SARASOTA – This weekend marks five years since an event that helped trigger the economic crash into the great recession.
Investment giant Lehman Brothers declared bankruptcy. Effects of the company's collapse still remain today. But Wall Street's risky investments, heavy borrowing to make them, and the sub-prime mortgage mess, all converged to swallow a $600 billion company in the largest bankruptcy in U.S. history.
When the bell rang to open the New York Stock Exchange Friday, it opened above 15,300, a height hard to see back in 2008, starting September 15th.
“The market had a big drop that day, and that set the tone for much of 2008,” says Bruce Bittles, Chief Investment Strategist for R.W. Baird & Co. in Sarasota. We watched as, ten more times that year, the market dropped more than 400 points in a single day. In all, eleven of the top one-day point drops in the Dow's history happened between September 15, 2008 and the end of that year. Lehman brothers' epic collapse reached far beyond wall street.
“Individuals were hurt in two fashions,” Bittles says. “One, their 401(k) accounts were drastically reduced.” And, second, he says, their homes plunged in value. As many lost their jobs, they could not afford their mortgages any more, and the spiral grew. Congress passed laws to reform wall street, yet the banks too big to fail back then have only grown. “Five banks contol about 80% of the assets, so it hasn't changed in that regard,” Bittles says of the environment on Wall Street.
Because of that, he can't rule out another Lehman Brothers happening, or big banks needing a bailout, but he says a more-cautious wall street makes a similar collapse unlikely. “I think the adversity to risk now will prevent that to a large degree,” he says.
But five years later, have we recovered from the first Lehman Brothers? “The markets certainly have,” Bittles says. “The markets are back to where they were, or higher now, in terms of the popular averages. Now the economy has not.”
That's because though unemployment has dropped, three-quarters of jobs created this year are part-time, in a still slowly recovering economy from the crash that can trace part of its boom to one company going bust.