Is There Good News in This Market?

Sep. 18, 2008 9:35 AM ETAIG, LEH, MER, BAC, FMCC, FNMA1 Comment
Larry Swedroe profile picture
Larry Swedroe
3.34K Followers

Consider All the Bad News We Have Had

Home prices have fallen 15% and in some markets about 30%. And expectations for further declines as supply at about 11 months and about 5 indicates stable markets.

Oil went to almost $150 per barrel and gold to almost $1,000 per ounce. The Dollar collapsed as the Euro hit about 1.60. The auction-rate securities market, hundreds of billions, seized up.

Countrywide (the nation’s largest mortgage lender) had to be rescued, and Indy Mac (one of largest and a large bank) did fail. FNMA ((FNM) and FHLMC (FRE) had their equity basically wiped out in bailout.

Lehman (LEH) had the largest to-date bankruptcy in history at $168b. AIG (AIG) needs a government bailout and was put into conservatorship. Credit spreads widened dramatically, and many people were cut off from credit.

We saw huge hedge fund losses, with their worst year in perhaps 15 and maybe worst ever. We've already seen 134 LBOs go bust. Many more are likely to follow.

The Democratic nominee wants to raise taxes on capital.

Those who knew all this before the year started might have thought market would be down at least 40-50% if not more (as it was from 73-4 and 2000-02).

Anatomy of a Crisis: Mistakes Made by Investment Banks

They took more risk than they were able to take. If they lost the bet, the company goes bust. Never bet more than you can afford to lose.

They had too many eggs in one basket or a few baskets that were highly correlated (in Lehman’s case, commercial and residential securities or investments). Also, these banks invested in other risky investments whose correlations tend to rise during crisis.

They had way too much leverage for the amount of risk taken. Highly leveraged institutions have to be right

This article was written by

Larry Swedroe profile picture
3.34K Followers
Larry Swedroe is head of financial and economic research office for Buckingham Wealth Partners,  a Registered Investment Advisor firm in St. Louis, Mo.. Previously, Larry was vice chairman of Prudential Home Mortgage. Larry holds an MBA in finance and investment from NYU, and a bachelor’s degree in finance from Baruch College. To help inform investors about the passive investment approach, he was among the first authors to publish a book that explained passive investing in layman’s terms — The Only Guide to a Winning Investment Strategy You'll Ever Need (1998 and 2005). He has authored seven more books: What Wall Street Doesn't Want You to Know (2001), Rational Investing in Irrational Times (2002), The Successful Investor Today (2003), Wise Investing Made Simple (2007), Wise Investing Made Simpler (2010), The Quest for Alpha (2011), and Think, Act, and Invest Like Warren Buffett (2012). He also co-authored eight books: The Only Guide to a Winning Bond Strategy You’ll Ever Need (2006, with Joe Hempen), The Only Guide to Alternative Investments You’ll Ever Need (2008, with Jared Kizer) and The Only Guide You’ll Ever Need for the Right Financial Plan (2010, with Tiya Lim and Kevin Grogan), Investment Mistakes Even Smart Investors Make (2011, with RC Balaban), The Incredible Shrinking Alpha (2015 and 2020 with Andrew Berkin) Reducing the Risk of Black Swans (2013 and 2018 with Kevin Grogan), Your Complete Guide to a Successful and Secure Retirement (2018 and 2020 with Kevin Grogan), and Your Essential Guide to Sustainable Investing (2022 with Sam Adams). He writes for AdvisorPerspectives.com, AlphaArchitect.com, and TheEvidenceBasedInvestor.com. You can follow him on Twitter  (http://twitter.com/larryswedroe).

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