Alan Thompson President and CEO of the Bank of Butterfield speaking about the current financial situation. How this happened and the impact on BermudaIn 40 years of Banking I have never seen anything like this kind of situation, with the financial and banking industry so impacted by a crisis,

 

this is not just corporate troubles, you have countries that are in serious trouble, with Iceland defaulting, and we have talk of other countries potentially defaulting.  As we have seen Wall Street and Main Street are closely connected.  It is an absolutely remarkable situation - from Lehman Brothers going bankrupt to Merrill Lynch being taken over by The Bank of America in one weekend.

            How did this happen?  The USA exported this problem which started 10 years ago.  Real Estate markets were hot and lenders became aggressive.  The trouble was that these lenders were not bankers but were brokers - with no accountability to the system.  Everyone thought these loans were safe with AAA ratings.  Loans were sold to multiple institutions so no one knew who owned the loans and they were sold all over the world.  They were diversified so everything seemed ok but there was no accountability.  Another factor behind today's turmoil, was the use of credit default swaps (which effectively guarantee a credit for a small fee), employed by the likes of American International Group, which was heavily exposed to them. They made a lot of money, but they were taking a lot of risk. There is a relationship between risk and reward and unfortunately that got out of balance as well.

            From the banking system perspective a lot of things that caused the problems did not happen in Bermuda.  We did not have the sub-prime loans and none of us engaged in that, the lending standards here have been very good, residential mortgage portfolios have been very good, leveraging is nothing like the likes of UBS and others and we did not participate in credit default swaps.

            The hospitality sector has already been affected by the credit crunch and will continue to be so as they will not be able to get funding for 12 to 18 months. The construction industry was also going to be slow, with a number of projects not able to secure financing and others which were being completed struggling to find the demand.  The International sector will probably come through quite well as they do not have a problem in their investment portfolios. Worldwide jurisdictions like India and China are slowing and so the coming year 2009 will be tough.   Bermuda should fare better than most of its competitors during the current financial crisis, but it will be a slow road to recovery.  The Island is very much part of the world economy.

            Banks are going to have some struggles going forward to regain their momentum. We are at the beginning of the recovery process, but it is going to be slow and we are going to emerge as a different industry.  Government ownership could be a problem, it is obviously difficult for Banks, let alone Governments, to run the industry