As we mark the five year anniversary of the financial crisis we have many reflections. I will spare myself and readers a rehash of the gut wrenching feelings most of us had at the time and instead reflect on some of the progress we have made.
Five years ago there were many companies in Corporate America teetering on extinction. Be it the mom and pop shops or the corporate behemoths, management teams that recognized early on in the crisis that it was not business as usual, and difficult decisions had to be made have survived and, in most cases, now thrive. Those management teams have seen their way through by improving the financial management of their companies and recognizing the value of strong balance sheets. Today, Corporate America runs lean with strong cash flows and low debt levels. This has been reflected in equity market valuations. Difficult as it was, equity investors who had the courage and discipline to stay with their long-term investment plans have been handsomely rewarded. Domestic companies have made strong recoveries, and equity markets flirt with new all-time highs.
Second, as we all know, what set the ball rolling was the reeling and near collapse of the financial system. The Dodd Frank bill is the set of financial industry regulations created to address issues that lead up to the crisis in hopes of preventing a repeat offense down the road. For all of the hand wringing, more than half of the regulations that emanated from the Dodd Frank bill have yet to be finalized and integrated into the laws. An important (maybe the most important) regulation is the required increase in equity levels on the balance sheet. Having more skin (equity) in the game is the number one way to draw and maintain increased attention by management teams to the risks being taken within their respective organizations. In addition, the implementation of stress tests for the banks and requiring the large banks to have “living wills”, which are essentially road maps for winding down the various businesses, are significant and positive developments. However, key issues such as “Too Big to Fail” and the Volker Rule (separation of banking vs. investment banking activities that lead to taxpayer capital being exposed to undue levels of risk) have yet to be resolved. The issue of “Too Big to Fail” is particularly complex as our system is much more fragmented than most other nations of the world. Despite the crisis, there is more concentration of assets in the hands of the 10 largest banks today versus five years ago. While it will likely take much more time to resolve the implementation of regulations, the fact that people are focused on the issue is some consolation. Perhaps the length of the bill (2300 pages) also has something to do with the inability to have more of the regulations implemented. A more circumspect approach that is less prescriptive would probably help, but then Washington wouldn’t be Washington.
The pain suffered in 2008-2009 was excruciating. However, the economy, albeit weak, has recovered. Financial institutions, by their very nature, will always be fraught with risks. However, on a relative basis, today’s risks are significantly reduced versus just a few short years ago. In addition, the investment opportunities in today’s domestic equity markets verves five years ago provide healthier better-run companies with solid fundamentals and opportunities. All of this bodes well for investors willing to stay the course of their investment plans.
As always, all comments are welcome.
Denise M. Farkas, CFA