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  • Writer's pictureMatt Oberholzer

2008 Financial Crisis Versus Today

Updated: May 8, 2023

Part of having a financial plan and preparing for financial goals is having the ability to withstand market volatility. There will always be times that make it difficult to stomach the volatility, times such as the 2008 Financial Crisis as well as the drama that we are experiencing once again in the banking industry.


2008 Financial Crisis Summary


The foundation of the global financial crisis was built on the back of the housing market bubble that began to form in 2007. Banks and lending institutions offered low interest rates on mortgages and encouraged many homeowners to take out loans that they couldn’t afford.


Lenders created new financial instruments called mortgage-backed securities (MBS), which were essentially mortgages bundled together that could then be sold as securities with minimal risk to the institution.


Outdated regulations weren’t rigorously enforced allowing lenders to get sloppy with underwriting, thus the value of the securities couldn’t be established or guaranteed.


Banks began to lend recklessly to families and individuals without true means to follow through on the mortgages they’d been granted. Such high-risk (subprime) loans were then inevitably bundled together and passed down the line.


As the subprime mortgage bundles grew, with a large percentage moving into default, lending institutions began to face financial difficulties.


Many who took out subprime mortgages eventually defaulted. When they could not pay, financial institutions took major hits. The government, however, stepped in to bail out banks.


The housing market was deeply impacted by the crisis. The stock market, in response, began to plummet and major businesses worldwide began to fail, losing millions. This, of course, resulted in widespread layoffs and extended periods of unemployment worldwide.


Ramifications


The Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as Dodd-Frank, was passed in 2010 in the wake of the 2008 financial crisis. It increased regulation of the financial industry with the intent of better protecting customers of the financial industry.


The law aimed to stop another potential financial crisis was by adding more mechanisms through which the government can regulate and enforce laws against banks and other financial institutions.


In 2017 there were several changes to the Dodd-Frank Act. Leaving fewer banks subject to the strictest federal oversight, today fewer than 10 banks must deal with the strictest regulations created by Dodd-Frank making it easier for small banks and community lending institutions to operate. Perhaps most importantly, many small and medium banks don’t have to do stress tests to see if they could make it through a severe downturn.


2023 Silicon Valley Bank


Silicon Valley Bank, known as SVB, is the biggest U.S. lender to fail since the 2008 global financial crisis – and the second-biggest ever.


During in the pandemic SVB and many other banks were raking in more deposits than they could lend out to borrowers. In 2021, deposits at SVB doubled.


They had to do something with all that money. So, what they could not lend out, they invested in ultra-safe U.S. Treasury securities. The problem is the rapid increase in interest rates in 2022 and 2023 caused the value of these securities values to plunge.


The bank recently said it took a US $1.8 billion hit on the sale of some of those securities. They were unable to raise capital to offset the loss as their stock began dropping. That prompted prominent venture capital firms to advise the companies they invest in to pull their business from Silicon Valley Bank. This had a snowball effect that led a growing number of SVB depositors to withdraw their money too.


The investment losses, coupled with the withdrawals, were so large that regulators had no choice but to step in to shut the bank down to protect depositors and the FDIC is now running the bank.


What About My Bank?


At the end of 2022, SVB was the 16th-largest bank in the United States with $209 billion in assets. That sounds like a lot – and it is – but that’s just 0.91% of all banking assets in the U.S.


Having said that, SVB’s collapse does highlight the risk that many banks have in their investment portfolios. If interest rates continue to rise, and the Federal Reserve has indicated that they will, the value of the investment portfolios of banks across the U.S. will continue to go down.


Fortunately, the federal government and other banks have moved quickly to guarantee depositors their money back in full. However, if you have more than $250,000 in deposits at your bank, we encourage you to use other financial vehicles to protect your money.


What About the Market?


I don’t know, and I won’t pretend to know what the market will do tomorrow, next week, next month or ten years from now.


The financial system is so deeply intertwined and the market is a reflection of companies performance as well as perceptions by individual investors. These perceptions are affected by rapidly rising interest rates, government regulators, Silicon Valley Bank fears and a variety of other topics. What I do know is that historically, despite having bad years as an investor, if you stick to your long-term plan, your portfolio will continue to rise.

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