Market History And Metaphors

“History doesn’t repeat itself, but it often rhymes,” Mark Twain supposedly once observed. As the Fed begins to shrink its balance sheet even as it determinedly jacks up interest rates, we would be prudent to consider where history has rhymed before and what we might learn from those instances.

2007–08

This is the tenth anniversary of the launching of a criminal investigation into the collapse of Bear Stearns. Here is a link to a quick chronology of the demise of the firm.

Reflecting on these ten years and the history leading up to and since the financial crisis is important. At Cumberland, we attempt to learn from history, and we respect it. Among our 40-plus people we have some oldies, some not quite so oldies, and also some youngies who were still students when Bear Stearns failed. Our youngest employee’s age was a single digit when the financial crisis entered its early stages.

Let’s think about this for a minute. Anyone in the financial services industry in the United States who is under 40 has no, or only limited, experience of the pre-crisis period. True, there are now many books for those who have the time and inclination to read about what unfolded. A couple of them are ours. But time has presented us with new issues, and ten years of excess reserves in the global banking system and ten years of zero interest rates have been applied as a lubricant to ease recovery following the crisis period.

Few remember that the first primary dealer to fail was Countrywide. And few have read the Federal Reserve history to see how the Fed amended its rules to facilitate the absorption of Countrywide into Bank of America. That was the first instance in which the Fed started to pick winners and losers. As my friend Chris Whalen reminds us, Washington Mutual wasn’t a primary dealer. It was treated differently than Countrywide was. For an interesting history lesson, see this Gretchen Morgenson column from June 2016.

We can now read how decisions to leverage up at Lehman Brothers were probably influenced by the notion that the Fed treats primary dealers differently than it does others. There was great surprise in autumn of 2008 when market agents learned that that was no longer going to be true.