CFA Society Singapore
NEW YORK (Aug 25): Just five minutes before Monday’s solar eclipse, hundreds of beachgoers along the Cape Cod National Seashore were donning special glasses and positioning empty cereal boxes with pinholes in them, tittering with anticipation to see the moon begin to blot out much of the sun. As a result, they missed something far more exciting some 10 yards offshore.
A hungry great white shark was attacking a harbor seal. It snatched the poor creature in its jaws and hurled it toward the shore, in between body-surfing and boogie-boarding youngsters. Those, like my son, who had been watching the water, saw the seal breach out of a foaming commotion of water and blood and yelled "Shark!"
But the majority of folks on Nauset Beach, including the lifeguards focused on the safety of swimmers, missed the great white itself. They only saw the dying seal with its blubbery entrails visible as it swam in hobbled fashion along the surf, leaving a thick trail of blood in the water. That was the end of the beach day as the authorities, now in great abundance, prohibited further swimming.
As yet another heralded 10-year anniversary of the great financial crisis approaches, the true-life tale of the shark in the eclipse presents an apt metaphor for what happened back in 2007. People on the beach straining their necks to peer thousands of miles into space missed the more important event just a few feet away.
In retrospect, of course, I should have been more attentive to the water than the sky. Anyone entering Nauset Beach will, aside from the advertisements for Liam's clam shack, see the ominous signs warning about the preponderance of great whites, and flags hoisted high bearing the likeness of a shark. Nonetheless, the parking lot fills up on most summer days.
So it was with the global banking crisis. There were indications everywhere of a system going awry. A decade on, these are the things financial experts and pundits are returning to in a perverse form of celebration. Everyone, it seems, has their view about which of these events from early 2007 and into the first half of the following year foretold the calamities to come. But the truth is more complicated.
Though intellectually stimulating to revisit with hindsight, in isolation none really explained the whole picture in ways sufficient to avoid the inevitable attack. Those who experienced the crisis in the trenches of finance, journalism and public policy will continue a healthy debate for as long as they can remember what happened.
It's worth recalling some of them since we are now in the 10-year anniversary cycle – but with the simple purpose of recognising that only the sum total of events can provide a real lesson for future avoidance. And even that will be imperfect.
It's widely accepted that the canary in the coal mine came in early February, 2007, when HSBC announced it was taking an extra US$1.8 billion in provisions for mortgage loans provided to subprime US borrowers. Mauro Guillén, director of the Lauder Institute at the University of Pennsylvania's Wharton School, kicks off his timeline of the crisis with this event, which inspired a savvy Breakingviews piece questioning whether subprime would be "the first shoe to drop.”
Perhaps because HSBC had a few years earlier, and unusually, acquired a lender focused on less creditworthy customers, many saw it as an isolated case. They didn't need to look much further for other warnings that the shark, to stretch the analogy, would soon devour the seal. New Century Financial, a subprime lender, was bleeding out for much of first quarter of the year, culminating in its April bankruptcy. Months later, two Bear Stearns hedge funds investing in ropey mortgage assets went bust.
By August that year it had started to become apparent that the problems were no longer isolated to a few buccaneering market participants. CNBC commentator Jim Cramer's on-air rant that "the Fed is asleep" was followed by a notice to investors from BNP Paribas that it couldn't value a bunch of mortgage-related assets in its portfolio due to a "complete evaporation of liquidity." Within weeks, central banks were injecting money into the financial system.
At the annual Federal Reserve symposium in Jackson Hole, Wyoming that year – the decennial anniversary comes this weekend – central bankers appeared confident no systemic crisis was imminent. In a speech entitled "Housing, Housing Finance, and Monetary Policy," then-Chairman Ben Bernanke said, "It is not the responsibility of the Federal Reserve - nor would it be appropriate - to protect lenders and investors from the consequences of their financial decisions."
Despite these jitters, investors remained calm, even complacent. From the week before HSBC burped to October of that year - when UBS, Merrill Lynch and Citigroup warned of some US$20 billion of subprime losses – the S&P 500 Index rallied some 10%.
The complacency rolled on until troubled Bear Stearns was swallowed by JPMorgan in March of 2008. That’s an anniversary that will no doubt merit barrels of ink next year, as will the mother of all crisis celebrations with the 10-year mark of the September demise of Lehman Brothers and the bailout of both AIG and mortgage agencies Fannie Mae and Freddie Mac.
Each anniversary marks an opportunity not simply to remember what happened, but to recognise that no single event can really be said to have predicted, kicked off or ended the crisis. Like all collective delusions and manias of crowds, the failure of most investors, regulators, politicians, bankers and, yes, we journalists to identify the danger lurking just below the surface in 2007 only becomes evident by examining the full arc of what occurred.
And there is a further lesson, one that both the history of market bubbles and financial panics - as well as mid-eclipse shark attacks - will confirm: we will almost certainly be looking in the wrong direction when the next attack comes round.