Finance

The Financial Crisis – 10 years on: what happend and what we’ve learned

NEW YORK, NEW YORK, UNITED STATES (REUTERS) – Saturday (September 15) marks 10 years since the collapse of investment bank Lehman Brothers when the bubble in the United States sub-prime mortgage market burst.

Lehman Brothers sought Chapter 11 protection on September 15, 2008.

The investment bank was hurt by a decline in real estate values and a financial crisis caused by lack of liquidity.

“It started with this instrument that really was insurance on debt and the various major institutions were providing extra insurance should debt go under. Well as we led up to it, it started becoming clear there was more insurance written than there was debt,” Liz Miller, president of Summit Place Financial Advisors, explained.

“And then some of that debt went bad and as we now know a lot of that debt had to do with subprime or bad mortgages. But because there was extra insurance written against it, we had a stack of cards. We had the debt go bad and then we had all this insurance that was written against it continue to go bad, and there just wasn’t enough liquidity out there to meet everyone’s demands.”

Lehman’s bankruptcy remains the largest bankruptcy filing in U.S. history with holdings over $600 billion (USD) in assets.

The night before the bankruptcy filing, Lehman employees were already packing their belongings and abandoning their desks.

Earlier in 2008, the U.S. Government had stepped in to rescue other troubled banks such as Bear Stearns, and mortgage giants Fannie Mae and Freddie Mac. Many still wonder why the Federal Reserve let Lehman Brothers go, while it rescued numerous others.

“I think the thinking from Hank Paulson, who was the treasury secretary at the time, was that they didn’t want to create a moral hazard. They didn’t want the markets to think that the government was going to step in and bail everybody out,” said Alec Young, global markets research managing director at FTSE Russell.

The consequences were disastrous – a global systemic risk that almost brought down the entire financial system.

Consequently the U.S. Federal Reserve had to come up with a $700 billion bail-out fund – the Troubled Assets Relief Plan (TARP). In the process, the U.S. House of Representatives voted against the fund on September 29, 2008, sending the Dow Jones down by 778 points in a single day wiping out $1.2 trillion (USD) in market value. The failure of Lehman Brothers also heated up a debate among industry insiders, regulators and politicians whether a bank is too big too fail.

Later, Congress passed the Dodd-Frank law which called for hundreds of new rules, including new oversight of the massive swaps market, mortgages and consumer financial products, and large nonbank financial firms.

The markets have stabilized since their free-fall in 2008, but what’s to prevent another financial meltdown?

“I think there are several things that are going to prevent another financial collapse,” said Kevin Kelly, co-founder, CEO and managing partner at Benchmark Investments.

“One of it is really self-regulation. We’re starting to see that happen with the banks and who they’re lending money to and how they’re lending money, and they’re using a lot of analytics, AI (artificial intelligence) into those decisions.”

Also, “banks need to keep higher capital in reserve than they used to,” said Miller. “Banks have to value their holdings a little bit differently, manage them from a balance sheet a little bit differently. So I’m highly confident that the next crisis isn’t the same as the last crisis.”

Miller said the 2008 financial crisis not only had institutions re-evaluating risk, but investors as well.

“Anyone who probably had about 10 years or so into a 401k into their career was so marked by 2008, I think that will carry with them for the rest of their life,” she said. “The clients I work with, the investors I talked to, are now always looking for the shadow, always looking around the corner, can’t even appreciate really good years in the stock market.”


Associated Links

  • Freddie Mac
  • Dow Jones
  • Lehman Brothers
  • Nomura
  • Great Recession
  • Investment banking
  • Bankruptcy of Lehman Brothers

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