Last week marked the 10th anniversary of the event that some say "officially" started the global financial crisis that brought capital markets to their knees during 2008 and 2009.

On July 10, 2007, bond analysts from the credit ratings department of Standard & Poor's decided to put a small chunk ($7.3 billion) of "subprime" mortgage bonds on "watch" for a downgrade. These bonds were backed by a bunch of mortgages that were given to homeowners who had less-than-stellar credit. Because each bond was comprised of many mortgages given to unrelated borrowers across the country and housing prices were assumed never to go down, the bonds originally were given a "AAA" rating. That meant the chance of default was very, very low despite the credit profile of the underlying borrows. While the seeds of the housing market's demise were sown years before and had already started to cause severe financial stress, the S&P analysts finally started to recognize there was a problem. Their downgrade kicked off a chain of public events that ultimately resulted in downgrades of more than $1 trillion in mortgage-related securities and sent capital markets and our economy into the abyss.

By the way, the severe financial stress referenced above had to do with the slope of the U.S. Treasury bond yield curve at the time. If the yields of U.S. Treasury bonds are plotted on the Y-axis and the term structure of the bonds, e.g., 3 months, 1 year, 10 years and out to 30 years, are plotted on the X-axis, the line would generally slope up and to the right. The yield on a 10-year Treasury bond is normally higher than the yield on a three-month bond; investors want a higher yield to tie up their money for a longer period of time. However, in July of 2007 the U.S. Treasury bond yield curve inverted, causing the three-month yield to be higher than the 10-year yield, for the first time since 2000. Inverted yield curves generally are a sign of financial stress and foretell a coming recession.

Besides the reminder to always pay attention to the yield curve, one of the many lessons we learned from the whole experience is the notion of a "failure of imagination" or the inability to think about all potential outcomes of what can go wrong. At that time market participants assumed housing prices would only go up and could never go down because housing prices (seemingly) only went up during everyone's lifetime. Most everyone assumed housing prices would go up forever. Even if subprime borrowers ran into problems it would not be a big deal because the price of the underlying asset used as collateral (the house) would continue to go up. There was a failure to imagine what would happen if housing prices went down. Very few people studied the financial history of the 1930s and realized housing prices can, in fact, go down!

Though we are not expecting another global financial crisis for a long, long time, we do know the economy will, at some point, find itself in another recession. We also know that capital markets will once again come under pressure sometime soon. Where will the collective failure of imagination be next time around? We think about potential answers to that question all the time and will continue to share our ideas with you in the months ahead.

This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product.  The opinions expressed do not necessarily reflect those of author and are subject to change without notice.  Diversification cannot assure profit or guarantee against loss. There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses. Sequoia Financial Advisors, LLC makes no representations or warranties with respect to the accuracy, reliability, or utility of information obtained from third-parties. Certain assumptions may have been made by these sources in compiling such information, and changes to assumptions may have material impact on the information presented in these materials.  Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment adviser does not imply a certain level of skill or training.

The views expressed represent the opinion of Sequoia Financial Group. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Sequoia believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sequoia’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. Past performance is not an indication of future results. Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment advisor does not imply a certain level of skill or training.

Sequoia Financial

Talk to an Advisor

We would love to chat with you about how Sequoia can help you achieve your financial goals.

  • Akron, OH - Headquarters
  • Tampa, FL
  • St. Clair Shores, MI
  • Troy, MI
  • Beachwood, OH
  • Cleveland, OH
  • Columbus, OH
  • Mayfield Heights, OH
  • Hilton Head, SC

© 2022 Sequoia Financial Advisors, LLC

Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment advisor does not imply a certain level of skill or training.

On an Important Anniversary & Failures of Imagination | Sequoia Financial Group


The website encountered an unexpected error. Please try again later.