Aftershocks: Five Key Questions to Answer After the Market Crash
It Isn't About What Happened; it's About What Happens Next
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:
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 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:
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."
