A tale from the trenches of the 2008 GFC.

I started in the utility business in 2005 shortly after Hurricane Katrina. The utility company employed a trader that would speculate in the electricity futures and options market (mainly trading in PJM). I was hired on as a risk analyst to monitor his positions using the nonsensical method of Value at Risk. After he blew himself up in 2006 betting on another strong hurricane season, I was moved over to my departments treasury unit. There I was cross trained in daily cash management, which meant that I was in charge of paying the bills of the utility by going out and securing funding in the CP (commercial paper) market. Everyday I would call Goldman, Merrill (before they blew up), Morgan Stanley and get the daily rates for the commercial paper. I could get paper going out as far as two years, so the idea was to match up the revenues with the liabilities, since the utility business a very seasonal business. Essentially they borrow money in the summer months to fill their gas storage tanks, and get repaid during winter when that gas is burned by the end user customers.

So fast forward to 2008, and I had been reading alternative news and economic analysis for two years, and could see the writing on the wall for the financial markets. Specifically, I had looked at some of the TBTF banks balance sheets and saw the black holes they called level 3 assets. For those that don't know, L3 assets where ones that had no market, and essentially were valued at whatever the bank thought they "should" be in a normal functioning market. I call this the comic book valuation model.

I was running the treasury desk when the Lehman bankruptcy occurred. All of a sudden, the rates in the paper market skyrocketed. Over the course of the weekend, funding rates doubled, only to double again a few days later. In addition, the liquidity in the market dried up to a trickle. I mentioned before that I could borrow for up to 2 years, as much money as the utility needed. Well, that stopped on a dime and the only paper offered was overnight paper. Which meant that I had to pay that back the next morning. So my maturities that week looked like the following.

Mon Tue Wed Thur Fri
$20MM $25MM $20MM $25MM $20MM

By the end of the week I was borrowing $120MM and sending wire transfers that were in effect 25% of the entire debt outstanding for the $2B corporation. I had daily meetings with the CFO and Treasurer of the company to go over what I was seeing and hearing in the CP markets. That Friday, it really looked like all hell was about to break loose. The dealers were telling me that if something drastic wasn't done by the Federal Reserve that the entire funding market would be closed come Monday. At 230 that afternoon, the Fed announced a program to guarantee all money market mutual funds.

What struck during all of this, was just how clueless 99% of the people in positions of authority at the micro and macro level were about the proximal causes and effects of what was happening in the markets. After a conversation with the CFO of my company, he told me that he was going to talk to "his banker" friend at the local bank to see if we couldn't get better rates in the market. This is someone who is making $1MM + a year, and yet had absolutely no idea what was going on in the market.

Despite my objections to what ultimately happened in the subsequent weeks, I can tell you first hand that our system died that week. The effects of which are still seen today. I'm not sure how the next round of crisis will unfold, but it won't be the same as 2008. This a topic for another discussion.

I don't know much about this platform, but I look forward to seeing how it develops over time. I plan on telling some stories from my past and current dealings in the financial markets. Nothing that I will talk about should be considered financial advice.