Welcome to this, part one of my reminiscences about the history of EPIX.
“I was asked what I thought about the recession. I thought about it and decided I did not want to take part” Sam Walton, founder of Walmart.
I thought I would put on record a key turning point in EPIX’s history. In June 2008, EPIX was exhibiting at the annual housing exhibition in Harrogate, and we were taking advantage of a quiet spell to discuss the world’s economy. This was three months before Lehman’s bank collapsed, taking with it a big chunk of the UK banking industry. But you could see it coming.
To give you some background, from 2004 to 2006 American interest rates had risen from 1.25% to 5.25%, which increased the number of borrowers defaulting on their mortgages (sounds a bit like today in the UK). As a result, house prices in America had started to fall and many homeowners found themselves owing more money than their property was worth (‘negative equity’). Buy-to-let investors were even more likely to default on their loans when prices fell.
By 2007, the steep decline in the value of mortgage assets in the US had caused major losses at many US lenders and forced even some large firms to appeal to the government for loans, to seek mergers or to declare bankruptcy. Meanwhile in the UK, banks and building societies were still fighting aggressively for business, making increasingly risky loans, sometimes at 95% or more of a property’s value – that value having been inflated by high levels of demand and low interest rates.
One of the first casualties of this cavalier approach was Northern Rock, a UK-based building society that had converted to bank status in 1997. From the outset, it adopted a funding strategy which was increasingly based on issuing mortgage-backed securities (MBSs) as per the American market – rather than using customer deposits as the source of funds. For a while, this approach had been successful – Northern Rock had a growth rate of around 20% for over a decade and in the first half of 2007 its new mortgage lending accounted for around one-quarter of the total in the UK.
Two particular problems emerged during the summer months of 2007: a generalised lack of confidence in MBSs associated in large part with developments in the sub-prime mortgage market in the United Sates, and doubts emerged about the viability of the Northern Rock business model in particular. As a result, Northern Rock became faced with severe liquidity problems and, in September 2007, were forced to seek assistance from the Bank of England. This move sparked a run on the bank until the government moved in to offer a guarantee to all deposits. That was not, however, sufficient to stop the rot and Northern Rock was nationalised by the British government in February 2008.
The crisis in the United States deepened through the first half of 2008 and it was obvious that this would sooner or later spread to the UK. We predicted that there would be a squeeze on finance which would impact potential customers wishing to purchase a new computer system so what should we do about it? We anticipated that the medium size firms who were at the time our target market would put up the shutters and stop spending (they did), the large firms would continue as normal but these were not our market (they didn’t – they too suffered from a shortage of investment cash), and so the opportunities for us would all be with the smaller companies.
By September 2008, the rumblings had turned into a storm but, whilst most of the country were gripped by a recession, EPIX decided not to take part: we were busy working on a new system to suit the needs of our new target market and increasing our marketing activities.
We took a business development loan in the spring of 2009 in order to finish the project and, as a consequence, the second half of 2009 was our busiest since the company was founded in 1991. The rest, as they say, is history.
