09.05.18
10 Years: Reflecting on the Global Financial Crisis
by: Rich Blake
On Monday, September 15, 2008, the world gasped at the stunning reports: Investment banking behemoth Lehman Brothers collapsed. It was the largest bankruptcy in U.S. history. Global markets went into convulsions with dizzying declines across all asset classes. Before the year was out, stocks had lost one-third or more of their value, and the bank and brokerage playing field was in a state of dramatic upheaval, careers ending, books of business in tatters, clients on edge and the future uncertain. What actually came perilously close to becoming an even worse nightmare (runs on banks, ATMs out of cash and unreplenished) instead became a devastating yet survivable gut punch, though a blow like this still calls for more introspection a decade later.
The aftermath of the crisis can be viewed not only in specific, obvious ways but also through more ambiguous generalities. Below, we look at a few ways the financial advisory community has changed in the past 10 years in light of such an enormous event for the industry.
The Mighty Fell and Got Back Up
For members of the advisory world, the crisis boiled down to a singular moment when, in the midst of the Lehman collapse, there came word that Merrill Lynch was being forced into a federally arranged union with Bank of America, which absorbed $50 billion in company shares.
At the time, this was almost unthinkable and served as a defining moment during a tumultuous time. Merrill with its 18,000 advisors and $2 trillion under advisory, was the firm responsible for bringing Wall Street to Main Street and a gold standard for others to emulate. That Merrill would cease as its own company was impossible to fathom. In some ways it must have been akin to the survivors of the Titanic watching the mighty vessel plunge into the icy sea. However, now 10 years after the crisis, it’s safe to say the ship has righted. Yes, it took a $45 billion bailout (which Bank of America has since repaid), and Merrill Lynch is now a component of Bank of America’s wealth management division. However, it was a rough start as many of the top producers jumped ship in the early transition months.
Bank of America kept the Merrill name, taking the jewel advisory business from the Merrill crown and making it a centerpiece. BofA's Global Wealth and Investment Management Business recorded a profit of $1 billion in the first half of 2018, up 20 percent from the prior year. The division, which includes Merrill and also U.S. Trust, has watched its advisors boost books of business by an average increase of about five households per advisor, compared to two households per advisor, which had been the average increase a year earlier.
Regulatory Drama Center Stage
With Dodd-Frank, Consumer Protection Bureau, DOL Fiduciary Rule, SEC Regulation Best Interest and state regulations, the regulatory environment has largely shaped the past 10 years in the financial industry. Primarily, regulations have driven the entire conversation in the community, from “How do we respond?” to “Is this even happening?” Advisors, even the many who have always faithfully served clients’ best interests even at the height of the mortgage mania, now face more stringent rules covering a range of activities.
For all of the new protections granted to consumers, there remains some fundamental mistrust of the broker and financial planning industry. The widespread crisis fallout — forcing more transparency — is seen by many in the industry as tough but healing medicine. Advisory business leaders may disagree on how to best incentivize sales forces (Merrill Lynch boosted its individual advisor's take-home cut by 2 percent at the start of 2018), but all would agree that clients deserve to be in-the-know when it comes to risks and rewards on both sides of the table.
Interconnectedness Remains the Same
What couldn't, and to some extent still can't, be fully grasped about the overnight collapse of Lehman is the sheer swiftness of it all. It is now clear that giant banks highly leveraged and subsisted largely on short-term funding arrangements. For all of the hand-wringing over the "too big to fail" dilemma, the reality for banks is that they are larger and still leveraged, which in many ways is the nature of how banks can and will operate. They are still reliant on short-term financing and interconnected in ways that many can’t quite figure out how to untangle. We’ll see if the next 10 years helps to shed light and potentially even resolution on these issues.
Rich Blake A veteran journalist based in New York City, Blake has covered the financial world for numerous publications, including Institutional Investor, ABCNews.com and Reuters. Blake was a co-founder and executive editor of Trader Monthly magazine. The Buffalo native is the author of three nonfiction books, including “The Day Donny Herbert Woke Up,” which is currently being adapted into a motion picture. In 2004, Blake was nominated for a National Magazine Award in the Reporting category for Institutional Investor.