Many experts say today that the COVID-19 pandemic and its unexpected ubiquitous quarantines make an economic global crisis inevitable. I decided to look through previous crises to understand their impact on the financial services industry. Moreover, I want to understand what actions companies took to survive these crises.
The Great Depression
Let’s start with the Great Depression. During this crisis, the unemployment rate reached 25 %, but in some US states it was almost 80%. Because of Roosevelt’s Emergency Banking Act of 1933, the banking system was reorganized and about 50% of US banks were closed.
Reformed regulations of the financial system restricted banks from making risky investments and lenders from encountering inexplicable interests. The global economy needed more than a decade to recover.
Although the Great Depression was trying for most companies and services, some of them not only survived but also had success. They looked for new opportunities, changed their strategies to attract customers and diversified their offerings.
The Dot-Com Bubble
Unlike during the Great Depression, when a number of prerequisites warned about a nearing crisis, nothing similar was expected near the turn of the century, when the dot-com bubble burst. Investors, venture capital firms, and banks at the time were confident of technological advancements and eager to invest in technology companies, even though most of them were not yet profitable.
Once the internet companies started running out of cash, stock market indexes went down by close to 60% in a single day. Only about 48% of companies created during the boom survived. Ignoring the trend of growing as quickly as possible to beat off the competition, most of those who survived had seen opportunities in micro-niches where they experienced little competition. Some companies survived and even grew by acquisitions and diversifying the services they offer.
E*Trade is one of those companies that were wounded by the crisis and had to fight hard to keep afloat. New financial products offered by the company interested private investors, which allowed E*Trade to survive.
Charles Schwab continued to add innovation even through the dot-com crash. Schwab was one of the first to offer online trading. Although the firm had to lay off more than half of its employees, it was still diversifying its offerings and acquiring wealth management firms to diversify its clientele.
The Great Recession
The 2008 crash is called the worst economic crisis since the Great Depression. Lehman Brothers, a venerable 158-year-old investment banking firm, collapsed. During a few years before 2008, mortgage debt had risen enormously. Americans borrowed money for houses even without proof of a job and income. Thus, mortgages were transformed into a very risky investment.
Lehman owned tens of billions of dollars in overvalued assets. In September 2008, the Reserve Management Corporation revalued its Lehman securities at zero. This caused a chain reaction where many financial institutions and companies such as banks, mortgage lenders, and insurance firms were also suddenly proven to be untrustworthy.