Financial crises are facts of history but need not be the end of the world


Financial crises are facts of history but need not be the end of the world

Where were you when Lehman Brothers went bust? Ask a banker that question, and you’re more or less guaranteed to get a detailed account, with times, locations and recollections, in much the same way “ordinary” people remember the exact circumstances of the death of a pop star or a president.

On the tenth anniversary of Lehman’s seismic bankruptcy, the war stories are being recounted in the world’s financial media. But if you cannot remember where you were and what you were doing on Sept. 15, 2008, don’t worry.

The good news is that you will surely get another chance to experience a financial crisis, because one is bound to come along sooner or later. That is also the bad news.

Economic and banking shocks have been a recurring historical theme of at least the past century, and arguably much further back. There seems to be an in-built mechanism in the global financial system that leads, roughly once a decade, to some kind of crunch, crash or crisis.

In nearly 40 years in financial journalism, I have reported on three big ones: the “hurricane” crash of 1987, the Dotcom bust of 2001, and — by far the most serious — the global financial crisis of 2008. There were a few other “shocks” and “crunches” in between, but those three were true crises.

It was more than a year after Lehman that the crisis hit the Gulf.

Frank Kane

If there was a common narrative between them, it was this: A new “big idea” gets seized on by the financial world as a rationale for why the normal rules of financial gravity no longer apply. In 1987, it was program trading; in 2001, the Internet itself; in 2008, collateralized debt obligations (CDOs).

In the face of these “new paradigms”, all the bankers’, regulators’ and policymakers’ wisdom seemed to evaporate, and the architects of the world financial system started behaving with all the investment acumen of the fabled New York shoe shine boy. Buy, buy, buy.

That is nice while it lasts, but of course it cannot last forever. What goes up must eventually come down. So boom turns to bubble turns to bust.

What made 2008 so serious, an existential threat to the global financial system, was the fact that at the heart of it was plain old bricks and mortar. The CDO experts advanced loans to buy sub-standard real estate to people who could not afford it, and then mixed up those dubious loans with perfectly good ones. In a short time, the whole system was infected by these “toxic” assets.

The most potent toxicity occurred in the US property market, but quickly spread to other asset classes and other geographies. Because nobody could accurately estimate the value of assets, all were regarded as suspect. Trust in the international financial system began to evaporate. Lehman was the spark that ignited a general panic, but really the 160-year-old bank was just unlucky — many other big US and global financial institutions, many with bigger exposures, could have similarly collapsed without the government bailouts Lehman was refused.

For a couple of weeks after Lehman, the world financial system hung in the balance, but the bail-outs and funding programs of “quantitative easing” led by the US government pulled it through.

The Arabian Gulf seemed a relatively good place to be, a shelter from the storm. True, the regional banking system was feeling the same squeeze as everybody else, but the banking authorities acted pretty quickly to inject plenty of their considerable liquidity into the system and protect depositors. There was very little chance ever of the ATMs running dry, as was the case elsewhere in the world.

It was more than a year after Lehman, in November 2009, that the crisis hit the Gulf region with a vengeance. Never mind Lehman – in the UAE and other countries in the GCC, the real question is “where were you when Dubai World stood still?”

The conglomerate’s debts threatened to derail regional economies, but were resolved through restructuring, demonstrating the resilience of the Gulf’s banking systems and the deep pockets the oil exporting economies possess.

If, as history suggests, the likelihood of another financial crisis increases with each passing year, the serious question is: “Have bankers, financiers and policymakers done enough in the past ten years to mitigate the damage next time round, wherever it may originate?”

In some ways, the financial world is a safer place than it was in 2008. Regulatory systems have been tightened, banks have been given (and mostly meet) tough new capitalization targets, and real estate lending has been reined in.

One big threat remains: Global levels of indebtedness have risen threefold in the past decade. But that is an issue for another day.

  •  Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai


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