A little over 10 years ago, Lehman Brothers filed for the largest bankruptcy in United States history on September 15, 2008. That bankruptcy was only the beginning and set off a chain reaction of bank failures that required unprecedented intervention and bailout by the federal government to prevent an economic catastrophe in our country.
To refresh your memory, here are some statistics from that financial crisis:
- 8.8 million jobs were lost
- Unemployment spiked to 10% toward the end of 2009
- 8 million homes were foreclosed upon
- $19.2 trillion in household wealth melted away
- Home prices declined 40% on average and were even steeper in some cities
- S&P 500 declined 38.5% in 2008
- Households lost $7.4 trillion in stock wealth from 2008-09, or $66,200 per household, on average
So, what have we learned? I have two major takeaways:
Lesson #1: Better banks with reduced risk
Today, our banking system is healthier and more resilient than it was ten years ago. Back then, banks were over-leveraged and over-exposed, but now their capital and leverage ratios are much stronger and are less exposed to sub-prime mortgages.
Though banks today face a new set of challenges centered around their trading and traditional banking models, they are less at risk of a liquidity crisis that could bring down both them and the global financial system. Worth noting: banks stocks have yet to regain their pre-crisis highs.
Also worth noting: regulations are being rolled back and/or relaxed by the current Trump administration. Neel Kashkari, President of the Minneapolis Federal Reserve Bank and former overseer of TARP (The Troubled Asset Relief Program), was front and center during the crisis and its aftermath. Today, he still maintains that global banks need more regulation and higher capital requirements. He says “Financial crises have happened throughout history; inevitably, we forget the lessons and repeat the same mistakes. Right now, the pendulum is swinging against increased regulation, but the fact is we need to be tougher on the biggest banks that still pose risks to our economy.”
Lesson #2: Housing Market
A major part of the financial crisis was an overheated housing market that was stoked by unscrupulous lending to unqualified borrowers, and the re-selling of those loans through obscure financial instruments called mortgage-backed securities. Unqualified borrowers were given adjustable rate mortgages that they couldn’t afford at just the wrong time; interest rates rose just as home values starting declining.
Today, the housing market has recovered in most major cities and for the most part, mortgage lending has become more stringent. Borrowers are not as exposed to adjustable rates as they were ten years ago; only about 15% of the outstanding mortgage market is at an adjustable rate (per JP Morgan).
Could this happen again?
The question on many of my clients’ minds has been “Could this happen again?”
The answer is, we do not know. We will have another crisis on our hands at some point, we just don’t know what that will look like. The good news is that I don’t think we have a crisis on our hands any time soon.
Our economy is in way better shape now than anyone would have guessed it would be ten years ago. We are at a lower unemployment rate now than we were before the last economic crisis at 3.7%…that’s an 18-year low! And the Dow Jones has nearly quadrupled in the last decade. We’ve come a long way since the Federal Reserve and the Treasury interceded to save our banking system from going under.
My advice is to stay diversified, adjust your risk tolerance appropriately, and don’t believe anything that appears too good to be true. Interested in discussing further? Feel free to contact me!