THE ECONOMIST

Lessons From The Recession

18 years ago

Who would have guessed in mid 2007 that carriers would be laying upships, ship owners agreeing to charter rates that are as good as rockbottom and container freight rates at peppercorn levels? Sure, thereare economists, this one included, who had warned that things mightwell slow down, but no one had the conviction to forecast the level ofdisaster that the industry is now facing.

Today institutions are facing the pain of their investment decisions while shipping companies are trying to justify the investments undertaken during 2006-7. No one cared about the risks, everyone assumed that the gravy train was unstoppable, money was there to be made. Everyone forgot about small things such as economic cycles. Everyone was taken in by the financiers and the smart (today an oxymoron) bankers selling the gold paved highway to wealth.

Who would have imagined that an institution such as the Ontario Teacher’s Pension Plan, with advice from Goldman Sachs would spend $2.4bn on four container terminals being sold by OOCL. The logic, in their own words was: “With their long-term cash flows, relative stability and lack of vulnerability to economic vagaries, infrastructure investments like this are a key offset to the long-term liabilities of a pension plan”. How sound is that plan today?

The same Goldman Sachs that paid £2.8bn for Associated British Ports. AIG Global Investment Group bought the US terminals that DP World was forced to sell. More recently Goldman Sachs Infrastructure Partners purchased a 49% stake in Carrix Inc, the owners of SSA Marine, and Macquarie Bank bought into terminals in South Korea.

Today the port industry is facing a severe downturn in volumes showing that they are also vulnerable to the economic vagaries of the global economy. Ask Seattle, Tacoma, the San Pedro Bay ports about economic vagaries given the sharply declining container volumes.

The lesson for all of us is clear: for every boom there is a bust and greed has caused this current bust to be worse than any since 1929, and the repercussions are deep. There is, sadly, no free lunch.