A year ago as the failure of big Wall St investment bank Lehman Brothers propelled the credit crunch into its most acute phase, for many New Zealanders it probably seemed somewhat distant and abstract.
But for those engaged with global financial markets Lehman's collapse and the aftermath will be remembered as a period of near apocalypse. With the confidence and liquidity which fuel the vast complex machinery of global capitalism grinding to a terrifying halt, for several weeks the world was stalked by the spectres of past financial and economic calamities.
"The world was very, very close to something none of us want to contemplate quite frankly," says Bancorp Treasury Services' Earl White, who was at Ground Zero at the time - New York.
He remembers that in the few days between the bailout of mortgage giants Fannie Mae and Freddie Mac and Lehman Brothers' collapse, many on Wall St believed US authorities would not allow the 158-year-old investment bank to fail.
They were proved wrong with breathtaking speed.
"The scariest or most interesting thing for me was the time frame over which it happened. Guys up there at the time said one of the major banks said they were going to pull all their lines of credit to Lehman at about 4pm on Friday afternoon and basically it was all over by 4.30. It was from 'yeah we're okay' to 'it's all over' in minutes not hours."
Lehman Brothers officially filed for bankruptcy the following Monday.
Shocking as the speed of the collapse was, White says the fallout proved far more disturbing.
"Even the Fed didn't realise the potential ramifications of letting them fail, the extent of the potential systemic risk out there because of the relationships with other counter parties.
"They were so lucky it didn't lead to the next big thing which was going to be financial calamity for all of us. We were very close."
Most New Zealanders probably gained some inkling of the scale of the event when the ensuing plunges in US equities eclipsed previous credit crunch-related losses.
"Some of the loss of wealth in global markets was mind numbing," says AMP Capital Investors head of fixed interest Grant Hassell.
His first thought was a sense of relief at our distance from the mess - "Thank goodness we live down in New Zealand, a commodity growing country isolated from a lot of the pressures up there".
While New Zealand was not immune the local sharemarket fared better than most, initially at least.
Craigs Investment Partners head dealer Bryon Burke describes the local market aftermath of the Lehman collapse as "panic" but suggests it was a passive kind of terror with local investors mostly staying on the sidelines rather than dumping stock.
In that regard, it was not the rout seen in 1987 when the local equity market was an altogether different beast.
"This time it was almost a financial industry collapse and now there aren't any financial stocks on the New Zealand equity market."
Which is not to say there wasn't a heavy sell off, the NZX-50 fell by almost 17 per cent in the ensuing month's trading, but Burke believes that was mostly by offshore institutions desperate for cash.
"Yes, there was panic but the bulk of the issues seemed to stay in the financial sector for the early parts of that September-October period. It wasn't until that second fall in March which was more dramatic with Iceland falling over and growing fears for the global system.
"People were starting to become more cautious leading up to Lehman's but everything needs a trigger and I think what amazed people was the gravity of the situation in the financial sector, how everything is so interconnected, Once the banks stopped lending to everyone, things ground to halt."
The dearth of cash to fund normal banking was perhaps the biggest problem for New Zealand arising from the credit crunch in general, and the Lehman collapse in particular.
Speaking on condition of anonymity, a senior interest rate trader at one of the major local banks says credit markets, particularly the UK and US commercial paper markets where New Zealand's large banks source much of their short term funds, had been "going bad" for 12 to 14 months before Lehman Brothers' collapse.
Disturbing rumours, including some about Lehman Brothers, were "flying around almost every week" for months before the collapse, says the trader.
"Credit spreads started moving out, cash became harder to raise. Instead of being able to raise six- or nine- or 12-month money you could only raise one- through to three-month money and the cost went up."
New Zealand households and businesses felt the pinch in the form of rising interest rates.
Then when Lehman's fell over the commercial paper markets, first New York, then London ceased to function completely.
"The scary thing really was that we went a number of days, I think I counted 28, when we hadn't been able to raise any cash in the offshore markets," Burke said.
"Most of the banks here would have had the ability to carry themselves for a month, and some of us a little bit longer than that. Nevertheless when you're used to being able to raise money every day at will, to get into a position where you were just unable to raise any, it became a very scary prospect. At that time it was very difficult to see what was going to turn it around."
For the veteran trader, who'd been through the float of the New Zealand dollar in 1985, the sharemarket crash two years later, and the East Asian Crisis and the collapse of Long Term Capital Management in the late 90s, it was the worst market conditions of his career.
"The biggest problem of course is that if we as an economy don't have access to that debt capital, there's only one thing you can do and that's reduce the size of the assets that you're carrying on your balance sheet, which means considerable tightening of credit conditions. It's a reasonably scary prospect and one which is still probably front of mind for the central bank, the authorities and indeed the banks themselves.
"If you look back now at that period, we didn't do too badly in the way we were able to come through it without causing too much pain."
He puts that down to the strength of the local bank's Australian parents and the RBNZ's work to alleviate the difficulties.
Nevertheless, the ensuing damage has been immense and will continue to be felt for some time to come.
While there are tentative signs of recovery virtually everyone the Business Herald spoke to for this article believed many difficult but necessary adjustments, including massive deleveraging and a comprehensive regulatory overhaul of the global banking industry, have yet to be made.
"The global banking sector in general is on life support still," notes Bancorp's White, who is concerned confidence remains fragile and could be destroyed again by further failures.
Furthermore, the investment banking industry's culture of greed which helped fuel the "toxic asset" bubble has clearly survived the crash.
"The bad old attitude and behaviours are still lurking. They haven't been squashed by any stretch of the imagination and we could have another bubble in a year or two."
Shockwaves spread to NZ
The New Zealand Stock Exchange board in downtown Auckland reflects the overnight crash on Wall Street, 30 September 2008. Photo / Richard Robinson
