It is 10 years since the collapse of Lehman Brothers. I remember it well as I was on holidays in Cascais, Portugal with my wife and 2 year old son. Buying the papers and watching CNN whenever I could to see what was going on. When they filed for bankruptcy, the stock markets went into a tailspin and we had a global recession.
Everybody thought that Lehman Brothers were too big to fail. But given the right circumstances, the US government found themselves unwilling to help them out. The US government had already bailed out Fannie Mae and Freddie Mac. There was also a presidential election coming up in less than 2 months time and both candidates, Obama and McCain, had said no more bailouts using taxpayers money. It didn’t look good if Wall Street was bailed out while small businesses when bust. The decision to let Lehmans go bust was a mistake but it still happened.
We are now in a world where everything is connected. Financial products are sold all over the world. Production of goods may take place in 2 or 3 different countries. Despite the attempts of people like Donald Trump to reverse things, globalisation is not going to go away. What this means though is that if one country or regions economy is failing, it spreads to other countries (they call is contagion).
Collateralised debt obligations. The packaging of debt into a product and selling that product to investors who get a cashflow from the mortgage repayments. The problem is, anyone could get a mortgage in 2007, even the unemployed, so when they started to default, these CDOs were worthless. An even bigger problem is that a lot of people, including the asset managers, didn’t know what they were buying. The rating agencies didn’t either and they gave these products the highest rating based on the size of the bank selling them.
As a consumer level, there are lots of complex products being sold that promise you high returns with low risk. They are a myth. And if you don’t understand them, do not invest in them.
With low interest rates and light touch regulation, people stopped saving for things and paid for it all using credit. And the longer the repayments, the better. Which is all fine as long as interest rates stay low and wages remain at the level required to meet the repayments. But when salaries fell, the banks still wanted their money back and the repayments were taking up a larger percentage of take home pay than before. With a fall in property prices, the debt levels were higher than the value of the property, so it was in effect worth nothing. Or you had released equity on your home for personal expenditure and buying cars (depreciating asset). So all you were left with was more debt and no assets to show for it. As there is a legal obligation to pay back the debt, there is now years of trying to get out of the mess that all this debt has brought you.
People make mistakes, it is what makes us human. It is important though that we learn from them.
If you have any questions, send me an email at steven@bluewaterfp.ie