On 9 August 2007, BNP Paribas announced that it had suspended withdrawals from three investment funds, effective from 7 August
The funds held securities linked to American subprime mortgages. BNP Paribas explained that trading in these securities had effectively ceased, making it impossible to establish reliable valuations.
Why mention that? That is for two reasons.
The first was that this was the first sign that a global financial crisis was coming. The market was becoming so disorderly that valuations could not be established, but more importantly, BNP Paribas could not sell the mortgage securities it held to meet investor demand for cash.
The second is that the FT has reported today that:
Deutsche Bank's asset manager DWS has said it will honour just 10 per cent of withdrawal requests from its flagship property fund starting on Tuesday, as falling real estate prices intensify pressure on the €100bn German property fund industry.
The €4.3bn “Grundbesitz Europa” fund, the biggest of three DWS open-ended property funds, would cancel 90 per cent of each investor's redemption requests, DWS said on Monday as it seeks to preserve liquidity.
Are the two issues exactly the same? No, of course they are not, but there are sufficient similarities to be worried.
An investment fund that thought it could offer savings opportunities backed by particular property-based assets has now restricted savers' ability to withdraw their money because the fund is sufficiently illiquid due to what must be market failure that the bank can no longer afford to give those who have saved with it access to their money.
The details might differ from 2007, but the substance does not. A bank-managed fund's refusal to pay is always significant and signals serious underlying market-failure issues.
In 2007, we ended up with a global financial crisis because the mortgage securities BNP Paribas traded were seriously overvalued.
Deutsche Bank's signal now is that some property markets have, at the very least, become so illiquid that it cannot sell properties to meet demand for funds.
History never repeats itself exactly, and I am not saying these two events are identical, because they are not. However, are they sufficiently similar to worry about? In that both represent the existence of seriously illiquid markets that are creating significant financial stress, as a consequence of which the relationship of trust between investors and a bank will fail, they share so many characteristics in common that the comparison has to be made.
I am not saying, at this moment, that this signals the start of the next financial crash. That can only be stated in retrospect. That this event provides yet another warning of the risks that we face is undoubtedly true.
Nothing that I am seeing at present provides me with any optimism as to the economic prospects for much of the world in 2027. In that case, if you have the opportunity and the means to do so, this is the moment to think about safety.
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Richard, gating is not the alarm bell you suggest. It is a routine liquidity tool for funds that hold illiquid assets, and it has been used repeatedly in recent years without triggering a crash. German open-ended property funds such as CS Euroreal, SEB ImmoInvest and KanAm suspended redemptions between 2008 and 2012, and several were wound up. UK property funds from Aviva, Standard Life, M&G and Henderson gated after the Brexit vote in 2016, and almost every daily-dealing UK property fund suspended in March 2020. Woodford Equity Income froze in 2019, H2O side-pocketed assets in 2020, and Blackstone’s BREIT and Starwood’s SREIT capped withdrawals in 2022–24. None of these became 2008.
The DWS problem has also been building in plain sight. The fund wrote its units down 7.3% in September, investors withdrew €570m in seven months, and DWS brought in exit penalties and redemption gates. Outflows since end-2022 total about €6bn. That is a slow, well-flagged repricing of commercial property, not a sudden freeze.
BNP Paribas in 2007 was different in kind. Those funds were sold as near-cash, held opaque, leveraged securitised debt, and sat within an interbank system that seized up when nobody could value anything. Property funds are understood to be illiquid, which is precisely why gates exist. A gate working as designed is not market failure.
Do you realise you have made my point for me?
What you have pointed out is that I have every right to be concerned.
Thank you
“Do you realise you have made my point for me?”
I have absolutely no idea how you come to that conclusion from what i have said other than you are not listening to the facts presented.
With respect, read it again. You did confirm all that I said.
There are plenty of “red flags” that might suggest a crisis is around the corner but this is most unlikely to be one. Funds that offer “daily liquidity” (the ability to withdraw money at short notice) but invest in illiquid assets (in this case property) do have to “gate” funds occasionally and this is in the T&C when you invest – you can’t liquidate property in a day or two – it takes weeks/months.
The key difference with 2007 is that then, the funds held securities (rather than real assets) and there was a strong expectation that these could be liquidated (almost) instantly…. and they could not be.
I am not familiar with this fund but there are two reasons for a rush for the exit. Either, it is fund specific with investors believing the published valuations of assets is way to high or it is more general and reflects the fact that investors are feeling very twitchy – which may well manifest itself in other areas which might have more serious consequences.
We will have to disagree.
Gating happens – usually in times of crisis and disorderly markets; I agree, and at times of demand for exceptional outflows.
Those are all happening now. The question is, why?
I think that is the systemic question – and the scale of denial here is the big issue.
I think the crises emerge when there is a mismatch between expectations for liquidity and (the lack of) liquidity in practice. In this instance, there is no real mismatch – certainly not a systemic issue.
I expect to get cash out the bank on demand, turn my gilts into cash tomorrow and my equities in 2 days. For a fund like this I would hope the “gate” is closed only as long as it takes to put a realistic redemption price on assets – either by liquidation or cautious mark-to-market prices. The key is to avoid letting some investors out at too high a price by drawing down on a liquidity facility which then leaves investors that don’t sell in a leveraged property portfolio at the wrong price. It seems to me that the gating here is sensible.
If my bank won’t give me cash or there is no market in gilts then it is a real problem.
I agree that gating can be a perfectly sensible response to a liquidity problem. It can prevent investors who withdraw first from being paid at valuations that disadvantage those who remain.
But I think you are underestimating the wider issue.
The suspension of withdrawals by BNP Paribas in August 2007 was not, in itself, a systemic banking collapse. It was a warning that assets previously assumed to be readily marketable could no longer be reliably valued or sold.
That is the important point. A liquidity problem in one fund may be manageable. But when investors discover that similar assets elsewhere are subject to the same uncertainties, confidence can disappear very quickly.
I am not suggesting that this particular fund will cause a financial crisis. I am suggesting that apparently isolated liquidity problems can sometimes reveal much wider weaknesses.
That is why they deserve attention.
It seems to me that the comments so far reinforce your argument. Of itself the Deutsche Bank action is only a pointer. However, the AI shenanigans have all the hallmarks of the sub-prime calamity. That does suggest that the bank is at the very least worried about the future as you are.
There is no doubt in my mind that behaviour like this needs noting and watching. A pity by the way that such decisions are left to the institutions themselves whom I must say I am unlikely to trust at all these days.
I burst out with laughter at this point: “The funds held securities linked to American subprime mortgages.” Really? after 2007/2008 – wow, fools and their money etc.
I wonder what will happen when people try to exit ETFs. I used to follow Vestas and Orsted in detail. The actual share turnover per day is circa 30k. What happens when the owners of 100k or more want to sell?
ETFs are a tool designed to exacerbate any liquidity crisis.
Hmmm, not sure that this is true. When I taught on this subject I did, for several years, completely agree with this view – that the superior liquidity of ETFs versus underlying issues was illusory because, in a crisis you would get a “double whammy” of illiquidity – illiquidity of the underlying compounded by the reluctance of arbitrageurs to create/destroy ETF units (versus the underlying).
However, in practice in credit ETFs (and it may be entirely different in equities) it was the ETF liquidity that supported liquidity in the underlying bonds. This was quite unexpected (to me, at least). Now, this was not in a full blown banking crisis like 2008 but when the evidence suggests otherwise I have to change my mind.
I admit I did not think about bond ETFs.
I only think about them for equities.