Al Charlson is a North Central Iowa farm kid, lifelong Iowan, and retired bank trust officer.
I’m sure many readers can look back at their careers and think of certain years which stand out in red letters. 2008 is one of those years for me.
At that time our bank’s trust department held several commercial buildings in downtown Waverly in a fiduciary relationship. On June 9 I went downtown in my knee-high rubber boots. I was able to get into one of the buildings through the glass side entrance doors. The corner office was rented to a professional group, and I joined them in carrying files upstairs to the mezzanine.
Every time we went out into the lobby to the stairs the water was a little higher on those glass entrance doors. It was eerie. We worked as long as we could.
When I left, I went out a door on the third floor and worked my way across the roofs until I came to a place I could get down where the water wasn’t too deep. The rest of that summer was devoted to those buildings, all of which were inundated by the Cedar River flood.
Another disaster struck on September 15, when long-established Wall Street bank Lehman Brothers collapsed. The next day the Reserve Primary money market fund “broke the buck”—its per share Net Asset Value fell below $1.00. The financial markets had effectively frozen.
I remember meeting my boss in the hall after that news broke—we were both stunned. We (and the rest of the country) were in a full-fledged financial panic. Some days that fall made the post-flood cleanup seem like a vacation.
The history of the 2008 financial panic can be traced at least back to the passage of the Gramm-Leach-Bliley Financial Deregulation Act of 1999. (Yes, Iowa’s U.S. Representative Jim Leach was one of the authors. He was our member of Congress most of the time we lived in southeast Iowa, and I was proud to vote for him every chance I had. Hey, nobody bats 1,000!)
Gramm-Leach-Bliley removed the 1933 Glass-Steagall “wall” between commercial and investment banking, opening the door for both more bank profit opportunities and more systemic risk.
At the same time, “hot shot” young financial “engineers” used sophisticated computer programs to assemble pools of sub-prime (high risk) mortgages, “packaging” them so that part of the “tranches” (slices) received good ratings from the risk rating agencies. The combination of good risk ratings and high interest rates seemed too good to be true.
It turned out not to be true. But before we learned it wasn’t, the demand for these sub-prime mortgage- based investments fueled a speculative boom in the housing market. We read the stories about speculators buying five condos at a time on a shoestring in Arizona. We thought it was an isolated aberration, but we were wrong.
In September 2008, we were on the edge of a repeat of the financial crash of 1929. The federal government responded aggressively. The Treasury Department, with a unique team approach led by Secretary Henry Paulson of the outgoing Bush Administration and Secretary Timothy Geithner of the incoming Obama Administration, joined the Federal Reserve under the leadership of Chair Ben Bernanke in an extraordinary combination of actions. They prevented a total collapse of the financial system and a repeat of the 1930s Great Depression.
Side note: although I believe these actions were necessary, I won’t disagree with those who feel the outcome was not fair.
The ”fixes” could not stop all the economic damage. About nine million jobs were lost, house prices fell about 30 percent, with many foreclosures, and the stock market had lost about half its value by early 2009.
As always, big market sell-offs create opportunities for people with “deep pockets.” One way the Treasury Department restored confidence in the banking system was to require the major Wall Street banks to increase their ownership capital. Typically, they did this by selling preferred stock redeemable after five years.
In early 2009 we were able to buy, for example, major bank preferred stock paying a 6.0 percent dividend for 60 cents on the dollar. That gave us a 10.0 percent annual cash return plus a 66 percent capital gain when the preferred stocks were redeemed.
We also bought stocks at “bargain basement” prices. In addition, there were many opportunities to buy foreclosed homes at depressed prices and convert them into rentals while waiting for the housing market to recover—not something we did in the trust department.
I had witnessed a similar scenario before. I remember earlier in my career the auction of a very nice 80-acre farm in an estate for $1,300 per acre. The heirs were present and had the right to reject the final bid; they told us to proceed. This was during the 1980s farm crisis. Five years earlier the farm would easily have sold for well over $3,000 per acre.
As I am writing, the Dow Jones Industrial Average has closed down 890 points (about 2 percent). A drop in the stock market is a relatively common occurrence. Are we at risk of another 2008-style, fear-driven financial panic that threatens our foundational U.S. dollar—U.S. Treasury debt—banking system structure? That’s impossible to predict.
I’m fairly sure our regulatory authorities and elected leaders would take prompt action to prevent a panic-triggering event if they could spot it. (Our 2008-2009 experience clearly showed us the that the cost of returning to stability after a financial panic led downturn is very high. We’re still paying for some of the Treasury Department-Federal Reserve emergency measures taken in late 2008 and early 2009.) However, identifying a potential triggering event is probably harder in an environment of unpredictable policy changes and uncertainty.
I’m glad I’m no longer responsible for managing other people’s money.
Top image is by corlaffra, available via Shutterstock.