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One deadly Summer… 10 years ago

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

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