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A Decade Since Lehman Collapse: How Big Banks Are Faring?

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It’s been a decade since the mortgage banking giant, Lehman Brothers, failed. This had resulted in a total collapse of the financial markets in the United States. What followed thereafter is inked in history as the ‘Great Recession.’

So, today we take a walk back in history to understand the causes and implications of the financial crisis, as well as see how the mega banks — JPMorgan (JPM - Free Report) , Citigroup (C - Free Report) , Bank of America (BAC - Free Report) and Wells Fargo (WFC - Free Report) — are faring now.

Causes & Remedial Measures

Signs of the impending recession had started showing as early as 2006 (as housing prices began to fall and yield curve inverted), but the Federal Reserve and government administration didn’t realize the gravity of the same. Further, banks had become increasingly dependent on derivatives and sold mortgage-backed securities (backed by sub-prime mortgages) to investors.

Thus, what had started as a housing market crisis spiraled out of control and spread to the finance sector, bringing down many banking behemoths and spooked the global markets as well. While Lehman Brothers were allowed to collapse in 2008, Bear Sterns, Washington Mutual, Wachovia and Merrill Lynch were acquired by rival banks.

However, this didn’t mean that the acquiring banks were financially sound. The Congress then had to establish the Troubled Assets Relief Program, allowing the U.S. Treasury to bail out troubled banks.

Several small and mid-size banks were adversely affected and the Fed had to keep the short-term interest rates near zero. Further, unemployment rates were hovering near 10%. The Congress had to undertake several other initiatives to bring the U.S. economy back on the track.

In addition, banking regulators wanted stricter rules and with the passage of the Dodd Frank Act in 2010, banks were required to comply with several stringent regulations and strengthen their balance sheets by moving away from non-core operations.

Per the provisions of the Doff Frank Act, banks with consolidated assets of $50 billion or more were deemed as systematically important and were required to fulfill more stringent regulatory requirements, including facing annual stress tests (resultant approval of capital plans) and submitting so called ‘living wills.’



How are the Big Banks Faring?

During a few years following the financial crisis, banks stocks were hammered. Investors were skeptical about investing in financial stocks. Nevertheless, increased regulatory scrutiny and measures undertaken by banks to regain their past glory eased investors’ concerns to some extent.

Additionally, these banks had to face several probes and legal charges for legacy mortgage matters and business misconducts. The companies had to pay billions of dollars as fines to the regulators and investors for resolving the matters. These significantly hurt the banks’ financial performances. Though these matters have gradually eased for most of the banks, Wells Fargo is still reeling under it since the revelation of the sales scandal in 2016.

At present, the finance sector is in the spotlight. Measures taken by the current administration to lessen regulatory burden (as demanded by the banks), a stronger U.S. economy, low unemployment rates and rising rate environment are supporting the sector’s performance.

The Fed begun rising interest rates in December 2015 and raised the same six times so far. Moreover, two more hikes are anticipated this year. Rising interest rates are highly desirable for banks, as it helps earn more interest income.

Ten-Year Price Performance

Looking at the price performance of the major bank stocks in the past decade, JPMorgan is a clear winner. The company’s shares have surged 141.3%, while Wells Fargo has gained around 38.2%.

The other two big banks — Banks of America and Citigroup — are nowhere near their pre-crisis levels. In fact, these have tanked 19.6% and 66%, respectively over the past 10 years.

Therefore, it looks like both Bank of America and Citigroup still have a long way to go before these banks can reclaim their past glory. Both have undertaken several restructuring and streamlining measures to strengthen their financials. These are getting reflected in their financial performances. But it seems that they will take some more time to reach their pre-recessions peaks.

Nevertheless, the banking sector, on the whole, is performing decently and we believe big banks will continue with their decent financial performances.

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