stricter about how much money they lend, at what rates, and to whom. So mortgage rates go up and the money left over for the turkey, toys and tinsel goes down.

Few retailers expect the Christmas shopping tills to be anywhere near as active as they had hoped. 'Normally we're optimistic before Christmas,' said a senior figure in one of the leading high-street chains. 'This year? We're very cautious.'

So cautious that yesterday marked the start of early Christmas sales. Retailers including Marks & Spencer, Woolworths and Toys 'R' Us cut prices in an attempt to encourage spending and cushion the impact of the credit-crunch.

For retailers, the festive season is having a muted opening.

Fuel: £1 and rising

Motorists are nervous. Petrol prices have hit a new milestone: crossing £1 per litre for the first time. With some low-income drivers spending a quarter of their income on travel, a Christmas squeeze may be inevitable.

'The vast majority of people do not have a choice,' said Sheila Rainger, head of campaigns at the RAC foundation. 'They are car-dependent and petrol is not a luxury. It is something they have to pay for. So if petrol prices go up they will have to cut back on other things first.'

But just how is the increase in petrol prices linked to the fact that crude oil also broke a barrier last week, reaching $100 per barrel? The answer is not quite as closely as you might expect.

Paul Horsnell, head of commodities research at Barclays Capital, explains that the £1 at the pump means drivers are already paying $333 per barrel at the petrol pump. It is not simply the price of oil driving what motorists pay but ever increasing taxation, he said. That is why motorists' groups are calling on the Prime Minister to introduce a variable element to petrol duty, to help cushion the effects.

'Crude oil can keep increasing but it would take an awful lot to get the price of petrol to double,' added Horsnell.

But the impact of oil price increases goes far beyond petrol. Many remember the dark days of the Seventies when two major oil shocks saw prices quadruple overnight and then triple, leading to a deep recession. Could the same happen again? Horsnell said: 'This has been a gradual increase over nine years and we have an economy that adjusts more smoothly. This is not the result of a political crisis or war, or any short-term event.'

Instead it is straightforward economics. The supply of oil is getting weaker while demand is rolling on. 'The age of cheap oil is over,' said Horsnell. So don't expect a 21st-century 'winter of discontent' but do expect the price of oil to keep on climbing.

Banks: profit and loss

So far the world's biggest banks have written down about $50bn in bad loans and losses as a result of the sub-prime crisis in the US that saw mortgages handed out to people with a poor credit history.

Among the heads to roll were those of the chief executives of New York-based Citigroup, Merrill Lynch and then, on Friday, Northern Rock. Adam Applegarth resigned from the beleaguered Newcastle upon Tyne-based bank, as a series of bidders moved in to try to buy it.

For others rumours and speculation have made for a difficult few weeks. On Friday, Alliance & Leicester shares tumbled despite it denying rumours that funding problems had forced it to go to the Bank of England for help. Barclays also had to deny rumours that it was about to write off some £5bn. Last week, the group disclosed net charges and writedowns totalling £1.3bn at Barclays Capital, but also announced strong pre-tax profits.

The consensus now, among City analysts, is that there's no reason for panic although the banks do certainly have cause for worry. As one hedge-fund trader put it: 'They seem to have got involved in loan vehicles that were a lot less solid than they should have been.'

However, members of the public who have put money into banks - as opposed to those who have shares or jobs in them - should be fine in the end.

After the Northern Rock debacle, the Chancellor, Alistair Darling, quickly put in place a series of much more generous Treasury guarantees in the highly unlikely event that a British bank should find itself in trouble once again.

Food: the drought effect

More bad news. Australia, a major producer of wheat, is suffering its worst drought in 1,000 years. Corn, milk, meat and vegetables are in short supply and food prices are rising at their highest rate in more than a decade, according to Britain's Office for National Statistics.

For the United Kingdom's factories that has meant a 6 per cent rise in the price of raw ingredients over the past year.

For families, it could mean an extra £1,000 on the annual food bill. The cost of a pint of milk has soared to reach the record level of 33p, while a loaf of bread has hit £1.20 in large stores.

A basket of 25 staple goods has already risen by as much as 12 per cent, according to a survey by the website mysupermarket.co.uk, which compares prices across online supermarkets.

Here again oil is a potent factor. Its rising price is putting pressure on food through the costs of baking, packaging and transporting it to the supermarket. Inevitably some of this inflation of prices will be felt ultimately at the check-out till.

There is some good news. The 'big four' supermarkets - Tescos, Sainsbury's, Asda and Morrisons - are fighting hard for their share of the market.

According to Jonathan Said, an economist at the Centre for Economics and Business Research, they could absorb some of the higher costs, squeezing their own profits in order to keep the customers coming through the door.

Housing: crash or soft landing?

Listen as you walk close to the smokers huddled outside pubs. Take note as you pass your colleagues gossiping at the office water cooler. Tune into the conversations wafting through trains and buses.

There is one question obsessing them all. When it comes to house prices, will they or won't they fall?

The fact that it is such a hot topic is little surprise. With incredible year-on-year growth many people have started to assume that profits from property would cushion them into retirement. The summer's events have shaken that faith.

So, are Britain's homeowners right to be nervous? Last week's news seemed to suggest yes. With the Nationwide Building Society forecasting that house price inflation will fall from close to 10 per cent to zero, it seems the good times have finally come to an end. Others are even more pessimistic. In one year's time the price of your house will be three per cent lower than it is now, predict researchers Capital Economics, slumping by the same amount again into 2009.

Moreover, homeowners, it says, should prepare to tighten their purse strings as mortgage rates are on the up. With between 100,000 and 110,000 mortgages coming to the end of a fixed-rate deal every month, new deals will mean higher monthly repayments. For some, said Ed Stansfield - a property economist at Capital - the only option may be a standard variable rate that could rise as high as 10 per cent.

'I can't believe that all families will be able to cope with that,' said Stansfield. In fact, the Council of Mortgage Lenders is predicting 45,000 repossessions in 2008 - not quite the 75,000 reached at the peak of the early Nineties recession - but still a worrying turn of events for homeowners. Even with the Bank of England cutting base rates, 2008 will be tough, he added. But not everyone is so gloomy.

PricewaterhouseCoopers says there is only a one in three chance that house prices will fall in real terms by 2010. Karen Ward, UK economist for HSBC investment bank, said: '[House prices] are nine times average earnings. I think prices will struggle to rise further but I do not expect a crash.'

Jobs: lean times in the City

The Square Mile will be hardest hit when it comes to jobs, with 6,500 disappearing over the next year, according to the Centre for Economics and Business Research. But it will be a soft landing for most. Banks, said CEBR economist Jonathan Said, are more likely not to replace people who leave than roll out mass redundancies. 'Lots of banks will ride the storm,' he said.

Those who stay in position can say goodbye to the fat-cat City bonuses they have been used to in the last few years. Last year, high-flying investment bankers found themselves with bonuses that were 70 per cent cash and the rest in shares. This time around those figures will be reversed, with large chunks of money coming in less reliable equity.

As for the rest of the economy, the pound's strength is not quite as good as you might think. It may mean cut-price shopping trips in New York for some, but for companies trying to export goods it means tough competition from abroad.

'It is more difficult to export products when the currency is very strong,' said Hans Timmer, lead economist and manager of the global trends team at the World Bank. 'So growth forecasts for Europe are coming down, and less growth means less jobs.' One thing that will help is the developing world; growing fast and continuing to demand exports. Nevertheless, ensuring that the pound becomes somewhat weaker will be part of the Bank of England's difficult task.

Luxury goods: a little less opulence

If it is going to cost more to manage the house and car and feed the family, it would make sense to take expensive purchases off the shopping list.

So will those small companies offering niche, luxury goods be in trouble? 'There will be an effect on luxury goods and it could be quite serious,' said David Kern, economic adviser to the British Chambers of Commerce.

'But with a qualification. These are niche businesses and the people that buy these products are not necessarily going to be hit immediately by the slowdown - some are very, very rich.'

Different companies will be hit in different ways, argued Kern. Those who sell heavily to City workers may suffer because next year will see bonuses drop.

Very expensive sports cars, for instance, could take a hit. But those who rely on multimillionaires not so reliant on the financial centre - such as antique furniture stores - will not find it so hard. 'A good niche business will already have thought about this and refocused their sales to that part of the market,' added Kern.

Any firm that needs loans to keep going, however, could be hit hard. According to the Federation of Small Businesses, there is a possibility banks could refuse to lend to any companies without a solid record.

The art market experienced a jolt earlier this month when The Wheat Fields, said to be Van Gogh's last work, failed to sell after Sotheby's valued it at £17.5m.

Other masterpieces also stayed on the wall at the New York sale. It was an extraordinary turnaround. Over the past few years, there has been a boom in auction sales not just in the US but also in London, fuelled by bankers, brokers, hedge-funders and immigrant multimillionaires. But the art market is proving resilient: last week, the contemporary sale at Sotheby's in New York broke records when it made $315.9m.