Quarter of a century

On this day, 25 years ago, after couple of years in public service (MFA of Latvia), I accepted challenge to move to financial markets. What looked to be some better paid job for who knows how long, turned out as a passion for a quarter of century (and counting). At this personal milestone I think it's very interesting to take a quick look back at how markets have changed, how financial industry has transformed since. Well, memory is tricky thing - disclaimer for text that follows :)

When I joined banking, there were 55 banks in Latvia, Barings Bank was still alive and kicking, western Europe had more than a dozen currencies (with British pound and German mark at the top), you could buy dollar spending 3 Russian roubles, dollar banknotes in large sums were more frequent flyer from London to Riga than Baltic citizens and Banka Baltija was at the top of the local banking list.

Then came 1995. First, Barings Bank, British merchant bank based in London, and the world's second oldest merchant bank (it was founded in 1762) collapsed. Of course like many other disasters, Nick Leesons (former derivatives broker who's to blame for collapse) problems started earlier and were just accelerated by Kobe earthquake on January 17 1995.

Unrelated to that, first serious wave of the local crisis occurred, when the largest bank in Latvia - Banka Baltija, went under. This piece of domino was big enough to directly or indirectly cause bankruptcy of another 19 mostly small banks. Consequences were severe for retail savers, crisis wiped out several millions in savings, but due to very low retail lending volumes it did not turned out as a major economical recession.

On global scene next challenge was Asian financial crisis in 1997. But not so many ripples in our region (I just remember running my Japanese yen positions in a range from 120 yen per dollar to 147 and then back below 115 - got some gray hair there) . Baltic region was hit by Russian financial crisis which started in august 1998 when Russian government devalued the ruble, defaulted on domestic debt, and declared a moratorium on repayment of foreign debt. Dollar price went from 6 to 22 roubles and back below 8 and then back above 22 roubles again and moving higher from there without looking back. This had major impact on Latvia's economy which at that time was heavily dependent on exports to Russia. Due to some Russian capital invested in local financial sector and local capital investments in Russia securities, this event brought in also some changes in banking system. Some banks perished, some changed owners.

One of the most painful events imaginable for me as an FX guy was euro implementation. Overnight I lost 11 currencies to trade and got one in place. On January 1st 1999 euro was born (1 EUR = 1.95583 DEM and the rest). Yes, yes, yes - many benefits there (trade, payments, accounts, finance systems and data fields, traveling benefits, price comparison, you name it). But still, imagine bakery being forced to produce one sort of bread because for consumers its easier with choice, less time to think which sort to buy, less space in shelves, easier with raw materials...

Like today I remember hype about new millenium. Will computers survive it, what tests should be done, which servers are vulnerable, etc? Much ado about (almost) nothing - we survived. But that was fun. And that "fun" continued with technology index Nasdaq falling from 5000 mark exceeded in September 2000, down to 1100 in autumn 2002. Later it took 13 years to come back to 5000 (and look where we are now!).

Well then somewhere there on January 2001 Greece joined euro zone. Right in time to be among the first wave of countries to launch euro banknotes and coins on January 1st 2002. Who could imagine that almost decade later many investors and whole euro zone will become hostages of Greek debt situation.

9/11 left long lasting impact in many ways and in many areas. Event is described very well by former head of US Federal Reserve Alan Greenspan in the introduction of his book "The Age Of Turbulence". He was on the plane back from Switzerland to US. I was at that time in dealing room watching Reuters screens and CNN on TV. Seeing second plane crashing to in to the World Trade Center on live translation is moment hard to forget...

Meanwhile Latvia continued journey towards EU and NATO. Both targets were successfully hit (NATO March 2004, EU May 2004). It wasn't going so well for next target - euro implementation. First financial step was successfully done on January 2005. After being tied to SDR basket since 1994, Latvian lats was pegged to EUR at the rate of 0,702804. But there were few more Maastricht criteria to follow (inflation, long term interest rate level, debt to GDP and public debt level). Trying to cover gaps versus the rest of EU in a very fast pace turned out not as expected for general economy. Foreign capital inflow reminded Asia pre-crisis time (1993-1996), when in the four large ASEAN economies foreign debt-to-GDP ratios rose from 100% to 167%.

Somewhere around 2004/2005 Latvia mortgage market started to skyrocket, price competition was fierce. Around the peak of lending growth (financed largely by capital from Scandinavia) borrowers where paying 40-80 bps on top of Euribor (euro still not the local currency) and LTV (loan to value) in some cases went to 105-115% (it was on adverts all over the place). Banks went to 170% loans versus savings ratio... Fuel for inflation was there - annual CPI went up into double digits, close to 20%.

Something started in August 2007. At that time in our region sentence "subprime mortgage market crisis" didn't meant a lot. It's only in 2008, when in combination of local high debt levels and less global appetite to prolong old debts we got fully blown crisis with local giant Parex collapse on top of it. Government spent lot of money by trying to save the day and that left heavy toll on debt levels. Government budget suffered. IMF and EU lending to Latvia, spending cuts, write-downs, loses, emigration, heavy decline of GDP some of the consequences market was dealing for years to come (and I think still dealing in some way). But local currency survived - contrary to some expectations for "we have seen how devaluations happen", devaluation did not happened (still not crystal clear for good or for bad). Foreign investments just got hit by decline of business and temporary losses but were saved from additional losses from devaluation threat (local income in lats, large debt in euros, financed by foreign capital).

It took some years to chase Maastricht criteria and finally on January 1st 2014 local currency Latvijas lats was gone (and year later neighboring litas was gone, before that on January 2011 we lost Eesti krooni). So here we are - so far in total 19 currencies in Europe gone and one is there to stay. Well protected so far, because outgoing head of ECB once said: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Consequences: already 4 years of negative euro interest rates, massive QE and EU government debt in total around 13 trillion euro - perfect base for next debt crisis around the corner. By the way, during my 25 years in financial markets I was following rhetoric's from 3 heads of ECB (new one to come in two weeks time) and 4 heads of Federal Reserve System but only 2 heads of Bank of Latvia (but change will come in two month time - it's about time).

But those of course are not the only changes over the last quarter of century. Heavy market regulation (especially investing and derivatives), focus on AML and KYC, many currencies and terms have disappeared from Libor table (Libor and Euribor themselves are in transformation process), Eonia is sliding away and €STR is there, governments have changed, wars were fought, commodities were jumping up and down and securities were changing hands, companies created, companies lost, payment institutions, fintechs competing with old establishments, cryptocurrencies appearing like mushrooms after the rain, cash disappearing, bubbles were created and bubbles were bursting and so many more changes. Trading rooms once full with traders are replaced with rooms full of servers, phone dealing and floor trading moved to desktop computers and then they were turned into mobile devices, Bloomberg and Reuters (now Refinitiv) have come a long way from desktop to apps...

When I started my career in banking Dow Jones was at 3923 (now above 27000), Nasdaq was at 765 (now 8156), one Troy ounce of gold cost 389 dollars (now 1491) and oil was at 15,9 USD/bbl (now 59,9). And in Latvia we are down from 55 banks to 19. Quite a change. Of course I missed lot of things in this text (and sorry for my grammatically inconsistent writing - consider this as a draft), but this was quick look back taking some time in the evening of this personal little celebration (base for a book in the future maybe?). Hollywood has done some job about this time in the markets - selectively of course, because there is no fun to depict boring every day life in the bank, big screen needs villains and extraordinary things. If You are interested, then some true stories of course with mix of some imagination are encapsulated in the following movies: "Rogue Trader" (1999), "Boiler Room" (2000), "Wall Street, Money Never Sleeps" (2010), "Margin Call" (2011), "Too Big to Fail" (2011), "The Wolf Of Wall Street" (2013), "The Big Short" (2015)...

And I believe that years to come will bring even more changes and some more good movies... Cheers to that!