It was the early evening of Thursday, 9 August, 2007, when I received a phone call at home from a Citibank dealer in London.
For many years, my organisation had been issuing short-term notes in the euromarkets to finance a geared fund, and some notes routinely rolled over almost every night. It was an excellent source of inexpensive funding, sometimes swapping into Australian dollars at below the domestic bank bill rate.
We posted issuing levels at the end of each Australian day and the London dealers could transact at those spreads without further reference. At the time of the call, we had over a billion dollars on issue in Europe, and this night A$50 million was maturing.
"We can't roll over your paper this morning. There are no bids in the market," the dealer said.
At first, while unusual, this was not alarming, as pricing levels between issuer and dealer are subject to negotiation and posturing. I asked for more details, and said we were willing to pay a few points more if necessary.
"You don't understand," he said. "It's not a matter of price. There are no bids on anything."
And that night, five years ago today, the Global Financial Crisis started.
I immediately turned on my laptop, and a quick scan of financial websites confirmed what had spooked the market. BNP Paribas had suspended redemptions on two of its money market funds, and to quote them:"The complete evaporation of liquidity in certain market segments of the US securitisation market has made it impossible to value certain assets fairly, regardless of their quality or credit rating… We are therefore unable to calculate a reliable net asset value (NAV) for the funds."
The US sub-prime crisis had come to Europe. The entire billion dollars of notes matured over the following months without a single rollover at any price. If ever confirmation was needed of the merit of diversified funding sources, this was it.
Initially, there was no way of knowing if the crisis would last a week or a year. The remaining $4 billion of our $5 billion borrowing program was onshore Australia, including short-term notes issued into the market, and direct bank lines. These sources proved more resilient for a familiar Australian name, but spreads widened dramatically, and the local note issuing program halved in size.
It's no surprise that the Australian Prudential Regulation Authority and Australian borrowers have subsequently focused more on building domestic funding bases, while the foreign panic supports the need for a decent retail bond market in this country.
Amazingly, while the debt markets were in turmoil, the equity markets continued to rally for some months. We knew either the bond or the equity market was wrong, but we were not sure which.
I recall talking to a bond fund manager who was gobsmacked by the rising equity markets, as he had sold every stock he owned. The collapse of Lehman Brothers was not until September 2008, over a year later. Hedge funds had plenty of time to short everything they could find, and soon Lehman disappeared, Merrill Lynch was rescued by Bank of America, and the US Federal Reserve bailed out JP Morgan Chase and AIG, which, in turn, saved Goldman Sachs. So much for the free market bastions of Wall Street.
At the five-year anniversary this week, the debt markets are open for good-quality borrowers, but issuing levels remain historically wide.
Major Australian banks issue term deposits at 150 points over the bill rate, a level never seen before.
If anything, the financing problem is even more intractable, as it has spread to some of the (formerly) best sovereign names in the world. While countries can borrow to save their banks, who can borrow to save the countries?
I expect that five years from now we'll still be trying to sort out the mess.
* Graham Hand is a former executive of the State Bank of New South Wales and Colonial First State. He is the author of the banking history, Naked Among Cannibals.