Investing - Theory, News & General • Financial crisis of 2008 - Inside Job

Just saw the excellent documentary "Inside Job." It's available now on YouTube for free:

https://youtu.be/T2IaJwkqgPk?si=CL-Fg9XwXRW7CDrJ

Also available for free on Amazon Prime, if you get that.

Well worth a watch. I was actually at Fannie during the meltdown and remember a lot of this like it was yesterday. The documentary does the best job of explaining securitization (and a lot of other things) that I've seen to date.

I had a lot of takeaways from this. You have to reflect continually on how you can survive financially through the inevitable shocks to the financial system. Make more money. Spread your bets. Don't eschew safe investments. Beware of the bubble and the "can't lose" schemes.

I used to recommend this documentary as a counterpoint to "The Big Short" which has a sort of human interest story of the same things.

(I'd also recommend the Director's film No End in Sight as a documentary - again, the first pass of history).

The film though that I wanted my students to see was "Margin Call". Margin Call is an exquisite depiction of a financial institution on the brink. The personalities, the politics, the meetings, the dialogue is just exquisite.

I have sat on sales calls like the climatic scene in the movie - on the other side. The Director's father worked at Merrill Lynch for 30 years, and it showed. Oh did it show.

The lessons for people here come up, again and again, when we have things like c****o (can't discuss here). Paeans about the inevitability of some trend -- and how we here have seen it when financial markets as a whole just don't realise. "Artificial Intelligence" stocks were all over various threads some months ago. And of course there was Tesla - which come to think of it has morphed into an AI stock We had people taking on leverage to buy Tesla.

Also the point about volatility of financial markets.

To be honest, 2008-09 was not like any other financial shock I have experienced in nearly 40 years of investing (gulp). I mean the Asia Crash of 1997-98 was like that for people in those countries, but I was never a specialist in that area. Dot Com was personally more damaging, but there wasn't the sense that the world was ending. I mean 9-11 had that kind of visceral shock but not about finance. In 2020, we were in Asia as the world was shutting down from Covid. There were 3 last flights out of Kuala Lumpur before they shut the airport (having already closed all the hotels): Addis Ababa, Narita (Tokyo) and Heathrow (London) and we were on the one to the airport. We arrived to a city almost totally silent - it's only ever like that on Christmas Eve. That too, was strange beyond belief, but I don't remember having financial anxieties.

It was seeing the world's largest financial institutions teeter on the edge of oblivion. When the UK Chancellor of the Exchequer Alistair Darling was called out of a meeting late Thursday to be told by his civil servants that "RBS was in real trouble". "How bad?". "There won't be any money in the bank machines (ATMs) by Sunday morning". When in a moment which was so quintessentially British, defining "Churchillian", that I could fall down and kiss the pavement for my adoptive country, the Prime Minister got up and said (to paraphrase) "Things are bad. They may get worse. We shall do what is necessary. If that proves not to be enough, then we shall do more". And a New York columnist wrote "Did the United Kingdom's Prime Minister just save the world?".

The point about stocks is that what you cannot imagine, can happen. And long enough in markets, it will.

When we say stocks are a good long term bet, but for any shorter period than, say 10 years (actually 30) they can really slam you, then we are not kidding.

I've already experienced one "lost decade" in my investing career (2000-10) and no doubt there will be other torrid periods. I hope I never see anything like Q 4 2008 again.

Profound. I need to watch the documentary and remember how bad things got in 2008/9 when I was in young accumulation mode!

It's a red rag to a bull because of cognitive bias (we rate what someone says by whether their political orientation matches ours) to even mention the name but also look up the column "Did Gordon Brown Just Save the World?" in the New York Times at the time. The point of the article was that he had, perhaps (and subsequent events say "yes")-- but that it was somewhat unlikely that anything a British Prime Minister did could have those sort of impacts.

The columnist was famous for studies of Emerging Market financial crashes (among other things) - one of the leading academic models of same. The point of the article was an echo of something that said columnist had written at the time of the Long Term Capital Management crisis (Autumn 1998). Which was that Alan Greenspan had somehow rallied markets - even though the Fed didn't have any actual power to turn things around. (This was well before the era of Quantitative Easing). That the leader of (let's face it) not that important a former Imperial Great Power, could turn world financial markets by an action - basically underwriting the solvency of Royal Bank of Scotland (then the world's 3rd? largest bank by assets, at least briefly) and HBOS (later merged with Lloyds).

I had a friend who was a very senior fund manager in the City of London. He told me that "if you don't have your money with HSBC, it's basically not safe". To be told that basically all the other main British retail banks: HBOS, Lloyds, Barclays -- that these were effective insolvent. In what was then the world's 5th or 6th biggest economy. The deposit insurance limit was £30k then, and I had friends who were going up the High Street, opening up accounts in each bank and building society (S&L) and depositing £30k in each one.

The British taxpayer became the investor of last resort for the British banking system-- we sold out of Lloyds (which bought HBOS) eventually for about breakeven. RBS we are down £28bn or so (and still own more than half the bank). And although Britain is only a medium sized player in world affairs now, the City of London was the world's Number 2 financial centre after New York. And so things spread from the centre. What that did was give cover to every other country's leaders to make the same guarantees for their financial institutions. And for the TARP (?) to be used to buy *equity* from banks - which wasn't its original purpose.

We were in a situation remarkably similar to the Wall Street Crash of 1929, and the subsequent failure of Credit Anstalt in Vienna in 1931, which led to a collapse of the world's multilateral payments system. (An even better example would have been the crisis in the City of London in summer 1914, when the entire mechanism for financing world trade (discount bills) failed - but because the world was gearing up for the War to End All Wars, that crisis has passed almost entirely from memory). The dominos had started to fall - very fast.

We are still living with the financial, political and economic aftershocks of the crisis. This is similar to Systems Control Theory (the guy in the next bedroom to mine at university was a friend of mine, who did his MSc on the subject). If you perturb a complex system with a shock then you can have aftershocks for very long periods of time afterwards (they had a neat demo of this in the lab - tapping a robot arm, it stabilizes after a bit, but then later on goes whonky again).

Statistics: Posted by Wannaretireearly — Tue May 21, 2024 11:59 pm — Replies 41 — Views 6089