10 Years Later, Many Deep Scars From the Financial Crisis Remain

September 16, 2018 by Jon C. Ogg

It has been about 10 years since the collapse of Lehman Brothers and since the forced buyout of Bear Stearns. The financial crisis turned into the Great Recession, and many of the former top banks and financial institutions have vanished or altered drastically. Even though the financial markets and economies have all by and large recovered from the financial crisis, there are still scars left over from it that are clear and present today.

The causes of the financial crisis were too many to list. Entire books have been written about them, the drama during the crisis has been covered in the media endlessly, and there are warnings every day that the next crisis could be around the corner. Beyond cause and effect, many issues scarred the public during and after the financial crisis and Great Recession that are still very present, even in 2018. And many of these scars seem very likely to persist in the coming years as well.

24/7 Wall St. has evaluated those scars. Admittedly, this has more of an American focus than an international focus. Also worth noting is that an indefinite number of additional scars will remain in place for years and are the aftermath of the Great Recession and financial crisis of the past decade. There is also no way to categorize which scar is the most prevalent because that varies from person to person and from group to group.

Specific instances are included to keep the generalizations from being too broad and vague, but again there are simply too many scars to adequately address here. So, here are eight deep scars that are still very evident a decade after the Great Recession and financial crisis.

1. A New Financial Vocabulary Was Created

Before we get into all the painful scars from the financial crisis, it is important to understand that the financial terminology that governed investing and the economy has changed. Some of it has been made up, some from thin air. After all, the crisis was unprecedented, so unprecedented terminology had to be created.

Former Fed Chair Alan Greenspan was notorious for terms such as “irrational exuberance” and “cupidity” during speeches and testimony. The financial crisis went above and beyond that for new terminology. Many readers know these terms as though they have been burned into their brains over the past decade. That said, one simply cannot overlook how much this has changed since pre-crisis levels. Many of these terms overlap, but they also never really existed before the crisis:

  • Quantitative easing: When you have already taken interest rates down to zero but have to keep coming up with ways to save the system.
  • Negative interest rates: Yes, you might not make any money at all lending to a government, and you might even just be happy to let them keep some of that money when you get it back.
  • Too big to fail: After the pain of seeing Lehman, Bear Stearns and the takeovers of Countrywide, Wachovia, WaMu and others, the nation’s top banks became so large that if any single one of them were to fail then they could topple the entire financial world.
  • Systemic risk: Similar to the too big to fail notion, this term became synonymous with bailouts and was applied to many institutions in which the failure of one might cascade throughout larger and smaller banks and institutions alike.
  • The Great Recession: Your grandparents may have endured the Great Depression of the 1930s, but there had never been anything worse than “normal recessions” in the post–World War II years until 2008 or so. The recession was so bad that they named it the Great Recession. So what if there was nothing positive about it?
  • Algorithmic and machine trading: There has been an explosion in trading by machine. This was present before the financial crisis, but nowhere close to what it is today, in a world where physical financial market exchanges have no floors or are run by a skeleton crew. Now the “algos” and machine-trading, in part aided by the explosion of exchange traded funds, account for the majority of individual stock trading. They also control billions upon billions of dollars worth of financial market trading every hour in equity indexes, futures markets, Treasury and debt markets, currencies and commodities, and so on.
2. Long-Term Savers Suffer as Treasury Yields Remain Muted

If you feel like you just don’t get paid that much for buying long-term or short-term debt these days, there is a reason. Despite the fears of quantitative easing, Treasury yields still remain vastly muted compared with pre-crisis years. In fact, the new normalized yields are probably going to be lower for a lot longer than the pre-crisis levels. Even with all the dread over the Federal Reserve hiking interest rates in 2017 and 2018, and likely ahead, the yields still remain very muted for long-term savers who want safety.

One thing that did occur in the financial crisis is that long-term Treasury bonds saw their value scream higher. There is an inverse relationship price between price and yields, which means that savers today effectively have to pay a larger premium for locking in a sure return over the long-haul. It also means they are getting lower returns for that guarantee.

The 30-year Treasury yield historically has been considered the ultimate safety trade for long-term savers. When yields are great, you can lock in that yield for 30 years and just live off the coupon payments. Even in 2018, the yield on the 30-year Treasury bond is barely over 3.1%. That is up from July of 2016, when the 30-year Treasury yield was barely 2%, but the yields of today are still a half-point lower than they were at the start of 2014 and are a full 2% lower than they were on average for one-third of the time between January 2016 and June of 2017.

3. There Are Still Negative Yields Outside of the United States

When investors buy into debt, they are effectively loaning money to a borrower, and let’s just assume that borrower is one of the governments in Europe or in Japan. They are supposed to receive interest for being the creditor. That’s at least how it has worked until recent post-recession years. When Europe and Japan delved further into quantitative easing than the United States could have ever imagined, they went so far as to have negative interest rates. This is where a creditor is so happy for the safety of lending money to a government that they are willing to accept a slightly lower payout in the future.

Having a negative yield on a debt would have sounded crazy in decades past. If inflation and hyperinflation are risks to real long-term savers, imagine if you locked in a negative yield for 10 years or more and what that would do to your savings. Still, that’s where we are. It is almost as if global investors inside and outside of these countries who lend to them are paying a sharp storage fee to a foreign equivalent of Fort Know to protect their cash from roaming hordes of thieves, barbarians and brigands.

24/7 Wall St. recently discussed how eight nations currently are suffering from sky-high interest rates and inflation. That just isn’t the case in much of Europe and in Japan. Interest rates remain low in most of the developed world today, but the thought that there are still negative yields, where investors and banks are willing to receive less than they lent to a government, should baffle the hell out of the rest of us.

4. Many Major Bank and Non-Bank Dividends Are Still Lower Than Pre-Crisis Levels

Bank stocks were serious dividend stocks ahead of the financial crisis. Lending all the crazy mortgages, the cash-out refinancing and having credit cards and credit lines out to anyone who could stand on two feet was insanely profitable — right up until it wasn’t. Then the you-know-what hit the fan. The major banks all came under the thumb of regulators, going into and after the bailouts, and much of the oversight today is far more restrictive on what banks may do with their earnings. That’s mostly a good thing, with some exceptions, but banks have to get their capital allocation plans approved, along with stress tests and reviews of capital ratios for deciding how much they can spend on stock buybacks and how much can be paid out for dividends.

Many of the top banks have seen their dividends recover handily, but the two money center banks with the bulge bracket investment banking arms still have lower dividends on their common shares than they did from before the financial crisis.

Bank of America Corp. (NYSE: BAC) had a $0.64 dividend in mid-2008 that went down to $0.32 for one single quarter before getting slashed to $0.01. That one-cent paltry quarterly dividend was not raised until mid-2014, when it went to five cents. Now the dividend has been raised from $0.12 to $0.15 this year.

Citigroup Inc. (NYSE: C) had a $0.54 quarterly dividend per share back in 2007, but it dropped to $0.32 in 2008, before being slashed to $0.16 for one quarter and ending up at the same $0.01 per share at the start of 2009. That one-penny quarterly dividend could not be raised until mid-2014, when it went to five cents. In 2018 the dividend was raised from $0.32 to $0.45.

And look at the situation at General Electric Co. (NYSE: GE). GE is a non-bank that was for years evaluated as half-bank and half-conglomerate. GE has never fully recovered and was even kicked out of the Dow Jones industrial average (and replaced by Walgreens!). GE’s shares have lost more than half of their value in just over a year, it keeps paring down financial activity, and its dividend is still at risk. GE might not be a bank, but its structure after 2020 may not even exist as it is thought of today.

5. Many Investors Remain Scared and Think Stocks Are Set to Crash All Over Again

Many investors simply have not participated in the great bull market that is about 10 years old. In the peak of the craziness in the financial crisis, stock investors were witnessing what might have become a total meltdown. That could have happened, but it didn’t. And the low yields from bonds were one of the signs telling investors that the risk was worth the reward after March of 2009. The S&P 500 bottomed out at a price of roughly 666 at the time. The S&P 500 peak of 2007 was roughly the same as the peak of 2000, which we will call a rounded number of 1,500 for argument’s sake. It was not until the end of 2012 and the start of 2013 that the S&P 500 recovered all its losses.

Zoom forward to 2018, and the S&P 500 has hit all-time highs basically year after year. It now sits at roughly 2,900. Investors can wish they followed Warren Buffett’s advice to be greedy when others are fearful all they want, but the reality is that most investors get shaken out of the stock market after big sell-offs rather than being opportunists. Very few people “loaded the boat” in stocks in March of 2009 and have held and added to their positions the entire time. Still, the stock market has been in a breakout bull market pattern for more than five years now, and many investors have either been on the sidelines or decided to get back into stocks only recently.

When investors are looking at the long haul, a lifetime of saving until retirement, it is no wonder so many people will be undersaved, by a long shot. This is what happens on the backside of the financial crisis. What may seem like a garden-variety stock market sell-off turns rapidly into a bear market, and then there is a financial crisis, and the fear that sets in becomes long-term paralysis.

It would probably be foolish to pile in every dollar of savings into the stock market all at once today, but just look at what that fear-turned-paralysis has done for those who are scaredy-cat investors. And watching mainstream media and financial media every day may not help out. They get better viewership and keep people more glued if they keep using phrases like “bubbles,” the “next crash,” the market “can’t sustain itself,” the stock market is “rigged against the little guy” and so on. Another bear market in stocks eventually will come. That is inevitable. But just look at the opportunity that has been missed in the past five years alone (let alone nine years).

6. The Top Banks Still Dominate the Total Amount of Assets and Deposits

When the big banks were bailed out in the years of the Great Recession, many investors assumed that the community banks and regional banks would get their shot at taking over where the big banks left off. Yet, that just didn’t happen. Too big to fail and systemic risk be damned!

The too-big-to-fail banks have become even larger. A fresh CNBC report noted that the top 10 U.S. banks, including JPMorgan, Wells Fargo, Bank of America and Citigroup, now have control of more than 50% of all assets from the top 100 commercial banks. JPMorgan has doubled its assets, Bank of America has seen its assets rise almost 50%, and Wells Fargo might be even larger had it not been for its scandals and regulatory caps put on it.

An early 2018 report from the Wall Street Journal noted that the three largest U.S. banks (by total assets) had added over $2.4 trillion in domestic deposits over the past decade. That was said to exceed what the top eight banks had combined in 2007. It also shows that JPMorgan, Bank of America and Wells Fargo all managed to complete significant deals during the financial crisis, although there were questions about the size and business activities of these larger banks. The trifecta of these banks held about 32% of all bank deposits (roughly $3.8 trillion), versus about 20% in 2007. And in 2017, roughly 45% of all new checking accounts were opened at those top three banks, and that is having only about 24% of all U.S. bank branches.

7. The Mortgage Market Remains “Subsidized”

If an economy is to be considered good beyond unemployment and gross domestic product (GDP), there really needs to be a strong housing market. Without one, it can become difficult to unlock the many thousands of dollars of equity that has built up over the years. People can become trapped in a home they cannot sell, and that means they might be unable to afford the home when the next recession hits. And people who need to relocate for jobs (America currently has more job openings than it does able bodies to fill the jobs) often cannot do so if the housing market prevents them from selling in a reasonable manner. Housing was subsidized in many ways before the financial crisis, but it remains highly subsidized (more in some cases) a decade after the financial crisis.

If you want proof that the government and the public want housing to remain subsidized, look no further than Fannie Mae and Freddie Mac. These two government-sponsored entities still rule the roost when it comes to traditional housing purchases under conforming loans. Politicians and many financial market critics argued that Fannie and Freddie needed to be killed ahead of, during and since the financial crisis. They played an undeniable role in many of the mortgages that should have never been allowed. Yet here we are a decade later, and Fannie Mae and Freddie Mac still exist — and they pay money to the Treasury now, and there is no active effort underway that has a chance of ending their ability to operate.

Regulations around the strict lending rules have started to become less stringent over the past few years. Some lenders are not requiring the traditional 20% down payment for home buyers to get a mortgage, and there has even been a return of the famed no-interest loans that helped fuel the fire of the financial crisis. This was destined to happen, but many borrowers are still nervous about getting too attached to a home they might be unable to get keep. And there are still regional pockets in American cities and counties that are almost ghost towns compared to a decade ago.

Even with tax reform, mortgages were kept in the game. Many people have argued that interest and/or property taxes should not be deductible against taxable income. The limits may have come down under tax reform, but this implied subsidy remains. Again, both sides of the government know that there has to be a healthy housing market to have a strong economy. And the real estate and mortgage lobbies are quite powerful and influential in protecting their interests when it comes to housing.

An early 2018 figure from Zillow showed that the value of the U.S. housing market was almost $32 trillion. That’s 1.5 times the size of the entire U.S. GDP. The housing market remains subsidized because another housing crisis would scar yet another generation of home buyers.

8. The World Is Addicted to Economic Stimulus

Despite a major economic recovery, the world remains addicted to fiscal stimulus. You can debate the whys and hows all day long, but at the end of the day there is no single world leader or central bank head that wants to preside over the next financial meltdown. Economic stimulus is new and was used, via traditional easing methods, prior to the financial crisis. It’s at a whole new level these days, and parts of this have been addressed or alluded to here.

Despite the U.S. Federal Reserve hiking interest rates and signaling that it wants additional rate hikes, the Fed still refers to its economic policy as “accommodative.” That is stimulus via lower than normal interest rates, even if it falls short of the efforts in prior years. The Fed still also holds well over $4 trillion worth of Treasuries, mortgage-backed securities and agency debt. And the Fed is doing a very slow bleed-off of those assets so it doesn’t spook the market. There was also tax reform in the United States, which some people argue only helps America’s wealthiest but all tend to agree was a huge boom for corporations.

We already mentioned the negative interest rates in parts of Europe and in Japan. European Central Bank head Mario Draghi has used the term “whatever it takes” to keep Europe moving back toward recovery. His timeline for when rates will be hiked points to the end of 2018 or early 2019, but it seems to have been delayed and delayed. Japan has bought up much its own debt with money created out of thin air, but the Bank of Japan also owns stocks and has proven that it is willing to buy more if it thinks it needs to.

The media and market professionals have referred to China as the “growth engine of the world,” but in a 2018 world it is doing whatever it can come up with (within reason, anyhow) to keep bolstering its growth and to keep its economy growing. With risks of a trade war growing each month, China’s equity markets have suffered in 2018. China has made moves to lower the value of its currency without damaging its credit ratings and ability to trade. It has made some efforts to lower taxes by a marginal amount, it has injected capital into its banking system and it still has trillions worth of ownership in its “state-run entities” in energy, telecom, metals and commodities, and so on.

And now there are real-world currency scares and instances of incredibly high interest rates in some of the world’s formerly prime emerging markets. Even after the United States finally turned in GDP growth of 4% again, the world remains addicted to stimulus, and there is no end in sight.

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The reality is that there are an endless number of instances where you can see the continued scars of the financial crisis and the Great Recession still quite present today. We have only been able to touch upon a few of them here, but here are just a few more to consider.

Many employees have been and remain without the basic modern era skills needed to fill jobs. Many business owners remain scared to fill all of their vacant job openings, and one of the reasons is the reminder that a recession can come again. And many businesses do not want to invest in new plants and capital equipment to fund future growth because they have mountains of excess capacity.

Lower pay for many millennials persists if they entered the workforce from 2007 to 2012. The level of student debt keeps rising and limits the ability of people to go out and buy homes, cars and other items that prior generations took for granted. There is even a growing percentage of Americans who think a move toward socialism would be good. And the opioid crisis in America riddles many areas where the recession hit an area harder than others.

There will be another recession one day. It’s inevitable in the economic cycle. And right now the United States is a $20 trillion economy in GDP terms, with about only a 4% unemployment rate and with more job openings than able bodies to fill those jobs. Still, many deep scars are very evident as holdovers from the financial crisis a decade ago and are very likely to persist in the years ahead.