"The banks, of course, fell apart like a pack of cards. My brokerage was caught in the epicentre of the crisis, and it fell headfirst into the giant butt crack that was created"
On hearing the news about the run on Silicon Valley Bank last week, I have to admit I instinctively felt my eyes open wide and the hairs on the back of my neck rising up in fear.
Not that it affects me, but it did take me straight back to 2007 and the early days of the credit crunch when the financial markets began crumbling beneath our feet. The following five years turned out to be some of the most testing I’ve ever experienced.
If you’ve got a few minutes and fancy a chuckle, picture this scene:
At the age of 32, my 6-year-old finance brokerage was growing at a rate of knots. With no previous business experience, my partners and I had transformed it from a tiny two-person start-up to a team of nearly 100. A proper dream come true for a working-class kid from a grubby steel-working town in South Wales.
Timing had been kind to us: specialising in second-charge mortgages (or sub-prime loans, as they were known) in 2001 was akin to having just discovered a rich and deep oil seam beneath your garden shed.
Property prices were about to skyrocket and clever jargon-speaking folk at investment banks had worked out how to invent money from, well… nothing, adding rocket fuel to the cycle. We found a rich endless source of clients, they lent the money, we took commission and fees. Lots of it. It was bonanza time.
A couple of years earlier, we’d negotiated a very favourable income stream from a UK lender wholly owned by Lehman Brothers (see where I’m going with this?) and with products that catered for a wide range of circumstances, we funnelled the lion’s share of our business in their direction. The party was in full flow and the business got bigger and bigger.
Signing off on several million pounds of net profit for the year, we jumped onto a plane and headed to Puerto Portals, Mallorca to join a stag party of brokers and lawyers. The sentiment about business and life could not have been higher. Over a boozy lunch in the sunshine at Wellies, we backslapped each other and generally congratulated ourselves for being us.
But, on that fateful day, the party was interrupted with two phone calls:
The first call came from a worried salesman who had lent me a white Lamborghini a day or two before, in the hope I’d buy it. Instead of taking it back, I’d left it at a restaurant in Cardiff (oops) and I couldn’t remember what I’d done with the keys (double oops). If the story sounds vaguely familiar, this was years before the Wolf of Wall Street, thank you. And this white Lambo was still in one piece.
The second call was from our Business Development Manager with news about our friends at Lehman brothers. The big dogs in New York City were pulling the plug on all future funding because as we now know they were going bust.
No funding meant no loans meant no commission or fees, which meant…. fuuuuuck. There goes my meal ticket – I knew it was too good to be true. And it was about to get a whole lot worse. There was only one thing to do – order more drinks and party like it was 1999. Who knows - this could the last opportunity for a while.
Our inexperience in downturns meant we’d ignored all the signs: the run on Northern Rock, the rumbling macroeconomic climate and the fact that one lender was holding us by the short and curlies. I mean, we were too busy being awesome to sweat the small stuff – high fives bro!
The banks, of course, fell apart like a pack of cards. My brokerage was caught in the epicentre of the crisis, and it fell headfirst into the giant butt crack that was created.
The problem with downturns is that they always come from different angles and for different reasons. There is usually a final straw that breaks the camel’s back. Let’s hope that history doesn’t repeat itself this time around, although it usually does of course.
Who knows what unthinkables are lurking uncovered in the banking system right now, preparing to unleash chaos on an unsuspecting public? I’ll bet they are hiding in there somewhere… gulp.
In 2007 I didn’t act fast enough and our business was caught with its pants down. Despite having amassed a substantial war chest, slowing down a 100-person business when the banks are effectively closed meant the cash was burned up within a couple of years. The Bentleys and Range Rovers were sent back, and belts were tightened. Fortunately, my wife and I still had some savings and a few rental properties. They carried us through, albeit on the bones of our rear ends.
We borrowed dangerously to reignite our finance company with no guarantee of success. Fortunately, over time it recovered and grew even bigger and more profitable than before. But the damage had been done and it taught me the most valuable lesson of my life. During the tough days of the credit crunch, I vowed that I would live frugally and invest every future spare penny so that I would never be exposed again.
With the old credit crunch debts repaid, and the first dividend cheques of the new cycle starting to come in, I had realigned my priorities and set about acquiring small 2-bedroom houses. They were cheap, easy to refurbish and affordable to rent out. The income from them was banked and never touched. Older properties were refinanced, equity was released, and more houses were purchased with a manic obsession for growth.
As the value of the portfolio developed, I came to realise that capital appreciation was a far more interesting concept than the income it created. With each new property, the value was growing exponentially as properties were purchased and refurbished to generate new equity.
I kicked myself for not having scaled the property business 10 years previously. The income from the finance companies meant the property business just wasn’t that interesting. Anyway, I’d been too busy trying to steer the finance ship through the jet stream to notice.
Like the story of the hare and the tortoise, it’s often the slow burners that come good in the end. If you can invest, then I would go for it. Right now, people are scared, and battening down the hatches. There are fewer prospective buyers and more willing sellers. The market is ripe for bargains; this is perhaps the best opportunity you are likely to get in the next 5 years. Offer low and be prepared to be consistent and to play the long game.
When the next downturn comes, you will look back and not regret your decision.
