Does Evergrande feel like Lehman?
As Evergrande missed its bond coupon yesterday and came very close to the precipice of default, the media was full of contrasts and analogies to the Lehman Brothers crisis of 2008. It occurred to me, and this is where my math magic served me so well. in twenty years of investing in hedge funds, which Lehman deposited almost exactly thirteen years ago. Thirteen years! I couldn’t help but wonder: do today’s traders have any idea what the Lehman benchmark really is?
Let me enlighten you, young reader, at the risk of aging myself but with the reward perhaps of taking you as a Twitter subscriber. Because I was there in 2008, sweating as a portfolio manager, and I lived to tell the story in my book, Damsel in distress, as following.
We found ourselves in a sticky situation of underestimating and undervaluing the risk, and we were content to carry on our business until it was no longer possible to ignore it. I remember the exact day that happened to me. It was Sunday, September 14, 2008. Canyon senior executives had been invited to a beautiful party for the daughter of one of the partners. The event took place on a sprawling beachfront property in Malibu owned by Oracle’s Larry Ellison
It seems to me that the Chinese government has both the will and the time to avoid financial chaos. The will, because real estate and tangential industries represent up to 30% of the country’s GDP. The weather, not only because of the Garcia Marquez quality of the Evergrande column, but also because of the broad authority of the government. Already, it appears the Chinese housing regulator has taken control of the company’s bank accounts and is directing its revenue.
The question, then, is to what extent the stopping of Evergrande’s payments will cause a tightening of liquidity among its creditors? Naturally, many American and European banks were quick to reassure investors that, in their store, Evergrande never was. Large, that is. But would anyone expect highly exposed players to come out publicly? The size and mix of this pool is critical and will only be revealed when needed. Because for financial players, a big default can become a game of Jenga. Thirteen years ago, after Lehman’s piece was taken away, it all fell apart.