Yet even that was not enough to fully prepare the executives for what they were about to endure.
“Did we foresee 2008, the way it happened? Absolutely not,” Mr. Vachon says today.
THE WARNING SIGNS
Spring, 2007: The capital markets are scorching hot, and the financial news is dominated by a series of massive takeover deals. The wave of private equity buyouts reaches its apex when various bidders, including U.S. giant Kohlberg Kravis Roberts & Co., approach BCE Inc. about a blockbuster takeover. A group led by Ontario Teachers’ Pension Plan ultimately wins the auction in July, bidding $35-billion, marking the largest private equity deal in history.
Jim Leech, Ontario Teachers’ Pension Plan:
We made the BCE deal on the first of July weekend. At that time, the markets were still hot. …The banks were showing their most lenient lending that had ever been seen. … Nobody imagined it would ever be the bubble it turned out to be.
By summer, fissures begin to appear in the financial system. Credit begins to dry up, and banks start exhibiting signs of stress. After a long boom, the U.S. housing market is cooling – fast. Home prices are dropping and foreclosures are climbing.
David Denison, Canada Pension Plan Investment Board:
In July, we started to see the mortgage market disruption in the U.S., and then the access to the debt markets, leveraged loan markets, turned overnight. We, like many organizations, were looking at potential takeovers and had been talking to the banks about financing those. … Then the next day those deals weren’t doable basically any longer.
Julie Dickson, Office of the Superintendent of Financial Institutions (OSFI):
The long weekend in August, 2007, a number of us met at the Bank of Canada and it was apparent that there could be major issues in the offing. … BNP [Paribas’] decision on Aug. 9 to halt redemptions in some investment funds was a bit of a turning point for me as it really indicated that the problem could be global.
In the summer, Canadians hear for the first time about trouble with a particular kind of short-term investment – ABCP, or asset-backed commercial paper. In the years leading up to 2007, investors had piled into ABCP, which consisted of 30-day and 60-day notes that paid interest earned from bundling assets like mortgages and auto loans together.
As fears spread that U.S. subprime mortgages would result in massive defaults, new buyers of ABCP disappear. That means existing holders of the notes – companies, banks and private investors – are unable to cash them in, putting $33-billion of securities in limbo. Almost overnight, trading in ABCP freezes.
Bill Downe, Bank of Montreal:
There was only a week of preparation. I remember having a conversation with the Governor of the central bank, Governor [David] Dodge, right at the beginning of August, and the question that was under discussion [was], ‘What’s the likelihood that the market could freeze up? And then, ‘What would the strategies be?’ But it rapidly went from an academic discussion to the reality it could happen. … Somewhere along the line somebody was going to make a big mistake. It just wasn’t clear who it was.
David Dodge, Bank of Canada:
There was a big flurry of activity in August, and after that was when, if you will – the shit hit the fan.
Downe: None of us appreciated the size of it, or the level of risk that existed in [the ABCP] market. And when it crashed, it crashed very fast.
As Canada comes to grips with its ABCP crisis, the U.S. gets a shock of its own.
H. Rodgin Cohen, U.S. law firm Sullivan & Cromwell LLP:
There start to be serious cracks in the mortgage market… Bank of America, within in a few days, steps up and makes a very large investment in [mortgage lender] Countrywide. At that point, a lot of the handwriting is on the wall. It’s just not visible to very many people… Some people saw it as graffiti, as opposed to prophecy.
Behind closed doors at a gathering of the Asia-Pacific Economic Co-operation in Australia in September, leaders begin voicing concerns about the problems surfacing in the mortgage market, particularly in the U.S.