After an extremely turbulent 2008 and 2009, the global investment industry was greatly altered by the time 2010 began. Giant investment bank Merrill Lynch had been forced into a merger with Bank of America, and Lehman Brothers was allowed to fail completely. Global banking and investment industry leader RBS was bailed out by government capital to the extent that is became controlled by the UK government. Insurance industry giant AIG was bailed out to a similar extent by the American government. The world became familiar with phrases like “toxic assets,” and American taxpayers, whether they liked it or not, backed emergency plans and market support programs with acronyms like TARP (Troubled Asset Relief Program) and TALF (Term Asset-Backed Lending Facility). By the end of 2009, the U.S. government had created initiatives based on corporate bailouts, asset purchases, emergency lending and financial market support totaling more than $2 trillion. These were only a few of the massive changes wrought by the upheaval of the global financial crisis that began quietly in the late summer of 2007 and roared into a full financial hurricane in 2008.
Asset values plummeted at first, and trillions of dollars in financial worth were wiped out worldwide. Markets posted a spectacular rise in 2009, but in most cases did not reach former, 2008 peaks. Mutual fund assets in the U.S. totaled about $9.5 trillion as of November 2008, down from about $10.9 trillion one year earlier. By October 2009, they were at a much improved $10.6 trillion.
About 50 million Americans participate in 401(k) investment plans at their places of work, while tens of millions own stocks, bonds and annuities in their individual accounts. U.S. retirement account assets totaled about $14.0 trillion at the end of 2008, down 22% from one year earlier, according to ICI, the Investment Company Institute (www.ici.org).
The entire world was deeply affected by the financial collapse. According to ICI, global mutual fund assets were $26.15 trillion at their peak in the fourth quarter of 2007. By the end of 2008, they had plunged to $18.9 trillion. By the second quarter of 2009, the value had improved to $20.34 trillion.
From 2003 through the end of 2007, total household net worth in America (including the net value of homes and investments) climbed from $50 trillion to a peak of $65 trillion. (These amounts include stocks, bonds, mutual funds, pension accounts, life insurance, durable goods and household real estate.) By the third quarter of 2009, the amount was only $53.4 trillion.
By the end of the painful 2008-2009 period, the investment industry, on a global basis, had been through losses, layoffs, scandals, bankruptcies, forced mergers, government intervention, bailouts and/or disappointments on a scale not seen in decades.
Adding insult to injury was the stunning revelation in late 2008 that an investment manager in New York named Madoff was running an alleged scam that involved billions of dollars in losses to investors. Unfortunately, these investors included many charitable foundations, banks, colleges and pension plans, in addition to wealthy individuals, hedge funds and other sophisticated investors. How could such sophisticated investors be so culpable? How could regulators completely miss the fact that this was probably going on for years? Last, but not least, how could someone who was widely known and respected turn out to be evil enough to perpetrate such a fraud? The whole world wonders, and the reputation of the entire financial industry has been hurt as a result. The timing couldn’t have been worse, as investor confidence was already at an extremely low point. Numerous other smaller, but still significant, financial scams were uncovered throughout 2008 and 2009.
As the financial crisis unfolded, governments around the globe issued emergency funding to leading banks and investment banks. At one time, virtually all stock market indexes had been down by as much as 40% to 60%, depending on geographic location. A handful of extremely clever large investors made vast profits by skillful, courageous, contrarian investing during the turmoil.
Today, the investment sector as a whole faces significant challenges over the mid term. Government scrutiny will be intense while the industry attempts to reignite investors’ appetites for IPOs and bonds, as well as riskier investments such as securitized debts, venture capital funds and hedge funds. IPOs were nearly nonexistent for several months, but a modest market for newly issued stocks had re-emerged by the end of 2009, led by China.
The shakeup of the financial industry led many top investment bankers to leave major banks, voluntarily or not. Boutique and second-tier investment banks saw the shakeup as an opportunity, and they grabbed both clients and star employees from their large competitors. Investment banks such as Lazard, Evercore, Cowen and others turned chaos into opportunity. Several major corporate clients sought the relative calm of smaller investment banks during the turmoil. Brokerage companies, such as First New York Securities, took advantage of this unique opportunity to hire top traders who were formerly with the bigger firms.
A complete rebound of the banking and investment system will take a long and trying time. Nonetheless, by the beginning of 2010, economic growth had fired up once again in much of the world. China and India each posted significant growth in GDP for 2009, and the U.S. and other fully-developed economies appeared to have climbed out of the depths of the recession.
By the end of 2009, Wall Street had engineered a surprisingly strong recovery from the meltdown. Many companies were hiring large numbers of employees—a sharp contrast to the layoffs of 2008. (By one estimate, more than 250,000 U.S. financial sector jobs were cut in 2008.) Business had rebounded comfortably. A few financial companies, most notably American investment bank Goldman Sachs, posted tremendous profits for 2009. The question remains whether serious growth in IPOs, mergers and acquisitions (M&A) and other business will ensue in 2010-2011.
Investments, banking and financial services of all types have become globalized industries in recent decades, in the same way that the automobile, pharmaceutical, technology, energy and consumer goods industries have globalized. The globalization was fueled by four factors: 1) the availability of global electronic networks for distribution of funds and real-time information; 2) the easing of local regulations on ownership of investment and banking firms by foreign entities; 3) the opportunity to serve the needs of multinational corporations; and 4) the increasing attractiveness, from a banker’s point of view, of business assets and rising household wealth in emerging economies. New business opportunities were sought out globally by major banks and investment firms, especially in such booming markets as China and India.
The term Sovereign Wealth Fund (SWF) is used to describe a national government’s pool of assets available for investment. Some nations that are major exporters, such as the oil and gas exporting nations of Saudi Arabia, Kuwait and Russia, have earned massive amounts of excess capital, and their SWFs have become a major influence in the investment world of today. SWFs, since they are under governmental control, may be subject to cronyism and mismanagement. By the beginning of 2008, the world’s SWFs totaled about $3 trillion, according to estimates by analysts at Monitor Group. By early 2009, that amount had dropped to $1.8 trillion as a result of poor returns during the financial crisis.