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NEW YORK ( ETF Expert) -- When subprime crisis concerns came to the fore in 2007, the U.S. had to throw all kinds of spaghetti at the wall before noodles began to stick.
For instance, the
Federal Reserve first slashed interest rates. Later, in March of 2008, the Fed and
JPMorgan Chase(JPM) orchestrated a buyout of
Bear Stearns. In September, the
Securities and Exchange Commission banned the short-selling of financial companies.
Still, nothing stuck.
The government decided to try a different path by letting
Lehman Brothers go bankrupt. Was Bear Stearns too big to fail, while Lehman Brothers was not? The government had exacerbated the uncertainty.
Congress passed TARP to buy toxic assets. The only problem was the government didn't buy toxic assets but chose to purchase preferred shares of the financial institutions instead. More uncertainty.
Eventually, the Fed ushered in the era of quantitative easing which allowed for the purchase of unwanted mortgage-backed securities; eighteen bearish months passed before confidence returned.
OK, so that wasn't a top-notch historical review. Yet the point is that the smartest people in the world struggled to instill confidence in the financial system from October 2007 to March 2009. And although the sovereign debt crisis in Europe today may not represent the same set of circumstances, dismissing the similarities outright may be detrimental.
Consider the extraordinary level of volatility in the past week. Granted, computerized program trading deserves some blame. Indeed, we can even chastise the "evil" hedge fund players and the insidious short-sellers.
On the other hand, the same thing could have been said about the volatility during the 2007-2009 bear market. Was there no reality in the problems that existed at the time?
Some of the worst-performing exchange-traded funds during the 2007-2009 bear market included the
SPDR KBW Bank(KBE),
iShares DJ Home Construction(ITB) and
iShares Russell MicroCap(IWC).
Subprime/Alt A mortgage exposure at financial companies decimated bank shares. Oversupply and negligible demand killed the homebuilders. And a deep recession rocked the smallest companies more than the larger companies, as smaller companies had even less access to credit. In other words ... it wasn't all due to market manipulation. (Even if market manipulation is 100% to blame, investors may not have the luxury of avoiding capital markets altogether.)