Third horsemen of the financial apocalypse is worst of the four
November 17, 2008
By Gerrit Thomas Ferreira
When, a year ago, I warned that FirstRand's 2007 earnings were exceptional and that it would consequently be difficult to improve on this performance in 2008 and that we should prepare ourselves for some difficult times, I did not imagine the carnage that would visit the financial markets during the last year.
It appears as if two of the horsemen of the apocalypse, namely Leverage and Greed, initially entered the race under the banner: "This time it is different."
They thus started running the race at breakneck speed, creating sophisticated collateralised debt obligations as if there was no tomorrow and pushing the US mortgage market (as well as other securities markets) to unprecedented heights.
Just when it seemed as if this time these two horsemen and their horses would never tire, two new horsemen, Lack of Liquidity and Fear, entered the race and proved, once again, that cycles are never different.
If you spend too much energy during the first part of the race, you never have the stamina to finish well.
When last seen, Lack of Liquidity and Fear were leading by a mile, and they are likely stay ahead for the foreseeable future.
Since my statement in last year's annual report, a multitude of US and European banks have failed and mortgage companies Freddie Mac and Fanny Mae have been rescued by the US government.
Deleveraging on a massive scale has been the theme of the last 12 months and should probably be regarded as one of the key determinants of the depth and duration of the current cycle. Going forward it will have a significant impact on global growth.
Despite the deployment of hundreds of billions of dollars of liquidity into the global banking systems, financial markets remained extremely fractious.
I believe we are likely to experience ongoing financial turbulence and economic strain for an extended period of time.
In fact, as I write this year's statement, Bear Sterns is long gone, Merrill Lynch has been acquired by Bank of America and Lehman Brothers has filed for bankruptcy.
Great names of investment banking have become victims of a relentless meltdown of markets.
I am sure that by the time you read this document there would have been hundreds of articles about what went wrong and why it went wrong.
I do not want to bore you with my lengthy version of the "truth".
However, for what it is worth, the following are a few of my observations of what happens to the value of assets in the financial markets when things go wrong and liquidity dries up:
It is not the price of credit that matters, but the availability of credit;
It is not the quality of the asset that matters, but the quality of the asset's holder;
It is not the realistic value of the asset that matters, but its market value;
It is not the strongest holder of the asset that determines the market value, but the weakest holder; and
It is not what you think the asset is worth (even if you are correct), but what the buyer thinks the asset is worth.
So beware the third horseman, or Lack of Liquidity. He is, in my opinion, probably the most dangerous of them all.
This is an extract from a statement by Gerrit Thomas (GT) Ferreira in FirstRand's 2008 annual report - his last as the chairman of the company
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