Aftershocks: Five Key Questions to Answer After the Market Crash

It Isn't About What Happened; it's About What Happens Next
Aftershocks: Five Key Questions to Answer After the Market Crash
There were two crashes heard within the banking industry on Monday.

One was the stock market, which suffered its biggest drop since the aftermath of the terrorist attacks of 2001 - the Dow Jones industrial average alone lost 504 points, or 4.4%. The Nasdaq composite lost 3.6%.

But the second crash may have been even more devastating. That was the sound of consumer confidence hitting a new low in the wake of the subprime mortgage crisis, which continues to claim Wall Street giants and community banking institutions alike at a pace unseen in modern times.

As one industry observer told CNN on Monday, "You have to throw out the history books because there's really nothing to compare this to."

"We've never witnessed this before," said another insider, drawing comparisons to the Great Depression. "There's no road map for this."

That said, "trust" remains the banking industry's greatest charge, and institutions of all sizes must work even harder now to protect their customers' financial and informational assets.

Toward that end, here are five key questions for banking institutions to consider - and perhaps communicate to their customers - in the wake of these devastating events:

What Just Happened? On one level, it was a weekend unlike any we'd ever seen in recent times:

Bank of America, one of the world's largest banks, acquired 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. But then Barclays ended up buying the firm's North American investment bank and capital markets business groups in a $250 million deal late Tuesday;
American International Group Inc. (AIG), the world's largest insurance company, sought emergency funding to bolster its sagging finances. As of Tuesday, AIG got an $85 billion loan from the federal government, and now the government owns more than 79 percent of the company. With $1.1 trillion in assets, AIG is the 18th largest company in the world and employs 116,000.

Combined, these actions led to what many are now calling "Black Monday," with the Dow alone experiencing its sixth-worst point drop in history. Wall Street was completely reshaped by the events of the past weekend, and as Wall Street goes, so goes the nation's financial market.

How Did We Get Here?
Monday's crash wasn't just about the weekend's events; it was a response to all of the recent losses suffered amidst the 14-month-old credit crisis born in subprime mortgage debt. In the past six months alone, we have seen:

The collapse of Bear Stearns, one of the world's largest investment banks;
The takeover of mortgage giants Fannie Mae and Freddie Mac
A slew of bank failures - 11 so far this year, which is the most since just after the 2001 terrorist attacks - headlined by July's IndyMac closure
The number of institutions on the FDIC's list of "problem banks" grew from 90 to 117 in the second quarter of the year, and there's every reason to believe that number will only continue to swell.

The bottom line is that bad debt continues to result in bad news, and there is no reason to believe the turmoil will end anytime soon.

What Do These Events Mean to the Banking Industry?

It isn't just about Wall Street; it's about Main Street.

While these events are overwhelming for industry insiders, consider their impact upon consumers, who are inundated with images and insights of market crashes, job losses and lines of depositors outside closed banks. It is the accumulation of these events that every banking institution now must deal with when trying to reassure customers that, yes, your money is safe. Undoubtedly, more institutions will fail in the coming weeks, but rather than ignore these events, banking/security leaders should use them as an opportunity to engage customers in conversations about the market, its checks and balances, as well as the institution's own health and protective measures.

Financial institutions should educate their customers and employees about this type of business cycle, says Doug Johnson, Senior Policy Analyst at the American Bankers Association. "Especially for those who weren't around in the late 80s and early 90s," Johnson says. Go back to the basics and explain the core values of the institution. "Show them that you've stuck to your own knitting and made prudent choices in investments, and the fact that your institution will weather this cycle because you were able to weather the last one."

At the same time, show customers how their financial assets are protected. Specifically:

Investments -- The Securities Investor Protection Corporation (SIPC) was created in 1970 as a non-profit, non-government organization funded by its members: broker-dealers that trade in stocks, bonds, mutual funds and other investments in the financial markets. The primary role of the SIPC is to return funds and investments to investors if the broker-dealer holding these assets becomes insolvent. "The SIPC does not cover you if the value of your investments goes down," says Gibran Nicholas, Chairman of the CMPS Institute, an organization that certifies mortgage bankers and brokers. "The SIPC makes sure that you recover the assets in your investment accounts if your stock brokerage firm or the financial institution where you hold your investment account goes bankrupt."
Deposits --The Federal Deposit Insurance Corporation (FDIC) is an independent federal agency that was created in 1933 to insure bank depositors and protect them against bank failures. The current limit on FDIC insurance is $100,000 for bank accounts and $250,000 for retirement accounts. "Customers should make sure that all deposits over the limit are held in separate accounts owned by different individuals or entities," says Nicholas. "This means that if you are married with two children, you can have one account in your name, one account in the name of your spouse and one account each in the names of your two children, all with the maximum of $100,000 in deposits, and you would still be fully insured for the full $400,000."

What's Likely to Happen Next?

Expect more bank failures.

It's become a weekly event, waiting until after hours on Friday to see the latest FDIC or OCC announcement about which bank has failed and which other institution will acquire its assets. This pace isn't likely to decrease anytime soon.

"The industry is due for some restructuring, and that's what we're seeing happening now," says the ABA's Johnson. "It also points to value of diversification, and not putting all of your investments or business in one area, regardless of your institution's size, because if you're not, then there's a greater vulnerability."

Johnson sees the Bank of America buyout of Merrill as a significant combination of two very large institutions - but not necessarily as a sign that the big banks will continue to get bigger while the smaller institutions contract or fail. "The successful community banks have always managed to find their own little niche in their communities -- that's why we still have more than 8,000 banks," Johnson says.

As for the impact of the Lehman bankruptcy - and especially the federal government's refusal to prop up the firm, as it did Bear Stearns -- John Berlau, Director of the Center for Entrepreneurship at the Competitive Enterprise Institute, sums up his reaction in three words: "It's about time!"

No doubt Lehman's failure will be difficult for the firm's employees, investors and others affected by the firms' dealings, Berlau says. "But Wall Street and the U.S. economy have survived similar failures before and come back to prosper. The investment banking firm Michael Milken's Drexel Burnham Lambert -- a powerhouse of the '80s -- went bankrupt in the early '90s. The '90s decade still roared, and many of the innovative companies financed by Drexel, such as Turner Broadcasting, still continue to prosper to this day."

What Are Our Biggest Risks?
Customer confidence is the big intangible - how do you reassure consumers that their financial assets are safe when they're inundated with images and insights of failures?

But in times of turmoil, informational assets are also at risk. Consider the recent bank closures and acquisitions - all the sensitive customer data that has to be transferred and secured between institutions. Or picture the scenes in the wake of the Lehman bankruptcy, with employees walking out the door with boxes. Frankly, people started out the door with boxes before the bankruptcy was filed. What sensitive data and intellectual capital might have walked out the door with them?

Stephen Katz, industry expert and former CISO at Citigroup (where he oversaw numerous mergers and acquisitions in his tenure), says banking/security leaders need to stay vigilant with strong data protection measures. "Right now over at Lehman they're concerned with the money positions and their losses," Katz says. "I would also say they need to take a look at their data handling procedures as they wind down their business."

And be mindful, too, that information security professionals are concerned about their own jobs. They may need help and direction to stay on task in terms of risk management and compliance.

Physical security needs extra attention in times such as these, but it's also important to shore up other areas of data loss prevention. The bad guys - the ones who prey upon the likes of TJX and Hannaford -- weren't devastated by "Black Monday." If anything, they were inspired and will look for new ways to take advantage of vulnerable institutions and customers.

It's a given that financial resources are tight, as banking institutions readjust their budgets. But the one risk that institutions cannot afford is to focus on the credit crunch at the expense of basic regulatory compliance and risk management.

As John C. Dugan, Comptroller of the Currency, recently told a conference group, "We simply cannot take our eyes off compliance while we address safety and soundness."

"We know how to deal with credit issues, and we will work our way through these very difficult problems," Dugan said. "What I don't want, though, is to finish dealing with the industry's safety and soundness issues only to find that we've allowed significant compliance problems to develop in their place."

About the Author

Linda McGlasson

Linda McGlasson

Managing Editor

Linda McGlasson is a seasoned writer and editor with 20 years of experience in writing for corporations, business publications and newspapers. She has worked in the Financial Services industry for more than 12 years. Most recently Linda headed information security awareness and training and the Computer Incident Response Team for Securities Industry Automation Corporation (SIAC), a subsidiary of the NYSE Group (NYX). As part of her role she developed infosec policy, developed new awareness testing and led the company's incident response team. In the last two years she's been involved with the Financial Services Information Sharing Analysis Center (FS-ISAC), editing its quarterly member newsletter and identifying speakers for member meetings.

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