By William Davis


Remember Bear Stearns? How about Lehman Brothers? If you don’t, you should. We all should. Both were classic American success stories with roots tracing back to Wall Street’s earliest days. Both firms weathered the Crash of 1929 and survived the Great Depression of the Thirties. Both shops went public on the New York Stock Exchange in the Eighties and were among America’s most admired companies at the turn of the century.

And both were out of business by the end of 2008.

August 9, 2007:  Bottom Story of the Day

“People holding instruments don’t appear to know what their value is. For this to have come as a surprise to them was a shock to the market.” UBS Financial Services

We’re reminded of the former trading houses because it was ten years ago last Wednesday when a glimpse of what would become the Financial Crisis of 2008 first came into view. On that day, the French bank BNP Paribas quietly froze three of its money market funds, saying a lack of trading in subprime securities left them impossible to value.

August 10, 2007: Bottom Story of the Week

“We’re providing liquidity to facilitate the orderly functioning of financial markets.” The U.S Federal Reserve

While certain corners of the bond market seized up immediately, the larger meaning of the event was lost on white-shoe industry executives and cloth-headed central bankers responsible for overseeing them. In truth, the U.S. mortgage market was packed with loans that wouldn’t be repaid, and credulous investors around the world were paying up for highly rated securities that were, in fact, junk

August 11, 2007: Bottom Story in the History of Wall Street

– “Overall, we believe that it is important not to succumb to an emotional desire to sell before things get worse.” Citigroup

So, here we are ten years later, and the global markets are quietly humming along. Too quietly, perhaps. We’re told that options on the S&P 500 suggest there’s less than a one-in-ten chance of a 20% rise or fall in the market over the next year – a reading lower than any time since the start of 2007. One could easily get lulled into a false sense of security by these extraordinarily calm markets. Unless, of course, one remembers the painful lesson of Bear Stearns and Lehman Brothers.

What the equity markets have been doing…

Weighed down by a handful of disappointing corporate earnings reports, most U.S. equity benchmarks sunk across the period. The Dow’s, though it did manage a slight gain for the two-week stretch, saw its streak of nine record-setting high closes end on Tuesday, in large part due the noise between the U.S. and North Korea. More substantial losses followed on Thursday, with the tech-heavy NASDAQ leading the way down, losing more than 2% on the day.

On the earnings front, Disney traded down after reporting weak second-quarter results. Several major retailers also lost ground after disappointing numbers, including Macy’s, which declined more than 10% on Thursday. News on the economy was mostly good, meanwhile, with reports showing job openings reaching a record high in June, while new jobless claims remaining near historic lows.

INDEX Friday’s Close One-Week Point Change Year-to-Date Change
DJIA 21858.32 +28.01 +10.60%
S&P 500 2441.32 -(30.78) +9.04%
NASDAQ 6256.56 -(118.12) +16.23%


What the fixed income markets have been doing…

With geopolitical tensions boosting demand for safe-haven investments, yield on the 10-year U.S. Treasury note touched its lowest level since June, though heavy new issuance activity restricted similar gains in the investment-grade space. Similarly, new supply contributed to weakness in the high yield bond market. Municipal bonds, meanwhile, recorded solid gains, supported by healthy demand, oversubscribed new issues, and limited offerings in the secondary market.


FIXED INCOME Period YTD 12 Months Yield
U.S. Treasuries
2.7% -(1.2%)% 2.2%
U.S. Investment Grade NC 4.6% 2.0% 3.1%
U.S. High Yield +0.4% 5.3% 8.9% 5.8%
U.S. Municipals -(0.1)% 4.9% 0.8% 2.1%
Non-U.S. Developed NC 9.7% -(1.8)% 0.8%


What the numbers are saying…

$4 trillion

The upper estimate of the collective funding shortfall faced by U.S. public pensions. Despite double-digit investment returns for many public pensions, they have only 70% of what is needed to pay future benefits to police, firefighters, teachers, and other public workers.

What the pundits have been saying…

 “People always come up to me and ask what the next ‘big short’ will be. The truth is I simply do not have an answer, and do not want to have an answer to this question. I lived through this period and do not want to see anything like it again.”

— Steve Eisman, American businessman and investor

What people have been saying…

“Does it make sense to offer a seven-year ARM tied to Libor when Libor is not going to be around in seven years?”

            — Kirstin Hammond, United Wholesale Mortgage

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