Tackling the Financial Graveyards of the GFC and the AFC: Stories from a former UBS MD
By Unicast Entertainment
For the 9th episode of Unicast Entertainment’s running series of video interviews, they invited John Holland, a renowned figure in the world of finance having been a board member and MD for UBS, and currently a non-executive director for some leading funds and fintech companies operating across Europe, USA, Asia, Africa and Australia. Through this episode, they discuss a variety of topics ranging from tips and tricks for aspiring bankers, to the Wirecard controversy, the adoption of digital payments in Africa and the future of impact investment.
Yet, one of the most relevant discussions undertaken during this interview, was on the Asian and Global Financial crises and the lessons we learnt in the realm of crisis management for the future. With the global financial ramifications of the COVID crisis today, learning from a veteran in banking and an active leader in global finance is of essence in understanding how institutions can best prepare themselves and adapt to these tough times.
Starting off with what we saw during the Asian Financial Crisis, John explains that in 1997 Asia saw what “in 1993, in Latin America (was) the Tequila experience.” In the 1990s, Asia witnessed a combination of socio-economic variables that created an unstable environment. These comprised of large current account deficits, fixed exchange rates with an overvalued post-Plaza-Accord USD, excessive borrowing and the inefficiencies presented by “crony capitalism.” On the 2nd of July, as Thailand - a debt-fuelled, importing economy - failed to maintain its currency peg with the US Dollar, we saw the brutal collapse of the Thai baht with a 40.2% depreciation in just a year. This presented major ramifications across the economy as imports became unaffordable and debt servicing costs skyrocketed. What was worrisome, however, was the contagion of the crisis across ASEAN, moving from Thailand to Korea and Indonesia, with the region seeing foreign-debt-to-GDP %s rise from 100% to 180%, resulting in one of the most devastating economic crises of the century. As John states, such “rippl(ing) through was very unusual in those days” and thus, the unprecedented nature of this crisis exacerbated the situation.
As a leader at UBS, John states that what was fundamental to UBS’ ability to weather that crisis was its successful crisis-preparation and the smart hedging of its positions. Yet, his vision as a leader was to pivot the focus of the organisation into research, kickstarting “Reality Check;” Leveraging their unique ability to capture and distribute market insights, UBS launched a segment that became responsible for computing nations’ vulnerabilities and exposure to the crisis and nations that were expected to be harmed so institutions could take pre-emptive damage-mitigating action. This presented to UBS a golden “client and branding opportunity.”
When it comes to the Global Financial Crisis, John makes two key differentiation about its magnitude and management. For one, he states that with developing nations out of the picture, UBS’ exposure to the crisis - caused by America’s securitised realty market (where John states, “banks had lost any understanding of how to value, and were valuing based on the wrong models”) - was much higher. Secondly, while for the Asian crisis, affected nations had ripped the proverbial bandage off when it came to the IMF reforms, absorbing pain in order to quickly restructure and turn around, during the GFC, economies took the ‘easy way out’ by printing money. More specifically, IMF’s AFC reforms were called Structural Adjustment Packages, which entailed reducing government spending and deficits, allowing insolvent banks to fail and aggressively raise interest rates (to protect the currency), which was in stark comparison to the multi-billion dollar GFC-era stimulus packages and bailouts.
When it came to UBS, the GFC was also a particular issue due to the interconnectedness of banks via collateralised market. With high levels of debt issued to one another with ambiguously-administered collateral - such as “government debt” - banks became complacent in their disbelief that one could go bankrupt, which meant that after Lehman collapsed, banks were unprepared to take on the un-vetted collateral on their balance sheets. John, for example, was told he has 24 hours to liquidate $12 billion of debt and equity exposure - where he was just one of the many banks across the world with similar exposure to Lehman, all cashing out in the same trade direction. With the Swiss government eventually taking over UBS management, the GFC for the UBS was far tougher and the strategy employed was one that mandated damage-mitigation over creative reinvention due to the sheer magnitude of the crisis.
Therefore, through this unique discussion, we explored the different outlooks employed by national and international governments while tackling 2 of the largest crises the world has seen over the last few decades, and the actions taken by a leader at UBS to save their institution and prepare for growth.
Check out the full interview at: http://www.youtube.com/watch?v=ckmiyz6hNjU&t=2442s
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