Tamsyn Parker

Money Editor for NZ Herald

Lehman's lessons - How to cope when disaster strikes

Investment leaders tell markets reporter Tamsyn Parker what the US bank's collapse meant to them, and whether something similar could happen again

Tim Bennett, CEO of the NZX. Photo / David White.
Tim Bennett, CEO of the NZX. Photo / David White.

Tim Bennett - chief executive, NZX

Q: Where were you when Lehman Brothers collapsed?

I was consulting to one of the banks in Australia during this time and actually spent the weekend that Lehman collapsed in Queenstown. It was all a bit surreal; what seemed to be an imminent global collapse against the beauty and tranquillity of Queenstown.

Q: How did it affect you?

Fortunately, the investment portfolio only took a bit of a hit (unlike many others I knew), but in many ways it was business as usual, as the industry had been reacting quite quickly since the Bear Stearns sale.

Q: What have you learned from the global financial crisis?

Transparency in markets is critical and even then, markets by their nature are increasingly volatile.

Q: Could it happen again? Why/Why not?

No, the regulatory changes made over the past five years will ensure this won't happen again. But as markets and economics evolve, we need to continue to be vigilant to ensure that the way we operate and regulate markets keeps pace with these changes.

Fiona Mackenzie - head of investments, NZ Superannuation Fund

Q: Where were you when Lehman Brothers collapsed?

I was working for Morgan Stanley's institutional equities division in San Francisco. My clients were United States-based institutional investors, such as asset managers and hedge funds, that were investing into the Asian listed equity markets.

Q: How did it affect you?

It really highlighted for me how interconnected the world has become and how quickly issues in one asset class, in this case US housing, can create issues across the global economy. We all remember Lehman Brothers and Bear Stearns, as both of these investment banks effectively disappeared in 2008, but many of the global investment banks such as Morgan Stanley were also severely impacted and had to reach out to external investors for capital injections to survive.

Q: What have you learned from the global financial crisis?

The importance of real diversification in your portfolio, not just in the type of investments that you hold, but how you access or manage them.

Q: Could it happen again? Why/Why not?

We believe global markets will continue to be volatile. The interconnectedness of global markets, which is a positive in that it allows capital to flow to where it is needed, also means that corrections in one part of the global economy can quickly have knock-on impacts in other markets. These corrections, however, can also provide good buying opportunities for long-term investors such as the NZ Super Fund, because we have the ability to ride out volatility.

Sean Hughes - chief executive, Financial Markets Authority

Q: Where were you when Lehman Brothers collapsed?

In September 2008 I was in Melbourne - head of legal for National Australia Bank's retail, business and corporate bank business in Australia. And I was about to return to ASIC [the Australian Securities and Investments Commission] in late 2008 to head up a team dealing with corporate governance issues.

Q: How did it affect you?

The immediate impact was the ongoing funding challenges for all the Australian banks - in terms of increased wholesale funding costs and the flow-on impacts for pricing. A secondary impact was the concern about who next might fail, whether the US or Europe were going to step in to save any institutions deemed "too big to fail" and whether there was likely to be any contagion impact in Asia-Pacific. The third concern was whether any of these collapses were the result of systemic structural inefficiencies or weaknesses in the financial system per se, or global regulatory oversight models.

Q: What have you learned from the global financial crisis?

Never rest on your laurels - markets are global, react instantly and pay little heed to national borders or the local economic environment. Smaller economies such as New Zealand can never immunise themselves from broader market shocks and this can be especially difficult where it impacts wholesale funding costs. Above all, markets are cyclical and there is no such thing as a risk-free guaranteed return on capital.

Q: Could it happen again? Why/Why not?

Absolutely. The one thing we are constantly reminded of is that we don't know what we don't know. Governments, regulators and institutions tend to build an apparatus to respond to the known threats, but we need to be inventive and creative to prepare for the unknown ones, too. Above all, it emphasises the need for us to be truly globally connected into how other countries and institutions are identifying and managing risks which haven't yet arisen in NZ so we can better anticipate and control them.

Paul Glass - principal, Devon Funds Management

Q: Where were you when Lehman Brothers collapsed?

Co-leading the team at Brook Asset Management and looking after $1.5 billion of NZ and Australian shares for clients.

Q: How did it affect you?

While equity markets had already fallen by over 20 per cent at that point, the collapse in Lehman was truly scary stuff as the world's financial system is effectively based on confidence, and that confidence had evaporated overnight. At that point further bank failures became a certainty and the only question was how much worse was it going to get. Even though we had positioned client portfolios well with large cash holdings and high quality stocks, there was nowhere to hide. I don't think the average New Zealander realised how dangerous the global position was and how bad the effect on the real economy could have been without massive global government and central bank intervention.

Q: What have you learned from the global financial crisis?

As a portfolio manager the lessons were: don't rely on experts; back your own judgment. None of the major bank economists saw the GFC coming. Always invest in quality; you tend to get rewarded in the good times and the bad. Avoid excessive debt. Always be open to opportunities when the world looks bleak.

Q: Could it happen again? Why/Why not?

Yes it will happen again. No real lessons have been learned from the GFC - banks are bigger, governments have more debt, people and countries continue to spend more than they earn. The opportunity for investors will be to sell assets when they become overvalued again and look to buy back in weakness.

- NZ Herald

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