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This week we've seen how a trillion pound problem could link a pensioner in Kent to the next global financial crisis and not enough people know about it. I'll be saying unsexy words like pension and liquidity, but bear with me. This is a disaster waiting to happen... 1/thread:
Pensions funds have tried to get people a good return on money amid low interest rates. In some cases they've treated asset managers like magic piggy banks: giving a tasty return but also instantly letting you withdraw cash. Spoiler: it doesn't work, that's scary 2/thread
What's the problem? Asset managers - part of the financial system which has grown rapidly in the last decade - hold trillions of pounds in their funds. But not all of this money is in what's known as liquid assets. You can't quickly sell these investments to generate cash. 3/
Now - imagine a situation where markets are wobbling. House prices are crashing. Or, a particular asset management fund has made some dud calls, like we've seen with Woodford this week. You might, as a pension fund trustee think: time to get my cash back. 4/
You can't. Woodford offers a morality tale for the next crisis because everyone asking for cash back on the same day isn't possible to fulfil. £263m of Kent Council pensions is on the line, as the fund tries to sell assets, when every potential buyer knows they must sell, fast 5/
Picture this at scale: welcome to the biggest fire sale in history. Fund managers around the world all selling as fast as possible. They can't. Shifting a tower block of office/retail space isn't going to be quick: it's an illiquid asset. 6/
This is a big fat liquidity crunch. Everyone can see the market dropping. Prices floor. Money, pensions, go 'poof'. Central bankers across the globe, including the @bankofengland's Mark Carney are losing sleep over this. A staggering $30 trillion is tied up in this problem. 7/
Woodford has gated its fund: stopped investors withdrawing cash for now. But that's a short term strategy and it won't work the world over in a crisis. Eventually you have to raise the gates. And the money, or what's left of it, will, like water will gush out. 8/
So: pensioners in Kent should not be seen as a one off problem. The Woodford/asset management story reveals a "major new vulnerability" in the global financial system, as Carney warns. Or, as @_BenWright_ says: it's "a foreshock of the main event". telegraph.co.uk/business/2019/… /ends
