By Tyler Betts: FX Risk Manager at Infinity International
It was 7.30am on a Monday and I had reached the summit of the Canary Wharf station escalators, with the pyramid topping One Canada Square on my right and to my left, the US investment banks Morgan Stanley and Lehman Brothers, followed by a footbridge across the water to South Quay. The sun was shining as I turned left towards my offices, my first role as a trainee foreign exchange broker was based across the bridge, the date was 15th September 2008.
There, formed one of my most vivid memories: reams of people walking out of the Lehman Brothers building with boxes containing the contents of their desks, looking desolate and lost. As a trainee and having only been in the city for a year, the significance of what I was walking past did not compute. Arriving at the office, my boss, an ex-Trader at the large banks throughout the 1980’s to the early 2000’s explained the magnitude of the situation as we watched the news events from the weekend roll in… Merrill Lynch has agreed to be taken over by Bank of America and the insurance company AIG was on the verge of collapse unless it could raise funds.
Our primary clients at the time were importers, with a large portion of our client base being companies exchanging GBP into USD to import from the USA and the Far East. Business had been good, with GBP/USD on the cusp of 2:1 against the pound in June 2008, only for it to fall to near 1.75 by September – we wondered if we would ever sell another US Dollar again! The situation became more concerning as a month later it had reached 1.6000 and by December, we were trading under the 1.55 mark (a 25% decline in 6 months) also meaning a +25% cost of imports. I was seriously anxious by this point, who in their right mind could afford to buy Dollars at this rate? I somehow managed to forge a career during this time and many of my clients proved just how resilient businesses can be by adapting to seismic changes. I still speak with most of them today.
We’ve spoken with a couple of senior treasurers about learnings from the 2008 crisis which may be relevant to what we are experiencing today. Unlike me, they most certainly weren’t green at the time, but still had to make sense of an unprecedented crisis.
Three key points resonated from these conversations:
- If you need funding, speak to your existing providers first. In 2008, there was a sharp turn in the economy at the same time banks and other credit providers adopted a more risk averse approach to lending. You may be able to quickly draw funds from uncommitted lines as emergency funding e.g. overdrafts. In times of crisis, doing so may be easier than dealing with new lenders.
- Forecast, forecast and forecast again. If you go with the ‘worst case scenario’ mindset and stress test more than you think you need to, you will likely have a much better idea of your cash position in each scenario.
- If you discover a financial problem, get people together and ask for contributions from across the business – not just from the finance team. In 2008, some of the best solutions to problems came from commercial departments who could change the way they operated with customers and suppliers as well as from the Treasury or Finance teams.
Forecast for the apocalypse, get the message out there if you think the business has issues and target the quickest ways to get funding if you need to.
Today I see many parallels with 2008, although the people with boxes outside Lehman’s are now the furloughed masses – with the stark possibility of redundancy at the other side for many. The difference this time round is that we have a human crisis, whereas last time round it was a financial crisis with banks refusing to provide funding. UK unemployment peaked at 8.1% in 2011 as we turned the corner on the ‘credit crunch’. In 2020 our most recent unemployment rate is 3.9%, but as the economy completely grinds to a halt because of Covid-19, it’s said that this will surpass 10% in the immediate future, according to the Office for Budget Responsibility.
There is help in terms of the Government support package, but the media is reporting that some businesses in need are having issues getting this, hopefully this is starting to be resolved.
What’s your view?
We’d love to hear from you on your experiences in this area, to help add to our knowledge and share better insights in the future. If you’d like to participate in our lockdown survey, click here.
If you have any questions, please message me directly or comment in our LinkedIn post.