10 years to Lehman Brothers, what did a Layman learn?

2008 Global Crisis

September 15, 2018 marked completion of a decade to one of the biggest Global Financial Crisis in the history of the world.

After Great Recession of 1930, Lehman Brothers Credit Crisis of 2008 was one of the worst in the Global Economy and Financial Markets. It came as a major earthquake for global economy and finance, the after effects of which can be felt even today after a decade.

September 15, 2008 – The D-day which changed the global finance and economy landscape when the 158-year-old trusted and Renowned Investment Banker filed for Bankruptcy and the US Markets crashed immediately by 4%.

The Lehman Brothers Bankruptcy was attributed to the Housing Bubble burst out and credit crisis.

What was the Immediate Impact of 2008-Crisis?

The demise of the then 158-year-old Wall Street giant led to a challenging dilemma about $619 billion worth of debt which Lehman held on its books from over 100,000 creditors.

How did Investors react?

The main reason for this debacle seems to be Low Interest Rate, Subprime lending and competition. Lehman Brothers once was one of the top Investment Bankers in the US. But, they heavily financed the real subprime category of borrowers.

As a result, when the Credit crisis busted, Lehman Brothers had to book heavy losses and file for Bankruptcy proceedings. This is in turn created a huge impact on global companies like Bear Sterns, Royal Bank of Scotland, Merrill Lynch.

Indian economy was not a left-out story. Everything dived in red across the stock market screens which made the investors cash-out their investments from stock market.

Not only small investors but also big investors like Narayan Murthy of Infosys who was then Board member of ICICI Bank, on receiving the news of the bank being affected by Credit Crisis, withdrew his deposit worth INR 1,000 crore and shifted it to SBI reports Economic Times

What are the lessons given by the Global Financial Crisis?

  • History Repeats Itself: After the great recessions of the 1930s, nobody ever imagined that a similar event will happen which will take the world by a storm. Well, what happened on September 15, 2008, proved that history repeats itself time and again. Its better to stay cautious about it.
  • Never Underestimate the power of Quality over Quantity: Global Financial Crisis was a result of compromising on the credit quality while lending. This applies to making investments as well, Always remember, Quality always repays, Quantity makes you repent.
  • RiskAssessment: Be it lending or investing, Risk Assessment is an important parameter to consider. An Investment should be made in-line with the risk component both the investors as well as the asset class of investment carries.
  • Risk Management: While investing an investor should always check if the investment value falls drastically tomorrow, will he be able to cope up with the resulting crisis and manage the critical events that follow. Proper Risk Management is a must-have for all the investors.
  • Too big to fail is just an illusion: The world economy across is globe is inter-connected. Both Internal and external factors of an economy can create a huge debacle across the globe and if a 158-year-old leading investment banker can fail, there is no business which cannot fail owning to various factors. Hence for an investor, it’s good to stay informed always.
  • Crisis or Blood-Bath – An opportunity for Value Investing: It is seen that whenever Stock Market Crashes, investors are in a hurry to cash out their investments. In case of Indian Indices, the story of September 2008 till now is that of Lehman to Life-time highs.

       The investors who stayed invested in the crisis or who did new investments then are reaping the fruits of huge wealth creation now. Hence an investor should always see a bear-run or a crash as an opportunity for Value investing and buy more at every fall.

Data Credits : Ace Equity – Adjusted Values

  • Reforms: The Financial Crisis gave birth to many reforms in economies across the globe. Structural reforms such as RBS – Risk Based Supervision, Transparency in the OTC Markets, Macro Prudential Policy – Policy that deals with Systemic Risk, etc. took place. Such events should always be taken positively by the investor as it leads to robust growth of economy and investment

Credit Crisis Suggestive Video: www.crisisofcredit.com


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