Lehman ten years on: Industry reflects on hard lessons and future challenges

Pedro Gonçalves
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A decade ago this last weekend Lehman Brothers crashed into bankruptcy in the biggest corporate failure in history. The ensuing crisis reshaped financial markets, economies and politics around the world. In an extended feature for International Investment, Pedro Gonçalves assesses the landscape today and asks what, if anything, has changed.

The US government was forced into a $700bn bailout of the banking sector, while in the UK, LLoyds Bank (then Lloyds TSB) rescued HBOS and the government was then forced to rescue both Lloyds TSB and the Royal Bank of Scotland. Barclays went cap-in-hand to the Qatari government.

The global financial crisis brought turmoil to mainland Europe’s shores with the Benelux governments having to rescue of the Belgian bank Fortis with a €11.2bn bailout package. Franco-Belgian bank Dexia also had to be bailed out.

Ten years on, industry experts comment on lessons learned and mistakes that could just happen again as memory fades.

“What went wrong? In a nutshell, it was the under-appreciation of risk. Credit was too easy. Extending property loans to unemployed people, who had no hope of ever servicing them, was symptomatic of this.

“What lessons of the crisis should be reinforced today? Firstly, there needs to be a healthy appreciation for risk and to price it accordingly. Secondly, it is important for investors to truly understand what assets are underpinning their investments.

“Finally, there must be more of an appreciation of how interconnected the world has become,” Mark Appleton, global head of multi-asset strategy at Ashburton Investments, said in a statement.

Larry Lau, manager of the Trium Diversified Macro Fund was there to see it all fall in the blink of an eye.

“As a Lehman alumnus, I lived through the before, during and after of the fateful event. While the bank was a progressive institution and prided itself on innovation – excessive over-reaching ultimately led to its downfall.

“The global economy has recovered, but scars remain. Regulation has tempered aggressive risk-taking, while conservative balance sheet management is now at work.

“Stricter rules and higher capital hurdles have reset an industry that had lost perspective. Loose corporate risk management, particularly in non-core ventures, should not jeopardise ordinary users of the system”. (continued on the next page…)

All a matter of trust?

Since the crisis, a litany of stakeholders, including governments, regulators and consumers have called for a restoration of trust in the sector. Ten years on, scepticism and doubt still prevails, with only 55% of Britons claiming they trust their banks.

For Luke Davies, chief executive and founder of SME investment house, IW Capital, it is all about regaining the public’s trust.

“Since the historic period of the financial crash of 2008 with bankers clearing their desks, this perpetuated a stereotype that all investors and bankers are ‘fat cats’ who are only in business for the bottom line figure. We need to change this image to regain public trust and demonstrate all the initiatives and good that comes from the sector,” he said.

However, repeating past mistakes could lead to the same financial problems that plunged the markets in 2008.

“The extra-loose policies, either monetary or fiscal, implemented to avoid an economic melt-down have not cured the root problem. And more troubling for the global economy is, over the last ten years, economic growth has grown increasingly dependent on credit, as the key economic growth drivers – work force growth and productivity – have softened.

Stimulus is able to smooth the cycle but has little effect on the growth trend, which depends on political will to implement reform.

The reality is you can’t have your cake and eat it. I see only two possible outcomes to start again: massive defaults on debt, perhaps via helicopter money or severe socio-political tensions, due to unfunded liabilities precipitating a social welfare crisis,” warns Fabrizio Quirighetti, co-head of multi-asset at SYZ Asset Management.

Vince Childers, manager of the Cohen & Steers Diversified Real Assets Fund, warns that riding the stock juggernaut is not a good idea.

“The mindset of most investors remains framed by the financial crisis and the disinflationary period that followed. However, we believe it is important investors do not dismiss the lessons of pre-crisis history and accept the possibility markets can display different dynamics in the future.

“Many investors are currently complacent in relation to inflation risks. Combine this with historically-elevated equity valuations and still-low bond yields and we could be witnessing potentially lethal portfolio positioning. While many forward-looking institutional investors are continuing to increase allocations to real assets, many individuals remain content riding the stock juggernaut.”

Dave Lafferty, chief investment strategist at Natixis Investment Managers, asks if we learned our lesson from 2008.

“It’s often said that you should never let a good crisis go to waste. As we approach the 10-year anniversary of the seminal event of the Global Financial Crisis – the collapse of Lehman Brothers – investors may wonder if we’ve learned anything from past mistakes. Through the varying lenses of policymakers, investors, and markets, the answer is decidedly mixed.

“Without question, policymakers around the globe have made some headway, particularly in the area of bank vulnerability. While concentration risk among the major global banks has actually grown since the crisis, broadly speaking, leverage and trading risk are down while equity and capital ratios are up.

“Large bank failures remain a risk, particularly in the European periphery and emerging markets, but the gradual de-risking of banks should make the system less vulnerable to contagion in the next Lehman-like crisis.” (continued on the next page…)

Has anything really changed?

The emotional impact of the event that saw close to $10trn losses in global equity markets is something some veterans in the industry will never forget.

James Bateman, CIO of the Fidelity multi-Asset investment team, described the collapse of Lehman as a “scar” that those who worked through the event will forever bear.

New regulations and increased capital buffers implemented post-2008 have made banks safer to try to prevent a repeat of the financial crisis, but these changes have also generated unintended consequences.

“With the US continuing to raise rates and the dollar likely to rise further, there are likely to be consequences. Another country binging on debt is the US, where the budget deficit is pushing higher under the Trump administration. Again, the seeds of future problems are being sown with fiscal stimulus at a time where the economy is already growing strongly,” Anthony Willis, investment manager in the multi-manager team at BMO Global Asset Management, said.

Whatever happens next, investors say that not panicking is key and that there is even a profit to be made for those who keep a cool head during a financial storm.

Ten years on from the financial crisis of 2008, analysis by investment and savings provider Aegon shows that those who remained invested and kept on saving through the financial crisis could be sitting on returns of 89%.

Jersey Finance said that history provides a valuable lesson, but it is now time to look ahead.

“It’s true that learning from past mistakes can be helpful in informing future decisions, but rather than wallowing in the misery of the past ten years, I’d like to advocate that this anniversary should serve as an opportunity to look forward.

If there’s one thing that has emerged as a vital take-away from the financial crisis, it is that careful analysis of your environment and prudent forward-planning is absolutely essential. There’s no doubt that we’ll see further disruption in the coming years, whether economic, social or political, and taking a strategic view (and sticking to it) will be vital for organisations and the IFCs that house them,” Geoff Cook, head of Jersey Finance said. (continued on the next page…)

Can it happen again?

In this new post-crisis world, there is no doubt that the ability of free markets, when it comes to efficient resource allocation, has been challenged.

“Big shocks do not creep onto us. They are usually out there in the open. What is unknown is the timing of the shock or its trigger. This time around, it is the very easy monetary policy and the unintended consequences of heavy regulations.

“From an investor perspective, sustained easy monetary policy has distorted economic signals. It has distorted the link between fundamentals and economic signals. This adds to our work because we have to be careful whether that link is re-established or not and the consequences,” Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers.

Banks are safer, but the industry warns that much of what has gone wrong since 2008 could happen again. It would seem that a decade after Lehman failed, finance still has a worrying amount to fix.

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