The capacity to withstand market turmoil was demonstrated during the financial crisis in 2008 and 2009. For a period of 18 months, Fund losses totalled roughly EUR 90 billion – more than 25 per cent of Norway’s GDP. The losses did not go unnoticed and led to a public  BIS central bankers’ speeches  3  debate on the investment strategy. The conclusion was that the strategy is robust and that Norway must accept such fluctuations in the Fund’s capital, given the high equity share. This point was made clear through 2009 and 2010, when those losses were reversed, and additional gains made. The government remained faithful to the strategy, reaffirming its commitment to the Fund’s long-term investment strategy. The large size of the Fund can also be exploited. Last year the Fund started investing in real estate as a new asset class. The first property investments were made in France, Germany and the UK. We are now preparing for property investments in the US. Direct real estate investments will provide a fairly stable, inflation-adjusted cash flow. Over time, in accordance with the mandate, we aim to invest up to 5 percent of the Fund in real estate. The investments will be allocated to more countries as we gain experience. Slide 11: Considerable overweight in Europe The large size and the long investment horizon also entail a need for diversification. From the start, the Fund has been invested with a considerable overweight in Europe.
It would operate with intra-day credit from its clearing bank, J.P. Morgan Chase, and overnight credit from the Federal Reserve. The Federal Reserve would provide credit that was fully secured by the collateral of the broker-dealer and this would continue for a period of time to enable the broker-dealer to wind down its trading book in an orderly manner – thereby mitigating to some degree the impact of the failure on financial markets and the economy. At the point in time when an orderly liquidation of the broker-dealer became practical, a petition would be filed for a receivership under the Securities Investor Protection Act. This became the contingency plan, although it was always subject to the Lehman board of directors deciding to file a Chapter 11 petition, a matter that was their responsibility and not ours. On September 15, Lehman’s board of directors elected to place the parent company in Chapter 11 while leaving Lehman’s brokerdealer open for business so it could wind down its operations. A look at the hypothetical alternative of lending to the Lehman holding company itself reveals that it was in fact not viable. By Monday, September 15, Lehman faced a total erosion of market confidence, and so the Federal Reserve would have been lending into a classic run. Had Lehman not filed for bankruptcy on September 15, but opened as if it were business as usual, creditors and counterparties would have rushed to protect their positions, using all legal remedies, causing the liquidity crisis to spread throughout Lehman’s organization.