Lessons From Lehman, Dimon vs Trump, and Corporate Events!
‘Those who cannot remember the past are condemned to repeat it.’ George Santayana
Over the last few weeks, there has been plenty written and said about the ten year anniversary of the bankruptcy of Lehman Brothers and the financial crisis which followed that dramatic event. One of the common questions repeatedly raised is could something like this happen again and what would be it’s cause? Like most complex situations, there are plenty of reasons why the events of 2008 unfolded the way they did, but the major one was lack of proper loan underwriting by those responsible with the primary duty of, naturally, loaning money. If you are not familiar, think about mortgage lenders, commercial banks, savings and loan institutions, and investment banks. The largest bankruptcies and the cause of the biggest problems were because loan officers did not do the basic tasks, literally the first grade steps, of lending money. Lehman and Bear Stearns both bought mortgage lenders that specialized in subprime lending, as did Merrill Lynch. In the commercial banking area, the biggest bankruptcy was Washington Mutual, which JP Morgan was offered by the government after it filed. Next, you also have to look at the lack of risk management at these institutions, and specifically, how much leverage they took on with assets of lower quality. A big part of the responsibility of a board of directors is to understand the risk exposures of the various business lines, and those in these positions did not perform that task. Obviously, the situation at AIG comes to mind with the hidden derivative exposure tied to the housing crisis. Much of the high profile discussion involved ex Treasury Secretary Hank Paulson and Tim Geitner, as well ex-Fed head Ben Bernanke and the effectiveness of the policy response by these public officials. It becomes evident that the lack of a functioning government over the last few decades ultimately placed these financial officials into very difficult positions. Before the large institutions got into trouble but when it was foreseeable, the finance heads couldn’t get the politicians to agree on any kind of legislation for preventive measures. It was only after the patient had the heart attack that anything got done. Imagine that, the politicians let the public down. Of course they did, that is what the pols do, and to expect anything different is foolish. So then the natural question is, will it happen again and when, and how to plan for it?
My own opinion is there will be financial stress in the world over the next few decades, and we have already experienced some of it over the last few years. Markets are inherently volatile because the world is interconnected and the digital transformation makes most systems easily accessible to global participants. The wide variety of financial instruments that trade by the millisecond (bonds, currencies, stocks, Cd's, money market funds, mutual funds, etf’s, swaps, futures, and forwards) affect each other. If you remember Brexit, or the last few weeks you paid attention to emerging market currencies like Argentina, Mexico, and Turkey, you know how quickly circumstances can change. Much depends on your specific situation and what you are trying to accomplish with your investments. I think 2008 was a very rare circumstance where about a decade of poor decision making in one of largest financial areas that make up peoples lives came back to hurt society for a long time. When it comes to finance, if you make bad decisions, you will ultimately suffer. The opposite also holds true. The idea that large institutions won’t ever make poor choices again is not realistic, but when it take’s place and the scale of the losses is unpredictable. You can only control what you do with your capital, and if others do things which give you a good opportunity, they are quite rare, so you want to take advantage of it. You will know it when you see it, but the idea anyone can predict the cause and when it takes place is, in my opinion, misguided.
In the financial markets this week, the big news came with the spat between Jamie Dimon, CEO at JP Morgan and the President. Mr. Dimon spoke freely at an event hosted in New York, and was feeling quite confident and relaxed. As we all know, or should know, just because you think it doesn’t mean you should say it. It also doesn’t mean there isn’t an element of truth, or more than an element, in what he said. Still, when Mr. Dimon spoke about how he earned his money and didn’t get it from his daddy, well, did you really think Mr. Trump wouldn’t respond? Elsewhere, Apple, Nvidia, and AT&T held events to showcase their new products and technology, that being phones and watches, artificial intelligence chips and 5G, in that order. The inflation number came in a touch light early in the week, helping fuel a rally, while retail sales were a bit soft, while the oil inventory numbers rose. President Trump gave us the word that he is ready to go on 200 billion more in tariffs for China. Finally, Jeff Bezos gave an interview where he indicated Amazon will decide where it’s next headquarters will be by the end of the year. All in all, it was a good week for the markets as they gained about one percent. History dictates this time of year is typically volatile, and as we know from Santayana, it is important to keep that in mind.
Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one's overall financial situation. The fact that Yale Bock has earned the right to use the Chartered Financial Analyst in no way means or guarantee performance better than market indexes.