Memories of recession come into focus

BY ALEX MCDONALD
Richard Elmslie’s memory of the last recession is as sharp as ever. At 25, he had earned more than $1 million through a series of investments. But he lost it all two years later when the ’91 recession struck.
He and his partner had planned to mass produce a briefcase with an inbuilt computer and phone. They had connections with Olivetti and Ericsson, and were convinced it was the sort of device no self-respecting salesman could live without.
“It was before its time,” he laughs. “It sounds pretty simple today but back then nobody was doing that.”
The aborted briefcase is a small blip in an otherwise radiant financial career. Elmslie went on to become head of power for UBS Australia. He’s now the director of RARE infrastructure fund, which he says is weathering the current financial storm.
“We focus mainly on regulated assets, like the wires on the street,” says Elmslie. “We get rent, and in a down market we’re meant to do better than normal equities because the revenues are more stable.”
Though he sees his entrepreneurial stint as a formative error, it was a timely one. Writing in the Financial Times in 1989, John Plender described “the spectacle of aggressive antipodean entrepreneurs roaming the world on borrowed money” as one of the more intriguing curiosities of the 1980s.
Looking back, there is a degree of symmetry between the current financial crisis and the period between the 1987 stock market crash and the ’91 recession. Statistics released by CommSec last month show the average Australian’s wealth dropping by $12,000 over the past year, the most dramatic fall since 1990.
Some experts say the current crisis is unlike any financial event in living memory. The CEO of Ernst & Young Australia, James Millar, believes the ’91 recession was a breeze compared to the current financial upheaval.
“We may end up in a similar downturn [following the credit crunch], but this is more akin to what happened in the 1930s,” says Millar.
But chief equity strategist at Macquarie Securities, Tanya Branwhite, demurs.
“There is one absolute commonality and it is the amount of debt that people take on their balance sheets,” she says. “It’s absolutely the same. The things that trigger [these crises] are always different, but the reason that some of the people you are talking to went bankrupt is because they had far too much debt.”
Like Elmslie, James Millar remember the ’91 recession well.
“I did very well out of it,” says Millar. “I was a receiver in the early ’90s, so I benefited from all the businesses that went under.”
Tanya Branwhite remembers it as a difficult time to find a job. When she finally landed a position with Elders Finance Group, the company failed and she was made redundant.
Like many economic downturns, the ’91 recession followed a boom period. In the ’80s, Richard Elmslie recalls the easy money available to investors, many of whom had little hope of repaying their debts.
One of those investors was Graham Young, an entrepreneur from Sydney’s north side.
Like Elmslie, he was forced to start from scratch after the property market nosedived in the early ’80s. Young says Sydney real estate had increased in value by 46 per cent in 1977 and pundits were predicting that Queensland property prices would follow suit.
So Young borrowed $80,000 to buy an investment property on a Gold Coast canal. He remembers sitting on a plane from Brisbane to Sydney in 1981 and reading the headline: ‘Gold Coast property crash’.
“I’ll never forget it,” he says. “I remember saying to the guy sitting next to me on the plane, ‘who writes this rubbish”
Young couldn’t find a buyer for the Gold Coast house, which he eventually sold at a loss.
“We had to sell our property in NSW to pay for that,” he says. “We started renting a house in Pymble and I got depressed.”
Young began selling stationary and computer binders door-to-door. By that stage he had two sons and a daughter on the way.
The following year he opened a small furniture showroom in Crows Nest.
“I kept walking passed this burnt out shop and one day I went into the bank,” Young recalls. “Then I started selling filing cabinets. Getting into chairs was a bit more technical. Eventually I got into them as well.”
At its peak, Young’s furniture business was turning over $4 million a year and employed 20 people.
Many entrepreneurs of the 1980s were known for their flashy toys. Graham Young’s greatest indulgence was flying. In the late ’80s he bought a Cessna 210 six-seater aircraft.
“It had leather seats, a radar ‘ it was the best equipped Cessna at Bankstown Airport,” he says fondly.
Graham Young can pinpoint the moment when his furniture business got into trouble.
“I went to Price Waterhouse Coopers and they came and did an analysis. They said I needed more liquidity. So they organised a loan for me, with very low interest at that time, and suddenly I had a lot of cash.
“When I had all this cash I ended up buying an aeroplane… I bought a factory because the funds were easily available. The bank actually took me out to lunch and threw money at me.”
The factory set him back $1.2 million, a hefty sum in 1987. Two years later the RBA cash rate was 20 per cent. The interest was crippling.
“I actually opened an account with a different bank because every month the National Australia Bank would take the interest out of my account, which was $15,000 a month’ It wouldn’t leave me any money to pay the wages.”
Young blames himself for losing his business and ‘ for a second time ‘ the family home.
To make matters worse, his employees reacted angrily when he told them the business had folded and they were now jobless.
“They thought I ripped them off,” he says. “Which surprised me a bit because they were only losing a job. I was losing everything.”
Tanya Branwhite has a typically analytical view of those entrepreneurs who came unstuck in the early ’90s.
“They were making acquisitions, they were being very aggressive and they were assuming that the price of those assets was never going to fall,” says Branwhite.
Yet James Millar believes there are lessons to be learnt in every financial downturn.
“Don’t make definitive judgements on the future,” says Millar. “You need a lean operating model and you have to fight like hell for every dollar of revenue.”
Despite the recent 5 per cent rise in inflation, Richard Elmslie believes Kevin Rudd’s stimulus package, along with the government’s guarantees on bank deposits, give Australia a decent chance of avoiding a lengthy recession.
“Spain is in a recession,” says Elmslie. “France is going into a recession. Portugal is in recession. Sweden is in a recession. The UK is about to fall into one. I don’t know how we’re going to escape it. Our banking system is better than the American one, though. That’s one thing that’s going for us.”