You may have forgotten, but the Great Financial Crisis (GFC) started 10 years ago
in summer 2007. We saw banks blowing up at regular intervals during our
holidays that summer. The world of finance was shaken, particularly by the Bear
Stearns collapse. Some people thought it was to be a doom decade. A summer
that changed the face of the world forever. This crisis was the biggest since 1929,
and so for us was the biggest we had ever experienced, since we hadn't been
born in 1929, or we knew nothing about it. We then learnt that certain funds,
including one run by a certain James Cayne, head of Bear Stearns, were unable to
repay investors because of a lack of cash or liquid assets. This suspension came
like a bombshell. The famous "High-Grade Structural Credit Strategies Enhanced
Leverage Fund" (with a name like that you have to be suspicious, surely?)
contained all the ingredients of a powerful Molotov cocktail. This fund was
backed by the famous US sub-prime mortgages. These financial assets were
invested in complex financial vehicles such as collateralized debt obligations
(CDOs) containing other assets also linked to sub-prime material. But, worst of all,
the fund itself had taken on borrowings (hence the name "enhanced leverage") at
a ratio of 1 to 10, meaning that for every 1 USD invested, 10 USD had been
borrowed. This gave it the potential to boost profits, but unfortunately also the
potential to backfire and plummet steeply downwards instead. There seemed to
be rotten apples in the US system, with nobody daring to shake the tree in case
they all came down at once. At the end of June 2007, two funds were declared
insolvent. The markets took this very badly indeed. After a period of jitters and
then wishful thinking, they slumped sharply. It was worse than the 1994 bond
market crash. In Europe, at the end of August, BNP announced that three of its
funds had liquidity problems. ODDO soon followed in its footsteps, along with
plenty of others. In the USA, the closure of American Home Mortgage ratcheted
the crisis up to a new level. Some funds were temporarily closed. This resulted in
impressive public relations efforts to calm people down and reassure them.
Suspicion and counterparty risk suddenly became things that needed to be taken
into account. This hit the interbank market hard, and it quickly dried up. Trichet,
only just back from Brittany, put €95 billion (then 61) into the market to contain
the damage and to re-establish confidence. On 22nd August BNP reopened its
funds. Fifteen days of stress that changed everything. Who can forget the queues
waiting in front of Northern Rock branches and the bank run? The crisis had now
arrived right at our doorsteps. Planet Finance was now heading towards the abyss
at an ever increasing rate. Then came the ABN.AMRO - FORTIS affair, with many
others who were hardly in better shape following on in its heels, reaching a climax
the following autumn.
And that deadly summer was the start of everything that still leaves us in a
precarious position today, in spite of many corrective measures and strict new
regulations. Thinking back to the very recent past, Banco Spirito Santo, then
Banco Popular and finally Veneto Banca and Banca Populare di Vicenza have
provided us with our quota of worries. No, perhaps the financial crisis is not
completely over. The embers are still smouldering, and although the fire may
seem to be under control, it is not completely out. We still need to be careful, and
never forget that banks too may fail. We learnt that at our expense. Let us
continue to be optimistic and look at the progress made. As the popular saying
goes "things could always get worse". Let us hope it is wrong in this case.
François Masquelier, Chairman of ATEL
June 2017