We may have come a long way in the decade since Lehman Brothers collapsed but the financial world cannot afford to be complacent, writes Martin Gilbert, co-CEO of Aberdeen Standard Investments
Talking to colleagues and clients while I was in the US last week, it is striking how far the country has come from the great financial crisis.
From September 2008, when Lehman Brothers collapsed, through to the end of 2009, the US economy lost around $648bn due to slowing economic growth. Many people also lost their jobs, with the unemployment rate hitting 10% in 2010.
By the time Lehman fell, it was clear something was very wrong in the global economy. The previous summer had seen credit markets seize up, and the repercussions of a collapsing US housing bubble were becoming clear.
For over a year, a series of issues added more and more tinder to a volatile bonfire. The collapse of Lehman Brothers was the spark that lit the touch paper and the fire spread quicker and burned more ferociously than any of us really thought possible.
All of sudden it became clear the banks were concealing more than they claimed and, critically, that they would not necessarily be rescued when they floundered.
Like other asset management firms, we held daily morning meetings reviewing what had happened the previous day and what we expected liquidity to be, so we could establish what ability we had to sell holdings to meet client redemptions.
We met with our brokers, through which we bought and sold shares and bonds, to ensure they were able to weather the financial storm and were not at risk of collapse.
We also had regular conversations with regulators around the world, of course, along with most financial institutions, discussing market conditions and the actions we had taken to ensure our own operational strength.
Aside from the trades that needed to be carried out - whether to meet withdrawals from our funds or upon discovering the financial fragility of companies, in particular banks, with previously stellar reputations - I encouraged our investment managers to hold their nerve. One of the worst things you can do is to sell at the point of maximum pain.
While credit, equity and other markets initially tumbled, they and portfolios did recover. For example, the European high
yield index fell 35% in 2008, but bounced back by 73% the following year and a further 15% in 2010.
Holding your nerve during a period of market turmoil is difficult. It is even harder to actually go against the herd and buy when everyone else is selling, but it proved to be a very rewarding strategy.
Not a re-run
Those bleak days in the teeth of the crisis seem a long time ago now, and that worries me. There are signs everywhere that the financial crisis has passed, whether it is the bull run in US equities, ultra-low unemployment or Greece emerging from its debt programme.
The risk is we become complacent. Each crisis is inevitably followed by attempts to stop another one happening. Indeed, the past ten years have seen a huge political and regulatory response, much of which I welcome.
But we have to remember these efforts have primarily been focused on preventing a re-run of the last crisis. They will not prevent the next one.
The trouble with economic crises is they tend to rhyme, not repeat. I can think of at least a dozen different economic or financial crises in the 30 years that I have been working in the industry. Each one was different, if only subtly, from the last. The experience from each did not prevent the next.
Even now, there are attempts to roll back some of the crisis-era regulation, most notably the Dodd-Frank Act in the US. Some of this is justified. All regulation has unintended consequences and the regulation in the response to the crisis is not immune from that.
Elsewhere, I worry about the institutional memory of the financial crisis. The lessons of the past can provide vital guidance for the future.
As each year passes, the number of people with first-hand experience of the crisis shrinks over time. This is not happening to a huge extent yet but obviously will increase over time.
This makes it easier to push for a gradual loosening of crisis-era rules, or negative behaviours, which should act as warning signs, to creep back in.
The famous words of legendary investor Sir John Templeton still ring true today: "The four most dangerous words in investing are: 'this time it's different'".
Another crisis will happen, and it will not be an exact replica of the last one. But there will be warning signs. History will rhyme. It is our job to try to spot these signs, and be ready next time the tinderbox ignites.
Martin Gilbert is co-CEO of Aberdeen Standard Investments
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