We have started our business at the end of 2007. So we have always operated in times of crisis. But what is this crisis? Four years later we can make some sense of it, and determine what the impact on building our business has been. But first: What crisis or crises are we really talking about?
There is a sequence of crises: the housing crisis, the credit crisis, the banking crisis, the liquidity crisis, the economic crisis, the debt crisis.
All together they are probably called The Financial Crisis or “the greatest financial crisis since the Great Depression” as the Wall Street Journal called it. It began with a boom-bust scenario in real-estate, or better: it really started with another boom-and-bust: the dot-com bubble of the late 1990s. When the decline of the stock markets in 2000 marked the beginning of a recession, interest rates were lowered to limit the economic damage. These low interest rates where a good stimulus to consumption, but also for the mortgage market. A lot of people were able to buy properties. The housing market boomed and anybody fit enough to put a signature under a contract could buy a house as banks and other financial institutions came up with mortgage products for anyone, including people who really where not financially fit enough to buy. The subprime mortgages kept interest rates low for the first few years (ARM (Adjustable Rate Mortgage) only to be increased in the following periods.
Housing crisis (2007)
In the US, the housing market peaked in 2006. Banks and other investors had devised complex financial instruments to slice up and resell the mortgage-backed securities in an attempt to hedge against any risks. More and more home-owners, over-leveraged, and now unable to pay defaulted, banks foreclosed and housing prices started to fall. The pyramid started to crumble, starting in 2007 when two hedge funds owned by Bear Stearns that had invested heavily in the subprime market, collapsed.
Credit crisis (2008)
Instruments with names like “Mortgage-backed securities” (MBS) and “Collateralized Debt Obligations” (CDO) suddenly posed grave problems for banks that had bought them, and at the same time more and more people were unable to pay their mortgages. Banks started to distrust each other, and credit was hard to come by, which was not only harmful for the housing market, but also for businesses. Hundreds of billions in mortgage-related investments went bad, and once mighty investments banks had to write off substantial amounts.
Some of the largest insurance companies and banks had to be saved by government. Some were not. In March 2008 the Fed staved off a Bear Stearns bankruptcy by buying $30 billion in liabilities and engineering an acquisition by JP Morgan Chase. Fannie Mae and Freddie Mac were bought by the US Government to save them, Lehman Brothers went bankrupt. Merrill Lynch sold itself to the Bank of America to prevent bankruptcy. In September 2008 AIG (American International Group) had to be bailed out for $85 billion because it was exposed to securities known as CDS’s (Credit Default Swaps, a financial instruments designed to protect against a default by a particular bond or security)
In The Netherlands losses from those investments and the effect of the tightening of credit caused ABN and Fortis to be bought by the Dutch Government.
Central banks tried to inject liquidity in the markets, but still, the crisis spread more banks got into trouble and countries like Iceland and Pakistan had to seek emergency aid from the International Monetary Fund. A vicious circle of tightening credit, reduced demand and rapid job cuts set in, and the recession was a fact.
No doubt this period also created opportunities, especially on the longer term: banks will not be seen as they were seen before, and refinancing as well as mergers and acquisitions will be a different business then until now. I do not think we would have been able to play the role that we did in the Mobile Telecom industry if the traditional investment banks where in the same position as a few years before. Also, companies restructuring debts, reorganizing, and adjusting their strategies to the new market situation created chances that we might not have had otherwise.
One of the most interesting aspects of this crisis: it will take a long time before confidence in banks will be restored, and I can see the whole Financial Services industry changing. As Brett King, the author of bank2.0 wrote: Consumer (and business) behavior and technology will chance the future of Financial Services. And: why call it Financial Services if no service is provided? Would we have been approached by an American investor who wants to create an online B2B bank in Europe. Maybe, but an Economic Crisis could be the right time for companies to engage in ‘Disruptive Innovation’ and new business models.
Economic crisis (2008)
During 2008 and 2009 many countries tried to provide stimuli for their economies, injected cash, reducing interest rates, and sometimes buying industries. In the US General Motors and Chrysler went bankruptcy with the US Government investing more than $60 billion. Thousands of jobs were lost. While banks seemed to recover and were returning bailout money to governments, unemployment rose to the unprecedented levels in many countries. In The Netherlands unemployment was relatively low with less than 6% in 2008 and less than 5% in 2009. On average in the Euro zone there was a 10% unemployment rate, But then, in the Netherlands a large portion of the workforce are independent contractors (6,5% or 500.000 people). This provides flexibility in terms of unemployment, but large numbers of professionals without an income.
Our company had (and has) a risk profile suited for situations like these. With relatively few people on the payroll, and more working with us in a network-setting as partner or associate, we did not feel the pressure of having to take assignments at ridiculous rates. At the same time we were able to recruit some of the most capable people around. Also, it became clear who our real clients were, and which companies were opportunistic enough to offer rates that were below what they would pay their own staff. We saw it all: low rates, ninety days payment conditions, and competitors that could not say no.
Debt crisis (2010)
By the end of 2009 the financial crisis seemed to have faded away, companies were hiring again, and the Dutch stock market (AEX) had risen more than 35%. In 2010 though a new crisis came to the surface as information about the size of Greece’s debts reached markets in Europe. After Ireland and Portugal turned to the European Union for a bailout, Greece came to the brink of default in June 2011. Support for the euro started to erode, markets began to sink worldwide and signs of a renewed credit crunch in Europe appeared.
Also in the US deficits that had risen sharply since the recession began in 2007, and unemployment levels that remained high even as the economy began a slow recovery. Although in August, hours before America would have defaulted on its payments, an agreement about a debt ceiling, and associated cost cutting was reached, Standard & Poor’s downgraded the government’s AAA rating, and, four years after the crisis began, the economies of the United States and the countries of Europe continue to struggle, confidence is not restored and markets fear the possibility of a double-dip recession.
In the “real economy”, companies perform worse than expected. Looking at our clients, companies like Tata Steel, TomTom, KPN-Getronics and E.on are facing lay-offs, Vattenvall is writing off on Nuon, RWE on Essent. Still, they are turning to us for talent and ideas. It is a good time to find out who are long-term thinkers, who are reliable and uncompromising. Just today, we spoke to an independent contractor who turned down what seemed like a once-off opportunity to help reorganize the IT Department of a major Dutch telecom company. Instead of engaging in what would no doubt have been a long and profitable assignment, he turned down to assignment because after a few weeks it was clear that internal politics as well as the strategy and lack of commitment made the chances of success, without collateral damage to the people involved, slim. He put ethics, his good name and long-term value above short-term financial gain. We cannot wait to start working with him.
We have grown, and in this crisis many new players emerged and became successful.
At the same time, we can see another bust and boom scenario coming our way. Although we are paying customers – of LinkedIn and Google, and enthousiastic users of Facebook and Twitter, some of these social network companies are sold or at least valued at astronomical amounts, without the stability or the profits to justify them. That is a bubble waiting to burst.