When subprime borrowers experienced problems in paying their credit, it became difficult to value products with subprime loans as underlying assets. At the end of the summer the credit rating institutes also began to downgrade credit instruments containing such loans. This resulted in the financial markets more or less losing confidence in anything that might contain subprime loans. This, in turn, fuelled price falls. 3 A common denominator for many of the investors, both hedge funds and others, who have experienced problems, is that they have had a high share of securities with subprime content, often in combination with high leverage. Considerable attention, as we all know, has been focused on the US investment bank Bear Stearns’ hedge funds, where the situation was such. When the financiers wanted to pull out, the funds were forced to sell their assets. The problem was that it was no longer possible to sell these assets, since liquidity in the market had disappeared. Quite simply, there were no buyers at prices anywhere near those that were previously listed or calculated. The funds therefore collapsed with substantial losses. Bear Stearns’ funds have received considerable attention, not merely because the losses were extensive, but also because they were among the first to experience problems. But there is also another category of hedge fund, which without having any actual exposure to subprime, was particularly affected by the turmoil. This was a type of fund that mainly relied on quantitative models for their investment decisions, so-called quant funds.
The full impact of these developments are only likely to be clear some years from now. This is indeed a most unfortunate situation. When factions exacerbate fractions, it damages even the most established forms of international cooperation. Third, the exponential speed of technological change has altered the global economic landscape and requires us to adapt fast. The proliferation of providers offer services that challenge the status quo. The dynamism of digital financial services redefines the nature of product delivery. It adds to the complexity of regulations and presents new challenges for economies, with broad consequences. Unattended, these challenges create risks that can stunt innovation, cause dislocation of labour and destabilise financial systems. Look at how ransomware attacks such as WannaCry and NotPetya have rattled internet users around the world. These virtual intruders infiltrated our synthetic selves, blocked access to our personal and professional files, and held us ransom by demanding payments to unlock them. These malwares infested computers operating on outdated and susceptible systems. For the financial sector, these recent attacks reinforce the lesson that, if we take a neutral stance to the IT revolution, we open ourselves up to weaknesses that can be extremely costly. For policymakers, these costs can have significant externalities that we must be concerned about. During World War II, Alan Turing and a team of experts took six months to crack the Enigma code. In contrast, today, Google can detect a virus in mere minutes through its algorithms.