• Monmouth Capital

Ten Years On

On 9th August 2007, the day BNP Paribas prevented investors from withdrawing cash from one of its money market funds, I was not anticipating the most serious economic crisis since The Great Depression.

We had just put down a 30% deposit on an off-plan two-bedroom flat in London. My timing could not have been much worse: having exchanged contracts as the first signs of trouble emerged, we then completed in October 2008, as Lehman Brothers went bankrupt and the world lurched into the Great Financial Crisis.

What’s worse, we discovered exactly what a “mortgage in principle” means: not much when your bank faces existential crisis. My bank revalued our flat and capped the LTV. We suddenly had to find 20% of the purchase price in cash within 7 days or face losing our deposit and the flat. For the final year of construction I had been taken monthly photos of the building as it took shape; how foolish and naïve I felt about such whimsy, set against the brutally cold economic reality we now faced!

The crisis changed everything. ZIRP or Zero Interest Rate Policy was about as hypothetical and wonky an economic theory as one could imagine; yet a decade after the crisis, yields on German 2 year government bonds are still -0.74% [1]. Central banks in America, Europe, the UK and Japan own trillions of dollars-worth of their own government’s bonds and it is not entirely clear when or even if these holdings will ever be sold back to the market or repaid [2].

Imagine describing this situation to somebody – to yourself, perhaps – in 2007. It would be pretty much unthinkable. Yet here we are; the “new normal”. Both the outcome and the path to get to this point were not predictable. What’s more, once the crisis had happened and there was a fear that everything would fall apart, new predictions appeared warning of severe further consequences, whether hyperinflation due to money-printing or the collapse of the Euro; and they haven’t turned out to happen.

To go back to September 2008: I was fortunate enough to have accumulated a large chunk of shares and options in my employer at the time. This was meant to be part of our long-term savings but in the absence of other sources of cash, we decided to exercise and sell them all to raise half the sum we needed. (It was a stroke of luck: days later, the share price plummeted as the crisis belched beyond the banks, and it remains at a third of the price I was lucky enough to get.)

As for the rest, drawing on brinkmanship I did not realise I had in me, I marched into the developer’s sales office and said we were withdrawing from the purchase. After a hastily-arranged and frosty call with the Sales Director, we had negotiated sufficiently to complete and, a month later than planned, finally moved in to our new home.

We had exhausted our liquid reserves and hugely overpaid, of course; but it was our home and we had a wonderful time living there. Five years later the market had recovered sufficiently for us to trade up to a house and all is rosy. However, it is only looking back at things that I can see quite how close we were to a very different outcome.

Had we delayed the decision to scoop up and sell my shares by a few days, or had the developer decided to play hardball and force us into forfeiting our deposit, we would have headed down a very different path. Banks were demanding much higher deposits and mortgage terms were being tightened. Would we have been forced to rent? Would we have faced the frustration of seeing properties we liked at sale prices but with no way to take advantage, having lost our deposit and missed the chance to cash in my employment shares at a good price? We cannot say what the outcome would have been.

In other words, as difficult as it is for me to acknowledge, we have ended up in a comfortable, spacious family home through a series of chance events largely outside of my control. From that point in September 2008, in my personal circumstances just as in financial markets, I don’t think there was much chance of knowing for certain where we would get to over the following ten years, and even less chance of knowing the exact route by which we would get there. That’s not to say we should lie down and do nothing; acting in the face of uncertainty is perhaps the definition of financial investment, which has now become rather more central to my life than it was back then.


- FS

Notes

1 If my grandchildren are reading this in the 2050s, that’s not a typo: minus nought point seven four percent. You have to pay Germany to lend them money. Vorsprung durch technik, as they used to say.

2 https://www.economist.com/blogs/economist-explains/2017/04/economist-explains-10

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