Trésorier/Treasurer magazine - N°99 - Nov/Dec/Jan 2018 - 5

EDITORIAL

- NOV / DEC /
N°99

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.

LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE

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.

JAN 2018

ONE
DEADLY
SUMMER...
10 YEARS AGO

François Masquelier,
Chairman of ATEL

Table des matières de la publication Trésorier/Treasurer magazine - N°99 - Nov/Dec/Jan 2018