To emphasize my point, consider the timeline below that led up to the destruction of Lehman Brothers—the event that ushered in the most-recent market debacle and subsequent recession.
February 27, 2007
Freddie Mac (Federal Home Loan Mortgage Corp.) announces that it will stop buying the most risky subprime mortgages/ mortgage-related securities
April 2, 2007
Major subprime lender New Century Financial Corp. files for Chapter 11 bankruptcy.
June 1, 2007
More than 100 bonds backed by second-lien subprime mortgages downgraded by Standard and Poor’s and Moody’s Investor Services.
June 7, 2007
Bear Stearns alerts investors that it is suspending redemptions from its High-Grade Structured Credit Strategies Enhanced Leverage Fund.
July 11, 2007
612 securities backed by subprime residential mortgages placed on a credit watch by Standard and Poor’s.
July 24, 2007
Countrywide Financial Corp. issues guidance of “difficult conditions.”
July 31, 2007
Bear Stearns liquidates two hedge funds that specialize in mortgage-backed securities.
August 6, 2007
American Home Mortgage Investment Corp. seeks Chapter 11 bankruptcy protection.
January 1, 2008
On the verge of collapse, mortgage lender Countrywide Financial is bought out by Bank of America, at a substantial discount.
March 24, 2008
Facing collapse, investment bank Bear Sterns is purchased by JPMorgan Chase.
July 11, 2008
The Office of Thrift Supervision shutters IndyMac Bank, handing deposits over to the FDIC for protection.
July 15, 2008
To protect mortgage lenders, the SEC temporarily prohibits the naked short selling of the securities of Fannie Mae, Freddie Mac, and primary dealers at commercial and investment banks.
September 7, 2008
On the brink of collapse, Fannie Mae and Freddie Mac are placed into government conservatorship.
September 15, 2008
Plagued by toxic assets, Merrill Lynch is forced to sell itself to Bank of America.
September 15, 2008
As Lehman Brothers fails, the Dow Jones Industrial Average plummets more than 500 points in a single day.
There were plenty of warning signs that went unheeded. Next time, when there is a next time, will you see the train coming?
Even on the brink of disaster with ‘all the handwriting on the wall,’ the human psyche clings to hope, revels in denial, and just won’t wake up and smell the coffee! The power of the status quo and “faith in our institutions” is just too powerful (for most of us). Fear of change, fear of the unknown, and a lack of appreciation of the surreal, colors our perceptions pretty much on a daily basis.