On September 15, 2008, Lehman Brothers Holdings, Inc., announced that it intends to file a Chapter 11 bankruptcy petition. This filing will by far be one of the largest bankruptcies ever recorded. Over the weekend Lehman Brothers unsuccessfully attempted to regain control of their balance sheet by negotiating possible fire sales with several key banks.
This fallout is unprecedented but does not signal the end of our economy. Investment and regional banks that became intertwined with the subprime market have a tough road ahead and will have a difficult time surviving. Although painful to watch, this reconciliation is necessary for our country to financially right itself. Our government cannot continue to bail out banks that have been irresponsible in their lending. Doing so will only further derail our currency and contribute to higher inflation. Eventually, there has to be a level of accountability and I applaud the Federal Reserve Board’s Federal Open Market Committee for allowing this failure to occur. The American taxpayer should not be expected to bail out banks.
Some compare this extraordinary meltdown to the railroad collapse of the 1800s or the banking collapse of the 1930s that led us into the great depression. While there are some parallels, all of this is profoundly different and entirely manageable. We are not heading into another great depression.
Our economy is far stronger, wired, and better structured to handle this kind of event than we were in the 1930s. Although the FDIC keeps their list of troubled banks under lock and key, it’s estimated that there are only 120 banks in danger of folding. In all, 9,000 banks failed during the 1930s and depositors saw $140 billion disappear through those failures. In 2008, only 11 banks have been taken into receivership by the FDIC and losses have been minor. What many people don’t realize is that banks fail all the time and the FDIC can, at any time, step up in and restructure the bank and merge its assets into a soluble platform. For example, in 2002, 11 banks failed after the economy took a huge hit from 9-11. Source FDIC Our economy recovered and survived the financial storm. Lehman Brother’s bankruptcy was a necessary chapter in this period of resolution. It is time we clean our financial house and get back to a real economy of responsible lending and low-level consumer debt. Don’t let this steer you away from your long-term goals. Bank failures and market volatility can certainly contribute to financial anxiety. Yet, if you look at the big picture, this is only a blip on the screen, will have little impact on our lives, and months down the road will all but be forgotten.
The time has never been more right to start looking for value in a depressed market. Dollar cost averaging during corrective times in the stock market can lead to very positive results during market recoveries. Plant your seeds now.
Marc Schrenker is the Chief Portfolio Manager for Icon Wealth ManagementRead more