September 4, 2018
I woke early Monday morning, September 15, 2008, quickly dressed, and walked across a frost-covered field to the cabin where we were camped 20 miles south of the Russian border in northern Mongolia. I had come to fish for Siberian taimen, the largest salmonids in the world. Over breakfast, our guides, who had been listening to Voice of America overnight, informed us that Lehman Brothers, the nation’s fourth-largest investment bank, had failed after 158 years in business. That same day, Bank of America purchased Wall Street’s third-largest investment bank, Merrill Lynch, for $50B—ending its 94-year independence. The following day, AIG accepted an unprecedented $85B federal bailout, effectively giving the U.S. government a nearly 80% equity stake in the world’s largest insurer. That Sunday, September 21, the Federal Reserve announced that the last two independent investment banks, Goldman Sachs and Morgan Stanley, would become commercial banks. By the time I returned to my hotel in Ulaanbaatar that weekend, the world had irrevocably changed.
As I reflect back on what happened 10 years ago, I realize how close the world came to experiencing another Great Depression. At no other point in recent history had investors experienced such profound economic devastation. From the market peak in October 2007 to the trough in March 2009, the S&P 500 fell an astonishing 56.8%. Especially hard hit was the financial sector, particularly banks. As a senior executive of a publicly traded institution where the majority of the revenue was banking related, I had a front-row seat to the Great Recession. According to the Federal Deposit Insurance Corporation (FDIC), 462 banks failed from 2008 through 2012 (18% of which occurred in Georgia). In contrast, in the five years that preceded the recession, just 10 banks failed. The KBW Bank Index logged a 76% cumulative loss from September 2007 to February 2009, leaving destitute many families who had sold their small community banks to increasingly larger banks. People who thought they were secure for retirement experienced dramatic cuts in their lifestyles, some even having to return to work.
At the time of my ill-fated fishing trip, I was chief executive officer of Wilmington Trust Investment Management. Our Atlanta-based team was charged with managing $36B for clients throughout the United States, all of whom wanted to know what on earth was happening. The week following my vacation, I attended Wilmington Trust’s board meeting in Delaware. During that visit, our general counsel presented me with our application for $330MM in preferred equity under the U.S. government’s Troubled Asset Relief Program (TARP). Given that the head of our banking subsidiary had just assured us that “everything was fine,” this didn’t make much sense to me. When I questioned the decision, I was told that then President of the Philadelphia Federal Reserve Charles Plosser wanted all banks to accept TARP funding in order to shore up public confidence in the soundness of the banking system. Little did I know, all was not sound. Two years later, just 18 months after I had resigned my position to re-establish Balentine as an independent firm, century-old Wilmington Trust was sold for pennies on the dollar in one of the largest banking firesales in U.S. history. In fact, the company’s market capitalization had shrunk from nearly $4.5B in 2008 to $350MM four years later.
While the banking industry was especially hard hit, the entire global economy suffered. As the risk of contagion spread—a striking testament to how interconnected the world has become—no industry was left unaffected. Reckless lending practices by Icelandic banks, a major lender to the fishing industry, even affected the price of lobster meat. Subdivision pipe farms, empty shopping malls, increased financial regulation, and a generation of investors left scarred and skeptical of Wall Street are all lasting reminders of exactly how close we came to the precipice.
In hindsight, the Federal Reserve did a remarkable job providing credit and easing monetary policy that allowed the economy to slowly de-lever. This was no ordinary profits recession—this was a balance sheet recession, and it occurred because we saved too little, spent too much, and lived beyond our means. The typical prescription for a balance-sheet recession is to either grow our way out of it (virtually impossible given the strong economic headwinds at the time), foreclose on the debt, or print money. Fed Chairman Ben Bernanke, a self-described “Great Depression buff,” knew exactly what needed to be done. By engineering monetary policy to bring interest rates down below the rate of inflation—what economists refer to as “financial repression”—investors were forced to take risk in order to generate a return on their capital. In effect, we de-levered the economy on the backs of savers.
Ten years later, the prescription seems to have worked. Financial markets have recovered with a strong underpinning of earnings to support asset prices and central banks have begun the long process of unwinding the easy monetary policies of the last decade. In testimony before Congress in June 1999, then Chairman of the Federal Reserve Alan Greenspan stated: “Bubbles generally are perceptible only after the fact. To spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong.” History doesn’t repeat itself, but it often rhymes.