The Oscar-nominated movie The Big Short reminds me of the dark days in September 2008 when Lehman Brothers applied for bankruptcy protection.
I was then dealing with US asset-backed securities (ABS) and mortgage-backed securities (MBS), as well as other financial institutions’ bonds.
Here’s a typical office chat at the time:
Colleague A: Boss, it’s so exciting these days. The Congress vetoed the US$700 billion rescue plan, Dow is down 777 points and FTSE 270 points. It’s the worst case since the 1987 stock market crash. The whole financial market is in extreme volatility.
Colleague B: News about banks keeps coming in. Wachovia is safe for now, at least Citi or Wells Fargo will buy it, but Washington Mutual is waiting to be closed down. Goldman and Morgan Stanley are in better situation because they just became bank-controlled companies instead of investment banks. Fortis and Bradford & Bingley are waiting for government rescue.
Me: The entire market is badly hurt. It’s a major reshuffle. How about the ABS/MBS markets?
Colleague A: The market will continue seeing a liquidity crunch and prices will continue to fall.
Me: What should we do about our positions?
Colleague B: MBS backed by the government will survive, but we better sell those without such protection and poor asset pool as soon as possible.
Colleague C: The market is starting to worry about adjustable rate mortgage (ARM). The loans in its asset pool are still paying low interest rates, but borrowers will need to pay high interest rates to refinance the loans in one or two years’ time. The concern is whether the borrowers will have the money to repay. Prices of such products have already dropped sharply.
Water-cooler conversations nowadays are a bit boring. But back then, every second counted and every step we took should be with extreme caution.
Because of the financial crisis, the US economy suffered recession in the following years. The Federal Reserve released three rounds of quantitative easing monetary policies to stimulate the economy.
Everything is still so vivid in my memory.
Seven years later, the US finally started to normalize interest rates. It seems the fears have been forgotten.
The world is all connected extensively. A country cannot stand on its own. A fire in one place will impact the economies on the other side of the globe.
I believe there are already signs of various crises emerging in the world.
Financial markets seem stable at the moment, but it may soon be dusk before darkness falls.
This article appeared in the Hong Kong Economic Journal on March 30.
Translation by Myssie You
[Chinese version 中文版]
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