In mid-August 2008, I was in a car driving through Italy on my way to Bari – with two cats on board – on my way to Greece to start a new life. We stopped at a service station for a break, and I took a call from a client to confirm that the deal that we had just done. I voiced, again, my concerns that this was a huge price for ship of its size and age, and whether or not it was worthwhile reconsidering it as the freight market was drifting down, and there were unpleasant rumblings in the banking sector. As I was working for HSBC at the time, I was perhaps more aware of these more than others. Nevertheless my client – also a friend – reassured me that everything would be ok, and authorised me to lift their subjects.
The new life in Greece was opening an office for the shipbroking division of HSBC in the same building as their Greek ship finance branch in Piraeus. This was long planned, and although we had yet to find a place to live, and indeed many other things, we were approaching it with the excitement of a new life adventure. It was the first time living abroad, and was the first time I would be managing an office, anywhere, let alone setting one up in a foreign country, even one that (I thought) I was familiar with. The market was great, I was spending a hell of a lot of time in Greece anyway on business – negotiations, closings, new clients – that it seemed a natural step for us in life, and for the business too. A shipbroking company sharing offices with a ship finance branch in the heart of the action was a no-brainer.
We boarded the ferry and had a pleasant crossing. I have a fond memory of our eldest cat settling down on the window sill of our cabin, enjoying the view. On arrival in Patras, we drove immediately towards Athens, but the road was something else. Coming from the smooth progress of autoroutes and autostrada it was a rude awakening. The traffic and the road was – you may say – enlightening and invigorating.
Just outside Megara, a tyre blew. We got through the tolls, and I unloaded the car to get the spare tyre to change it in the heat and the traffic. Humbled, tired and hungry we arrived, and rested. We had no choice. The next day – a Friday – was August 15th, the major Greek public holiday of the summer. We could only start our new life proper on the Monday.
The following few weeks were a whirlwind of activity, finding a place to live, buying two cars, setting up the new office – physically and documentarily – not to mention the business that was still to be done. And then everything changed overnight: Lehmann Brothers. I was working as a sale and purchase shipbroker with deals in play, for a huge banking group, alongside a ship finance branch. I had an office to create, business to do, a new home to set up, a new life to construct. The future was suddenly thrown into disarray.
These memories have been flooding back to me over the last couple of weeks as first Silicon Valley Bank and then Credit Suisse have gone to the wall. Apart from trying to work out what is really going on, and whether this really is an event on a similar scale to September 2008, I am also trying to remember how it felt at the time, and whether I am getting a similar feeling now. This is not very scientific I know, but then again bank runs are not very scientific either, a stampede for the exit as the illusion of solvency and trust evaporates. What was a solid institution a few days earlier collapses like a house of cards.
But this is true of all banks, and indeed the banking system itself. The very existence of a bank depends on the deposits they hold, not on the profits or losses they make. This is very risky, and also unique to banking. They are also vulnerable to what other banks are doing, or not doing, which causes – as we have recently seen – a domino effect through the banking system. A shipping company would appreciate – even encourage – incompetent competitors to carry on doing their thing, their leaving better business for them. In banking, having incompetent competitors is an existential threat for everyone.
This is what was happening in 2008, and although the collapse of Lehmann Brothers was a game changer and precipitated a far wider crisis, there were many earlier warning signs that confidence was waning, and the banking system was under stress. The collapse of confidence in Bear Stearns in March 2008, and the subsequent Fed bailout and fire sale to JPMorgan Chase was – in hindsight – a sign of further trouble to come. And in fact Bear Stearns offers a useful context to what happened with Credit Suisse recently.
Without going into huge amounts of detail, as SEC Chairman Christopher Cox said at the time, the collapse of Bear Stearns was due to a lack of confidence, not a lack of capital. Cox also noted that Bear Stearns’ problems escalated when rumours spread about its liquidity crisis which in turn eroded investor confidence in the firm. Bear Stearns’ liquidity pool started at $18.1 billion on March 10 2008 and then plummeted to $2 billion on March 13 2008. Ultimately market rumours about Bear Stearns’ difficulties became self-fulfilling.
In an update de nos jours this time it was rumours disseminated on Twitter about the health of Credit Suisse that prompted depositors to pull more than SFr 111 bill towards the end of last year before the almost casual comment by Saudi National Bank that it would not invest any more money in Credit Suisse. A bank’s lack of confidence in another bank dealt the final blow as a further US$ 35 bill was withdrawn in just three days. The rest we know.
The issue for shipping is well known already. It is not the state of the Credit Suisse ship finance portfolio, which is – I understand at least – not under any threat, although whether or not UBS continue to want it on their books in future is another thing. As the largest lender to the Greek market they will be reassured that the names they have leant to do represent any significant risk, something that cannot be said of their other lending policies mired in scandal and loss. It is the systemic risk to the banking environment that is the problem: when banks stop trusting each other, trade finance dries up. When trade finance dries up, trade dries up, and when trade stops so does shipping. This was the story of the crisis for shipping following the collapse of Lehmann Brothers.
This caused chaos at the time. Ships were idle, no-one knew when things would start moving again, and more to the point no-one knew what ship values were. The deal I was doing at the time was drastically renegotiated, not on the back of any reported sales, but on a compromise between how much the sellers could get from the buyers (and their financiers) and how much the buyers would lose if they defaulted. The ship was delivered – not a very happy closing for anyone, including me – and never reattained anything like the renegotiated value over the course of its life, let alone the original price agreed.
My life in HSBC for the next year or two was not short of work either. Apart from new deals being done, there were renegotiations of newbuilding contracts (some happy, others far from happy) and the constant reappraisal of values for HSBC’s loan book as well, which thankfully had a very blue chip profile: not one client defaulted in the period between 2008-2012 when the HSBC Shipping Services Greek office was in operation.
I share this with you to highlight a number of things, some the same, some different. The main thing that is the same is that confidence in the banking sector is again being hit: rumours of Deutsche Bank’s demise last weekend thankfully proved premature, but is adding to the mood music of uncertainty. What is different? Everything else. There is nothing like the same fevered atmosphere in the financial sector, shipping is good for tankers, kind of for bulk carriers, terrible and getting worse for containers. Back then just being around shipping was like being one of the blessed few. Need I add that China is different, Mr Putin has his boys camping in eastern Ukraine, and interest rates are rising to tame inflation not cool the economy.
Another big difference is the way that a prompt solution was imposed on Credit Suisse, and its bond holders – not to mention the shareholders still hanging on – by the authorities, in the shape of the Swiss politicians and the Swiss National Bank. The lessons of prompt and decisive intervention (and the lack of it) have been learnt. This no doubt stores up moral hazard issues for the future (and potentially bigger problems), and there is always the danger of fighting the next war with the tactics of the last one, but so far things are calmer than they were two weeks ago.
Credit Suisse did not turn out to be Lehmann Brothers, but it may be a warning sign of worse to come, like Bear Stearns was. What the worse will be is impossible to say, both in scale and effect. But if my examination of my memory – and the memory of my gut instinct is correct – something is coming. My memory of the lead up to September was one of stress and anxiety, and a feeling that things were being held up by dreams. I am sure this is also fed by hindsight, but the hindsight of those of us in shipping at the time is warped by other considerations. It was the environment that we were in, the water we were swimming in.
A lot has happened in the fifteen years or so since then. I left Greece, for good. I came back again, for good, under completely different circumstances. The new road from Patras to Corinth has been completed. Greece has come through a severe financial crisis of its own and is out the other side, stronger and better. I have seen a lot, done a lot, learnt a lot (and then forgotten most of the lessons) and made the same mistakes over an over again, but each time with a new and novel twist. A bit like the financial markets in fact.
However I do feel that those who think that the resolution of the Credit Suisse (and SVB) problems means no new problems should think again. My feeling is that they are the symptoms rather than the cause of their demise. Sure they had problems, but these are just the weakest being picked off now. Nothing has changed fundamentally in the wider financial environment now that these banks (and others) have been folded into or bought by others. Until the environment changes, these problems will persist. The thing about Lehmann Brothers was that it was the both the symptom of market dysfunction and the catalyst for fundamental and cataclysmic change. It was the illness and the drastic cure at the same time.
Thankfully for shipping – especially in Greece – the memory of 2008 still casts a long shadow. There is no excessive borrowing or lending – the German banks are mostly out of the ship finance picture – and nobody is talking about new paradigms, or sitting on previously unheard of piles of cash. I would also suggest that the Greek crisis itself has tempered attitudes towards borrowing and banks in general. I think we are better prepared, and the lessons have more or less been learnt, even if only because we have had no other choice.
When I boarded the SUPERFAST ferry on that night in August in 2008 I could not have imagined what was going to occur in the coming weeks, let alone the months and years that followed. There is no point in asking myself if I should have done something different, or indeed could have. There are two things I have to remind myself, one from Soren Kierkegaard and the other from Richard Bookstaber (who wrote a masterful book on the financial crisis):
“Life can only be understood by looking backwards; but it must be lived forwards.”
“The world cannot be solved; it has to be lived.”
Good advice for us whether we are thinking about finance, shipping or life.