Hello and welcome to this month's edition of Investment Insights, which marks the 5th anniversary of the bankruptcy of Lehman Brothers.
The official collapse of Lehman (and the unofficial collapse of Merrill Lynch at the same time) is deemed by many to be the epicentre of what we call the Global Financial Crisis, and which triggered what the rest of the world calls the Great Recession. There have been countless articles written about what occurred during the most tumultuous period of our financial generation (we hope), so we have gathered for you some of the more interesting ones. Perhaps the most interesting is this piece which summarises the crisis in 73 headlines, taken from the day Lehman filed through to the Dow hitting record highs again. It was at that moment, that point in time, that many recall their perception of markets, economies, and risk and return had changed forever.
In this piece from The Age, a banker describes hearing the news as "the moment when credit markets realised banks can go broke'', and that this realisation changed the way investment markets would think for a long time, possibly forever.
But have we learned anything five years on? In this short 4 minute interview with Barry Ritholtz, author of the book Bail Out Nation (whom we regularly feature in these articles), he argues that we haven't learned much as we now have a higher concentration of risk in a smaller number of banks. He also argues that there was no prosecution of the people who allowed the crisis to happen, nor were the regulators held to account for allowing it to happen. He follows this up with an extremely inflammatory piece making the case that some in the financial industry continue to commit crimes. He cites examples over the past century that seem to repeat themselves over cycles, with Bernie Madoff being just the most recent example of a Ponzi scheme, which of course got its name from none other than Mr Charles Ponzi himself way back in 1920.
Daniel Minihan, our Director of Wealth Management, posted his own piece on the 5 year anniversary albeit with a different take, looking at the advice of the time. That advice was to stay invested, focus on the long term and ride out the fall because eventually it would turn around. Whilst this had always been the prevailing view when markets were crashing, there was no greater test than 5 years ago. Today, whilst the Australian market has not recovered all of its losses, the U.S. has done so. Despite constant reports of the death of various world economies, the recovery continues to slowly gather pace.
For those that got out at the top and in at the bottom: congratulations, you have won the lottery. For those that stayed invested: you should now be seeing the results of staying the course. For those that got out and haven't got back in... remember that it's the long term that counts.
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