Sept. 15 marked 10 years since the collapse of Lehman Brothers. The Financial Crisis of 2008 wiped out about 8.8 million jobs, according to the Bureau of Labor Statistics, and caused about $19 trillion in household wealth to evaporate. While the recession officially started in December 2007, we wanted to review a timeline of some key events and also look forward to the future.
Significant Factors in the Financial Crisis
Leading up to the Financial Crisis of 2008 was a variety of factors that lead to individuals and businesses being overleveraged (over borrowing). Deregulation that started in the late 1990s coupled with predatory lending practices led to too much toxic subprime (lower quality) debt being on the balance sheets of many financial institutions. People were lured into mortgages they couldn’t afford with introductory “teaser” rates that reset later at a higher rate making the payments no longer affordable. Also, financial institutions bundled the debt and sold it to investors as mortgage-backed securities. Many investors were unaware of the amount of subprime debt that was included in the mortgage-back securities they were buying or just how risky the investment was.
September 2008 — A Scary Time
A look at the events of September 2008 reminds us of how quickly things can happen. On Sept. 7, Fannie and Freddie Mac are taken over by the U.S. government. On Sept. 15, Merrill Lynch is purchased by Bank of America. Also on Sept. 15, Lehman Brothers files for bankruptcy protection. On Sept. 16, AIG receives an $85 billion bailout package from the government with the government taking 79.9 percent ownership of the company. On Sept. 25, Washington Mutual Bank fails and its assets are sold to J.P. Morgan. On Sept. 29, Congress rejects the first version of the rescue package called the Troubled Asset Relief Program (TARP). This causes the Dow Jones Industrial Average to drop 778 points, which until 2018, was the single largest one day point drop. By Oct. 3, TARP was passed by Congress.
It’s important to note that even before September 2008 major events had happened. In January, Bank of America had purchased Countrywide Financial. Countrywide at one point had been the largest home mortgage provider. Also, in March 2008, J.P. Morgan agreed to purchase the struggling investment bank, Bear Stearns.
A Look Forward
During the Financial Crisis of 2008, the peak of the S&P 500 was in October 2007 and the bottom happened in March 2009. During that time, the S&P 500 lost approximately 50 percent of its value. Since then the market has come roaring back. However, now at the 10-year anniversary, it is important to look forward. Business cycles are inevitable and many market watchers believe the next contraction is coming, we just don’t know exactly when. We don’t believe in trying to time the market, but rather being properly diversified based on your tolerance for risk as well as your goals and objectives for your portfolio. It’s easy to have become complacent since the performance of the U.S. stock market has been strong over the last several years. However, now would be the time to look at your portfolio and make sure it’s still aligned with your overall goals, the time horizon for meeting those goals, and whether rebalancing or reallocation may be appropriate.
We believe that diversification is essential for the long term, but investors need to keep in mind that even prudent diversification and reasonable asset allocation will not ensure a profit or protect against a loss. However, keep in mind that it may spread your risk so that investments that do poorly may be balanced by others that do relatively better. Given where the overall market averages have climbed to, we think this is now very important.
Gary E. Croxall, CFP®
Registered Principal of LPL
Soren E. Croxall, CFP®
Registered Representative of LPL
Securities and Advisory Services offered through LPL Financial, member FINRA/SIPC, a Registered Investment Advisor. LPL Financial and Croxall Capital Planning do not provide tax or legal advice. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
