The Journey – Remembering the GFC

We’re back people!

Back to where? Back to the future, back to back, back to the journey.

Recently, I’ve been noticing more and more media articles regarding the GFC.

But sir, why would Australian media outlets write about a UAE based kickboxing and mixed martial arts event?

These 4 guys started the GFC in their mum’s garage.

No you fool – the Global Financial Crisis.

Oh, that old chestnut – yep I remember, we all remember.

It’s been almost 10 years since that seismic event rocked the world. Reading through these articles made me nostalgic of those heady days.

In 2007, I recall one distinct moment sitting around the university dormitory tables discussing the financial markets with an old friend and the topic of sub-prime lending came about.

“Have you guys heard of sub-prime mortgages?”

What’s sub-prime mean?

Investopedia states: “Subprime is a classification of loans offered at rates greater than the prime rate to individuals who are unable to qualify for prime rate loans. This usually occurs when borrowers have poor credit and, as a result, the lender views them as higher risk.”

Basically this translates to:

“Hey, I can’t get a loan anywhere else but what if I pay you a bit more, you’ll give me some money right?”

“Yeah, why not?”

YIPPEE my loan’s approved!

Wait… does anyone else see what’s wrong here?

I have a poor credit score (i.e. my capacity to repay debt is lower than the average person) and I am viewed as higher risk (fair enough) yet I can obtain a loan so long as I pay a higher rate of interest?

Not just me, but $640 billion of me. Cools. CNN Money reports in 2006, sub-prime loans amount to about 20 percent of the nation’s mortgage lending and 17% of home purchases.

WOW 20 percent! That’s one in… one in… one in six! No wait, five. 17 Percent, that’s… ah fudge it – that’s just under 18% I think.

What kinda fucked up silhouettes are these?

That’s a lot of mortgages and a lot of home purchases.

Of course, eventually the house of cards (so witty I am) all fell down.

But sitting around the dormitory tables that day in 2007 I knew none of this.

I just thought that the markets were behaving quite oddly.

For the last few years it only went in one direction UP.

See here on the ASX200 for those years and the aftermath:

Amazing work.

Today, I happened to chance a look at the US market and almost coughed up my Vietnamese pork roll with no mayo and extra chilli. See here on S&P500:

What a brilliant piece of art.

At first glance, the parallels between 2007 and 2017 suggest the media outlets are onto something.

I’m not saying the markets will slide from here on in – you’d be pretty naive to listen to everything in the media, I mean come on, they report that getting married is “surprisingly” rational on the FRONT page FFS.

But today, there are so many other factors to take into consideration – government interventions, increased regulations, mayo or no mayo, it’s difficult to make a clear judgement.

I can judge this guy needs intervention.

The right brain “feels” it’s about time for another roller-coaster but the left brain “rationalises” that nah it’s still in our minds – we are all prepared.

That’s the conundrum for myself at least, where are we headed?

Let’s go back to that fateful day in 2007 and see if there are any clues. With hindsight, the warning signs were there.

• A spate of sub-prime lenders filed for Chapter 11 Bankruptcy including New Century Financial – the largest. All this within the first 6 months of the year, coincidence? Nah, just the collapse of the sub-prime industry.
• HSBC announces bad debt provisions for 2006 rose 20% to USD10.5bn
• Bear Sterns informs investors that it is halting redemptions for 2 of its hedge funds – this meant investors cannot ask for their money back. “Hey didn’t I give you $100 to invest for me? Can I have it back?” “What $100?”

• Credit crunch begins as subprime exposure is discovered in banks and funds worldwide.
• French Investment Bank BNP Paribas suspends three investment funds that invested in sub-prime debt citing “complete lack of liquidity”.
• Central Banks co-ordinate efforts world-wide to increase liquidity.

• A whole bunch of others too numerous for this post, collapses, near collapses of household names, government interventions, politicians and central bankers scrambling, media on overdrive, me discovering pork rolls, it was endless.

However one of the key take-aways which I took away and which I missed at the time – is the lack of liquidity. The inability to transact in a market place due to lack of buyers and/or sellers.

Bankers are cunning folk, when they smell a rat, they bring out the flamethrowers to cover their backsides. Why send a platoon out when you can carpet bomb the whole village? When it’s time to GTFO, it’s women, children and bankers first – not necessarily in that order.

A banker in action.

Having worked at a number of financial institutions, I learnt that it’s frowned upon to cop a financial loss, but absolute sacrilege if you damage the “name”.

If you have to take a hit – you take a hit, you do NOT do anything to jeopardise your reputation and brand. Freezing redemptions and suspending funds hits your brand and goodwill the most.

Not only are you saying your performance is shit, but hey give me your money, we might not give it back.

Don’t worry, I’ll put this in a sub-prime fund.

Huge, just huge.

But hey notice how despite the negative news coming out, the markets still peaked late 2007? There was a good 7-8 months of negativity being pumped out but still it tracked along.

Humans – how little we know.

I’ll definitely be paying more attention on the news coming out and managing my investments even more closely – will you do the same?

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