8 Events that Shook the Industry in 2008From Hurricanes to Ponzi Schemes, it Was a Year of Disasters
Here are the top events that impacted our industry in 2008.
In April, the U.S. Treasury presented its blueprint that called for the most extensive regulatory overhaul since the Great Depression. It came on the heels of the Bear Stearns failure in March. But despite the urge to think it was just a knee-jerk reaction to that failure, Treasury had been working on this plan for more than a year. Its current future isn't clear, and the direction of any regulatory overhaul may be lower on the list after the year's events. But just to recap, the blueprint proposes to eliminate the OTS and the Commodity Future Trading Commission, rolling them into the OCC and the SEC respectively. It also says there should be three regulators to oversee financial institutions: a market stability regulator (Federal Reserve); a prudential financial regulator, (OCC, OTS and NCUA) and a business conduct regulator (the CFTC and SEC and some roles of bank regulators).
2. Big Failures and Bankruptcies Hit Industry
If the Bear Stearns bankruptcy in March was an indication of things to come, then the industry knew others would fail as well, but no one saw this coming. Over the second weekend in September, a financial tsunami hit the nation. Bank of America, one of the world's largest banks, bought ailing Merrill Lynch & Co, in a $50 billion deal to create a global financial services company; Lehman Brothers filed for bankruptcy (the biggest ever) after failed acquisition talks with Bank of America and Barclays. Barclays ended up buying the firm's North American investment bank and capital markets business groups in a $250 million deal. American International Group Inc. (AIG), the world's largest insurance company, sought emergency funding to bolster its sagging finances. AIG got an $85 billion loan from the federal government, and the government owns more than 79 percent of the company. Combined together all of these events precipitated "Black Monday," on Wall Street, where the Dow experienced its sixth-worst point drop in history.
Washington Mutual's failure and subsequent bargain sale to JPMorgan Chase on September 25 for $1.9 billion was followed by the October fight between Citigroup and Wells Fargo for the big prize -an ailing giant, Wachovia. Wells Fargo ended up the winner and bought Wachovia for $14 billion, another bargain purchase.
Investment companies Goldman Sachs and Morgan Stanley both applied to become bank holding companies, following shortly after that, American Express (ARTICLE #1058) also applied to become a bank holding company.
3. Regulatory Drumbeat Picks Up Pace
The drumbeat of regulatory compliance did not slow in 2008. In fact, the drummer picked up tempo with the compliance deadline ticking in November for ID Theft Red Flags regulation. The regulations that institutions were paying attention to in 2008 included related ID Theft Red Flags examination procedures. Application security and handling third party risk were also top reads, with the updated FFIEC business continuity planning booklet close behind. The FFIEC pandemic planning and FinCEN's BSA Guidance were also big hits with institutions that were compliance-minded.
4. Recession Blues Offset By $700 Billion Bailout
Federal regulators knew the worst could happen -- a collapse of the financial system was a possibility. When the summer came and economic indicators showed credit markets were souring, spending was down and unemployment crept upward as more and more businesses were forced into layoff mode, federal regulators decided to take action. Calling for a $700 billion package, federal regulators convinced Congress to pass a bill that helped Treasury purchase troubled assets from financial institutions to help stabilize the nation's markets and economy. So far only $350 billion has been earmarked to loan to institutions under TARP (Troubled Assets Relief Program).
5. Mortgage Crisis Still Troubles Industry
In a "State of the Banking Industry" to congressional leaders in the summer, banking regulators warned that the industry wasn't out of the woods when it came to the subprime mortgage crisis . Even as foreclosures continue to climb, federal regulators look for ways to help banks manage risks. An end-of-year moratorium on foreclosures by Fannie and Freddie along with some large banks has helped slow the foreclosure flood, but more work is needed to help homeowners move into sustainable long-term loans.
6. Loss of Consumer Confidence
Where is the confidence of consumers in 2008? With the headlines screaming recession, bank failures, stock market losses, investment scandals and the economy at its lowest point since the 1930s, consumer confidence can be thought of as a must-have for an institution to survive. Data breaches at major institutions in 2008 (Countrywide, Bank of New York Mellon, to name two) have also brought into question in consumers' minds how well their information is being guarded. In the coming Obama administration, institutions can expect to see more of a focus on consumer protection-type regulations being enacted and acted upon. If an institution can say it has its customers' confidence now, they're going to have to work hard to keep it intact.
7. The Natural Disasters: Hurricanes, Tornadoes, Floods
There's nothing left in some areas of the Texas coast where Hurricane Ike roared through on September 13 with a 15-foot high storm surge. Only a little more than a week before Ike was Hurricane Gustav, which carved a swath of destruction into Mississippi and Louisiana. These natural disasters are only two of the incidents that hit throughout the United States. Wildfires in California, the record floods that hit in June were devastating to urban and rural areas across the Midwest, remind everyone that nowhere is safe, and an up-to-date and tested BCP is the order for 2009 for all institutions.
8. Investment Manager Bernard Madoff's $50 Billion 'Ponzi' Scam
A well-known and long-time investment manager who was a former chairman of the Nasdaq was arrested in early December after he admitted that a hedge fund that he had offered to investors was actually a Ponzi scam that bilked $50 billion from its unknowing investors. Bernard Madoff, head of his own securities investment firm in New York, is now awaiting trial next year and is under house arrest in his $7 million New York apartment. Only a portion of the money that was purportedly part of the hedge fund has been recovered. His alleged scam is a final year-end black eye to the industry and takes consumer confidence to a new low.