October 2008 - the month that nearly broke the world financial system

By mid-October 2008, the bankruptcy of Lehman Brothers had morphed into a far more serious crisis.  Bear Stearns was absorbed into JP Morgan in March 2008, Fannie Mae and Freddie Mac were effectively taken over by the US government in September 2008, but the failure of Lehman Brothers over the weekend of September 14th created a crisis of confidence that nearly broke the world financial system.  The US government was forced to take over AIG, an insurance company with a "Financial Products Group" that had created a liability of $85-200 billion as a result of writing "Credit Default Swaps" on Lehman and other bank debt.  Of even greater alarm, failure of Lehman Brothers commercial paper caused institutional and retail investors to doubt the safety of money market funds.  As billions of dollars roared out of money market funds, bedrock US corporations like General Electric and McDonalds feared that they could not fund daily operations.  The US Treasury issued a blanket guarantee of money market funds in late September, and also outlined a "Troubled Asset Relief Program" to restore confidence. Congress initially failed to authorize the $700 billion program on September 29th by passed a slightly revised version on October 3rd.  The 4 day delay kicked away whatever confidence remained.

Bank stocks cratered, with Washington Mutual the largest bank failure in US history and Merrill Lynch, Morgan Stanley, Goldman Sachs, and Wachovia tapped as the next banks likely to fail.  On October 10th, the S&P 500 opened at 902, fell as low as 839, rallied as high as 937 but finished the day virtually unchanged despite a record 11.5 billion shares traded and an intra-day swing of 11.5%.  Stocks swung around 10%/day for the next several days on triple average volume, rallying back above 1000 on the election of Barack Obama before sliding 26% by Thanksgiving and 34% to a decade low of 666 on March 6th.

One year later, all seems eerily calm with the S&P 500 trading at a 52 week high of 1097 (but still 29.9% below the October 2007 record,) intraday moves averaging around 1% (same as September 2007) and daily volume around 4.7 billion (versus 3 billion in September 2007.)  A number of our clients have expressed concern that we are poised for another sickening meltdown, so to address those concerns we have compiled:

30 things to worry about (and why we're staying invested)

Investing success is bottom up (finding companies with the characteristics to be successful) and top-down (recognizing the big trends that boost some companies and economies forward while overwhelming others.)  As we are primarily investors in US stocks and bonds, we pay particular attention to those trends that could aid or harm the United States.  However, as more than 50% of the earnings and revenues of our companies come from non-US operations, we also keep an eye on events around the world.  The topics outlined below represent the top 30 things we worry at present about while investing for our clients.

Read the entire commentary here.