I could hear the phone ringing all around me. Everyone was engaged on their phone and keying orders into the terminal at the same time. It was a chaotic moment on the dealing floor at PWC building.
This happened in September 2008, the onset of the Global Financial Crisis (GFC). The market onslaught began on the third week of September and 22nd September was the Monday of that fateful week. Market saw a 50% drop from that week onwards and the S&P hit a low of 680 points in March the following year.
Looking back into those days during the GFC at the dealing floor, it sent chills down my spine. My hands were numb keying in orders, and keying them in vain as literally, there were no buyers on the other side. It became a challenge to hit the buyers whenever they appear on my SESOP screen, a dealing system used then. Of course, they have upgraded to GL system since. It felt as if all the dealers in Singapore were playing a game of “fastest hands win!”.
The situation then was so bad that i felt as if i was having a heart attack, and I was breathless. All these with sell orders coming from all directions. “I have to go. I am getting out”. This was what i told my team then and left the floor to take a 30 minutes break. I wasn’t sure if anyone heard me as all of them were engaged on their phones.
Another interesting thing that happened then was that our company was approached by Merrill Lynch to distribute some of their notes. My partner and I was talking quietly between us, questioning whether they will be around in one week’s time as Lehman had already failed. One week later, Bank of America announced their takeover of Merrill.
Fast forward 13 years, I no longer worked on the dealing floor. But i could never forget my experience back then.
In March 2008, the market was shocked to hear that Bear Stearns had gone belly up. A series of failures followed suit, from hedge funds to eventually, Lehman Brothers in September. It was the biggest bankruptcy in US history. Even the FED was struggling to put a floor to the free falling market.
Immediately, on the first week of October, the Wall Street bailout was approved. The cost of the total bailout worked out to be 1.4-1.5 trillion US Dollars. The market finally saw its low established in March 2009 and marked the start of the longest bull market in US history. This bull was brought to an abrupt stop in February 2020, about 11 years since March 2009, by Covid-19.
With the benefits of hindsight, we know that the crisis was a result of low interest rates and low lending standards which fueled a housing bubble. Many were encouraged to borrow beyond their means to buy homes they couldn’t afford. The banks and subprime lenders continued to sell these mortgages in the secondary market to free up more money to grant more mortgages. The financial institutions repacked them; sent them to be rated by rating agencies, and sold them as safe instruments to both institutional and retail investors. Magic happened! Toilet paper was miraculously transformed into financial instruments; highly sought after by insurance companies and investors alike.
When the meltdown happened, the holders of these instruments were literally holding on to “toilet paper”, they realised. Banks started to be wary and interbank lending came to a stop which worsen the situation. No one knows how much of what did the counterparty hold on their balance sheet, which was worthless to be exact.
At this moment, we are seeing a similar situation happening in China which threatens its financial system. I am sure most of you have read about China Evergrande, the most indebted property developer in the world. The possibility of the company defaulting on its debt obligation had fears raging through the financial markets of late. Everyone is talking about the domino effect if Evergrande is allowed to fail, from banks to insurance companies who are holding on to their debt to raw material suppliers, all of which will definitely be negatively impacted. Not forgetting homebuyers who have paid their initial deposits for their newly purchased apartment units which eventually, may not be build.
This event also comes at a time when the Chinese Government is coming down hard on every sectors of the economy, from internet companies to education providers to casinos in Macau. The Chinese market seems to be heavy laden with negative news each and everyday.
Some have said that the current Evergrande saga is similar to Lehman Brothers back in 2008. I would say, its both a yes and a no.
Yes, the situation is similar in the sense that in both cases, over-leveraging in the housing sector was the root of the problem.
No, I think the magnitude of Evergrande’s current issue is just a fraction of what Lehman had back then. Of cos, we also need to factor in the contagion effect. Then, Lehman clients are all institutional but Evergrande has retail clients from their wealth management arm and therefore, there is a high possibility that Evergrande will not be allowed to fail (just my opinion in which I can be wrong). But I would not discount the fact that if the company does fail, the domino effect can be catastrophic.
Moreover, in this stage of economic growth, I believe that the Chinese Government would explore all means and ways to prevent a systemic breakdown due to Evergrande ongoing issues. I have heard from my Chinese friends who said that the government is more keen to protect the man-on-the-street, those who had placed a down-payment for their purchases. Whether the Chinese Government will craft out a rescue plan for the company remains to be seen.
The market has started pricing the possibility of a unsystematic default by Evergrande. Sentiments are weak. It seems that the Chinese Market is all dark and gloomy. Evergrande has an interest payment due this coming thursday, 23rd of September. Market participants are watching this closely.
But let us look back to the time when Lehman brothers failed. It was dark and gloomy then. No one knows what was going to happen. But with the benefit of hindsight, we know that the economy eventually recovered and established the longest bull run in history. There are definitely opportunities in the midst of this doom and gloom.
You may argue that the Chinese central bank may not be that forthcoming relative to their counterparts in US. But what the Chinese can accomplished based on their current political framework, can work to their benefit. In the past, we have seen many private companies responding to the Chinese Government calling for social good. The one-party framework also ensures that policies can be implemented efficiently, without wasting much time negotiating. Will China be reversing their economic policies going forward? I doubt so.
The recent regulatory crackdown may prove to be useful in reducing systemic risk in the financial system as China enters into the next stage of economic development.
Yes, it can be scary but as the chinese saying goes, “in every crisis, there is always an opportunity”. Of course, I am not advocating buying Evergrande shares. But what I am saying is that there are other companies in China which are expected to do well going forward but their share prices are trading at a depressed level as a result of fear and market sentiments. So is the bottle half empty or the bottle half full? I will leave that to you.
Please read Disclaimer
The above article is strictly my personal views and should not be taken as financial advice. Please consult your investment advisor for further information.