By: Lyn Alden
This past weekend marked the tenth anniversary of the collapse of Lehman Brothers, the large U.S. investment bank that was near the center of the 2008 financial crisis. After being in business for over 150 years, it became by far the largest bankruptcy to ever occur in the U.S., with over $600 billion in assets at the time.
As such, financial media this past week was dominated by discussions about the financial crisis, Lehman Brothers, and whether the current financial system is stronger than it was back then or not.
At least on paper, banks are stronger than they were during the run-up to the 2008 crisis. For example, regulations ensure that banks carry more capital and less leverage than they used to. So, their equity as a percentage of assets has never been higher:
And every year, major banks undergo stress tests by the Federal Reserve to ensure that they have enough capital to withstand massive loan losses. Any banks that fail the stress test are blocked from increasing dividends or share buybacks until they solve the problems they failed.
In addition, household debt as a percentage of GDP is much lower now than it was during the 2006/2007 run-up towards the financial crisis:
Banks are being more stringent with lending standards, generally require substantial down payments on homes, and require decent credit scores for most types of lending activities.
As part of the coverage, both CNBC and Bloomberg interviewed Ray Dalio this week. Dalio founded the world’s largest hedge fund, has a net worth of about $18 billion, and was one of the major voices in 2007 warning against excess leverage before the crisis occurred.
This time around, Dalio said the next recession is not likely to be as financially severe as the previous one, although he is concerned that in this era of political polarization and high wealth concentration, that it may be politically and socially more difficult to navigate successfully.
In addition, he warned that we’re likely in the 7th inning of this current business cycle, or rather late in the game with perhaps two more years left before the next recession. Most of the indicators he watches are “flickering” but not quite “flashing”, as he put it. With rising interest rates, high asset prices, corporate leverage around all-time highs, the major cash repatriation from the corporate tax cuts mostly behind us after 2018, he considers it a good time to be more defensive in the markets.
In other words, in his view there is more downside risk than upside potential from this point, although recession indicators still show that one is likely not imminent.