Financial crisis game: The ultimate stress-test

With this objective, Euromoney, assisted by the London-based Centre for the Study of Financial Innovation (CSFI) and PA Consulting Group, invited 50 experienced financial experts, including active bankers and regulators, to throw themselves into an artificial but plausible crisis, set a year ahead in August 1998. Among the advisers who helped construct the simulation were bankers, senior regulators, and the British army, which runs complex "Theatre of War" games for up to 10 days each year.

The results of the Euromoneystress-test, most agreed, were fascinating, and chillingly real. The actors nearly forgot they were role-playing, and became the people they were meant to be - Alan Greenspan, Hans Tietmeyer, Eddie George, Rolf Breuer - hounded by real journalists and pitched into national and international squabbles. [One candid outburst: "I might end up hitting someone before the end of this. It's those bloody Germans, and they aren't really German!"]

The lesson of this game is that, when a global crisis looms, bankers and their regulators tend to look after their self-interest first rather than cooperate for the common good. Short-term advantage is preferred, while long-term survival and the good of the system are neglected, until it's nearly too late. It took most of a weekend, compressed into a few hours, for the British and US financial sectors to get their act together, while within 10 minutes "those bloody Germans" had formed a united front of banks and regulators and turned a financial crisis into an opportunity. Multilateral bodies such as the IMF and the BIS found themselves powerless while time-horizons were so short and the priorities were so narrowly national.

In a simulation that was meant to show a way out of a global meltdown, without winners or losers, the surprise outcome was the fierce rivalry fanned between financial centres. The US banks were still fighting yesterday's battles over assets already lost, and blaming their regulators for being so weak, while the British banks and regulators were content with assuring themselves the problem was "not their problem". The simulation ended in an apparent victory for the Germans and their well-known consensus system.

This is all seen with the benefit of hindsight. In the heat of battle, with limited information spread asymmetrically between the players, the landscape looked very different. And the Germans are suspected of resorting to a little pre-game collusion - that's how badly they wanted to win.

Crisis-building

The crisis begins with an earthquake in California on August 10 1998. Elmas, a Miami-based boutique trading Latin American debt and equity, finds itself caught with positions in Californian earthquake bonds worth close to zero, and the hedge it constructed - calls written on a regional property index - careering in the wrong direction, in the money. At this stage, no-one knows how many options Elmas has written and to whom - except Elmas's maverick Argentine CEO/president Alberto Schultz - but the losses could be several billion dollars.

Simple enough to contain, you might think. Elmas goes bust and its creditors and counterparties lose their money.

But there are deliberate complications introduced by scenario-writer David Shirreff. Elmas is owned by British merchant bank Mulhouse Brand & Co. Mulhouse Brand (MBC) was bought in 1992 by UK clearer Federated Scottish Banks, and then majority-sold in early 1998 to Bayerische Kreditbank, Germany's fifth-biggest bank. With 65% of MBC, Bayerische Kreditbank would appear to be the merchant bank's ultimate parent and lender of last resort. But since the ink on the sale is hardly dry, the Bavarians have an excuse not to take responsibility.

Apart from these three fictitious banks, each represented by actors playing the chairman, the treasurer and legal counsel, all other institutions in the drama have real names. Financial experts turned actor play US Federal Reserve chairman Alan Greenspan, Bundesbank president Hans Tietmeyer, Bank of England governor Eddie George, SIB chief Howard Davies, IMF head Michel Camdessus, BIS chief Andrew Crockett, and a galaxy of senior bankers, including Rolf Breuer and Jürgen Sarrazin the heads of Deutsche and Dresdner Bank, HSBC chairman Sir William Purves, Dick Fisher and Frank Newman, the heads of Morgan Stanley and Bankers Trust. There is also a press corps who are vital disseminators of information, disinformation, intelligent guesswork and propaganda (full cast list below).

The various interest groups, 1O in all, have private rooms linked by telephone. They can arrange meetings, use the press to spread stories, and negotiate one to one in the corridors or in two "safe" houses, the Monte Carlo room and the Savoy Suite. There are also an auditorium for plenary sessions and a Press Club for refreshment and gossip, at the risk of being wrong-footed by a journalist (the facilities and logistics were generously provided by PA Consulting Group at its head office in Victoria.)