February 18, 2016
A quick look at last week’s global financial news might easily mislead a reader to panic under the overriding negative sentiment of a sector not yet able to forget the nightmare of the 2008 subprime crisis. However: A behavioral fallacy in investors” thinking may be exaggerating the risks and dangers we read about. The fallacy is synchronicity. It so happened that in the previous crisis, a vast number of mortgages and (subprime) loan packages were due to expire at approximately the same time. It was a perfect storm, 2008″so dramatic and so climactic you couldn”t write it better for Broadway”especially when Lehman collapsed and all markets crashed overnight and…the ruination of Wall Street was so synchronic, it was often confused with representing the grand finale of capitalism; the abrupt and shameful end of the Western world, even?
That crisis guaranteed near-immediate”or maximal 60-day”waves of default, for month upon month ahead…on top of fear of the unknown. Born, as it was, out of toxic debt, cross-collateralized to disguise its contents. And wreaking havoc upon the unsuspecting.
The good news is, last week’s scenario is improving: The FTSE 100 has rebounded, up 2%. And today’s situation comes nowhere close to being a repeat of the manic, reckless trade in toxic assets preceding the “08 crash. Not in its bank-toppling simultaneity. Not in many ways.
In the summer of 2013, while studying on London Business School’s Sloan Fellowship, I joined a master class on capital markets given by a groundbreaking theorist, where I received a compelling warning. The red flag was this: “Hundreds of billions of dollars of bank debt, high-yield debt and commercial real estate debt is scheduled to come due [imminently].”
Cut to 2016. It’s Chinese equities and plummeting oil prices that brought the overextended bull market to a sharp stop. Three years later, the distinguished lecturer’s fears have not (yet) manifested themselves. Besides, in the case of those commercial debts highlighted, the lecturer had offered a range of swift remedies”an option that was not available, or practicable, in 2007″08. This is due to the collateralized nature of, and the multilayered and sheer multiplicity of, those debt obligations. Most loans can, by their nature, be (re)negotiated. Commercial or bank loans, especially so. The bigger the debt, the higher the chance of negotiability, as a rule. Refinancing is a routine activity at corporate levels, and a number of methods for dealing with problem loans are available. “Amend-to-extend” transactions, covenant relief amendments, exchange offers, or prepackaged reorganizations (even insolvency cases, leading to potential turnarounds)…all viable options in the event of default. Given such loans are held or underwritten by the most conservative participants in the market today (the banks), and given their capital thresholds have never been higher, panic is not required; not even if the debt is emerging-market-linked or whatever. Debts can be worked out.
What occurred before 2008’s crash was financial fraud on a massive scale. It was not a routine thing whatsoever. And it bears little resemblance, in the detail, to 2016.
It may well be that the collective trauma of 2008, and consequent fear of repeat meltdown, still scramble our individual clarity or pervert institutional confidence, and collective rationality to boot. Is it possible we”re (re)experiencing “financial PTSD”? Is this a case for the behavioral economists?
As the FT’s Big Read on “banking turmoil” Feb. 13/14 announced: “There was no clear catalyst for this week’s sell-off but its ferocity recalled the 2008 crisis. Banks say they are in better shape now [correctly so] but investors need brighter economic news before confidence returns.” It’s a well-put summary, and a reminder to hold back the triggering type of jargon”keywords such as “crisis” or “crash””until the situation merits it. Fear of another crisis may help create a new crisis, but it does not constitute a crisis. Only, grammar has its own anchors, so it’s easy to speed-read and ignore the phrase “fear of another””while allowing the single word “crisis” to enter the mind, which activates our fight-or-flight reflexes. Indulging our increasing propensity for emergencies, precisely as the media intended.
Of course, this old trick only works its spell if a genuine trauma hangover exists. In the difference between the whole and the 3/4 phrase lies everything”or lies the truth, anyway. Yet we humans think like search algorithms at times. Algo’s which (used to) seek out mere mentions of a critical keyword so then to trade on the number of iterations of that word on the WWW, disregarding each context entirely.
More good news, for the consumer, includes Russian oil company Rosneft’s refusal to consider output cuts in their oil production”with some provocative theories explaining why. Igor Sechin, head of state-owned Rosneft, a close friend of Putin’s, and member of Russia’s dominant ex-secret-service cabal, “signalled his steadfast opposition to combining with Opec to reverse the crude price rout through coordinated cuts in production,” according to the FT’s Oil & Gas. Sechin asked the FT journalists whom they thought he should be talking to? “Will Saudi Arabia or Iran cut production?” he wondered (rhetorically). Sechin blamed the U.S. shale boom and Middle East producers for flooding the oil market, a move he said may have been politically motivated.