Queensland victims of a global firestorm

TEN years ago today, the global financial crisis plunged to one of its worst moments with the collapse of Wall Street investment bank Lehman Brothers.

Australia was hammered in the aftermath and even now some after-affects linger.

The bankruptcy of Lehman, and the fact the US government did not bail it out, proved a shocking moment that set loose worldwide fear about which entity could go under next.

In the following weeks Australian share markets were hammered. Meanwhile, smaller banks, such as Suncorp, faced funding concerns and customers withdrew deposits to put their cash into larger institutions.

Companies would eventually fail in the rout. Big local collapses included Brisbane-based childcare operator ABC Learning Centres and Gold Coast-based funds manager MFS.

For investors who used Townsville-based advisory outfit Storm Financial, the pain would be financially apocalyptic after they borrowed heavily to invest in stockmarkets that subsequently plunged.

 

 

Tony D'Aloisio, then chairman of the Australian Securities and Investments Commission, told a joint Parliamentary Committee in 2009 that major corporate insolvencies- including ABC, finance outfit Allco, investment bank Babcock and Brown and agriculture investment operations Great Southern and Timbercorp - had caused losses of about $23 billion. Another 11 entities lost more than 90 per cent of their market capitalisation, taking those losses to another $39 billion, he said.

Greg McPherson, a senior Brisbane-based stockbroker at Bell Potter, on Friday recalled those days as ones of uncertainty, marked by key events such as the UK government supporting massive bank RBS or the US government bailing out insurer AIG.

"Some of the biggest names in finance were being essentially nationalised," he said.

"At the time, you really didn't know who was next and what it was going to take to stop it," he said.

Shares are yet to regather their highs of November 1, 2016, when Australia's All Ordinaries index closed at 6853.6 points. Stock dipped to the low 3000s by 2009 and on Friday had still only reached at 6276.3.

Mr McPherson partly links the long recovery in share markets to confidence being sucked out of the financial system.

Another long-term impact is both loan rates and deposit rates lounge at low levels, with central banks having cut interest rates to rev up GFC-addled economies.

According to finder.com.au, average home loans were at 9.33 per cent in 2008 and now are at 5.2 per cent, whereas savings deposit rates have shrunk from 7.08 per cent to 0.98 per cent.

There was also a flurry of regulatory civil lawsuits against some of the big names from the GFC, such as a successful one against Storm founders Emmanuel and Julie Cassimatis. But as The Courier-Mail detailed, there were few criminal actions and less successful prosecutions.

One of the few was against former ABC chief financial officer James Black, who pleaded guilty to providing $46 million worth of misleading information to the company's auditor. He received a suspended 18-month sentence.

Even with signs of strength in Australia's economy, investment experts are raising the spectre of another bust - and another after that.

Tricks of the trade can help recognise the timing and keep losses to a minimum.

"I suspect we are facing into a storm which looks worrying like the GFC: high debt, over-leveraged households and risks in the banking system," Digital Finance Analytics principle Martin North said.

"It's worth remembering that within six months of the crash, the Fed in the US and regulators in Ireland both declared their banks were strong, home prices were not in a bubble and there was no need to be concerned about the level of household debt."

 

 

"They were wrong on every count. Now take a look at recent local comments from our regulators and there is an eerie resonance."

Australian banks have been using mortgages to keep growing their balance sheets, Mr North said, which has resulted in an over-reliance on expensive short term money markets and international interest rate rises.

"Bank exuberance (for mortgages) reached a fever pitch," he said. That included lending standards being diluted and evidence in the royal commission now revealing that some home loans were mis-sold and in some cases even fraud was involved.

AMP Capital chief economist Shane Oliver also suggests investors and households should get used to the cycles.

"While after each economic crisis there is a desire to make sure it never happens again, history tells us that manias, panics and crashes are part and parcel of the process," Dr Oliver said.

"The big ones, typically, come along every 10 years or so.

"It's inevitable that they will happen again, as each generation forgets and must relearn the lessons of the past through another bubble."

 

 

But Dr Oliver thinks the next bust is still some time away.

"Prior to the GFC inflation and interest rates were high, whereas now they are both low, which means there is less risk of a bust," he said.

"Although some of the indicators of the next one are here but other (indicators) aren't. Another economic crisis is inevitable at some point but it will likely be very different to the GFC."

The average balanced superannuation fund fell 24 per cent because of the GFC, while growth funds fell 31 per cent, according SuperRatings chief executive Kirby Rappell.

But within four years most funds had recovered their losses and today, every $100,000 pre-GFC has grown to $168,000.

"For younger members, under 40, the GFC didn't have any real impact. This was different for retirees, the market falls directly impacted daily life or delayed retirement," Mr Rappell said.

Balanced fund portfolios have changed over the ten years. Their allocation to Australian shares has fallen from 29 per cent to 25 per cent, international shares are up, 23.5 per cent to 26.5 per cent, property has gone from 11 per cent to 9 per cent, alternative assets are up from 16.5 per cent to 20.4 per cent and fixed interest is down from 15 per cent to 12.5 per cent.

Dr Oliver's top lessons for investors to minimise the impact of the next fall are:

1. There is always a boom bust cycle. Long periods of growth, low inflation and high returns are followed by something going wrong.

2. Each boom bust cycle is different but asset values are usually pushed to extremes before every fall.

3. High returns come with high risk.

4. Be sceptical of fancy hard to understand, over-engineered financial products. Even if they have a AAA credit rating.

5. Avoid too much gearing, especially the wrong sort of debt such as margin loans.

6. Concentrate on diversification, across listed and unlisted assets, as well as safe havens of cash and government bonds.

7. Don't sweat the small stuff. Diversification is not resource shares or bank shares. Diversification is across several asset classes.

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