Billionaire short seller Jim Chanos claims he pointed to danger ahead in 2007, writes PROINSIAS O'MAHONY

G7 FINANCE ministers “completely and officially ignored” warnings as far back as April 2007 that the global financial system was in grave danger as a result of bank’s toxic assets, according to a leading hedge fund manager.

Jim Chanos, the billionaire short seller who famously

exposed the accounting shenanigans at Enron in 2001, told BBC radio this week that he was invited, along with fellow hedge fund manager Paul Singer, to brief the ministers near the end of the G7 meeting in Washington that April.

Singer, Chanos said, gave a “tour de force presentation” on the “coming crack-up in structured finance, how all these structures were very unstable and triple A was not going to be triple A.”

Although this was five months before the collapse of Northern Rock, almost a year prior to the meltdown at Bear Stearns and a full 17 months before the Lehman Brothers bankruptcy, the two hedge fund managers allegedly pointed out the appearance of “cracks in the facade”, citing HSBC’s admission three months earlier that US subprime loans were deteriorating at “an alarming rate”.

At the time, Germany was particularly concerned that hedge fund activities might become a “future source of problems”, Chanos said, but he said the attendees were cautioned that the real danger would not be private equity but “the regulated banks and brokers who were leveraged 30-1”, many of which held “glowing, toxic radioactive pieces of securitisation which they could never sell”.

Chanos had already taken out short positions against the most leveraged banks and he claims to have even listed the names of specific institutions at risk,

telling the ministers that “you should worry about virtually all of them”.

The grave warnings fell on deaf ears, according to the hedge fund chief. “The German finance minister who was chairing the meeting thanked me politely and then thanked Paul and said ‘So what do you think about hedge funds?’”

The G7 communique that followed made no reference to the brewing subprime storm and was breezily optimistic in tone, boasting that the global economy was experiencing “its strongest sustained expansion in more than 30 years” and was becoming “more balanced”. It went on to praise the “emergence of advanced financial techniques such as credit derivatives” which “have contributed significantly to the efficiency of the financial system”.

Short sellers like Chanos profited hugely from the ensuing collapse in share prices. Fingered by bankers during the early stages of the crisis, they have long protested that “the people who were raising the alarms aren’t the ones to blame”, as Chanos put it last December.

That PR battle was further boosted this month by a new study that found that shorts anticipate and help uncover financial markets misconduct, the authors concluding that “there is no evidence that short selling exacerbates a downward price spiral when the misconduct is publicly revealed”.

Many countries restricted short selling of financial shares near the height of the panic last year. US restrictions were lifted last October while the UK ban ended in January. Short selling of Irish financial shares remains banned, however. When it was banned last September it emerged that Chanos’s firm Kynikos Associates held short positions against AIB and Bank of Ireland.

Chanos’s allegations have sparked fierce criticism in the UK, where Gordon Brown – chancellor at the time – is firmly in the firing line. Shadow chancellor George Osborne said that Brown ignored “clear advice”; Liberal Democrats treasury spokesman Vince Cable opined that the prime minister had “failed to listen to any of the warnings of the brewing financial storm”.

A statement by the British treasury neither rejected nor confirmed Chanos’s version of events. It said, in part, that “no one anticipated the scale or synchronised nature of the global financial crisis” and that the government was “working to ensure we learn the lessons of the crisis”.