What Will Be the Next Lehman Moment?

Wall Street

In mid-2007, a unit of Bear Stearns began to experience difficulties due to its exposure to the subprime mortgage market. Little did anyone know at the time, but that incident was the canary in the coal mine that signaled the onset of what eventually became the 2008 financial crisis.

Despite the problems Bear Stearns was having, and the necessity of new Federal Reserve credit facilities to prop it up, most people largely shrugged it off. Stock markets continued to grow, setting all-time highs in October 2007.

Even when things got rougher at the beginning of 2008, we were assured by policymakers in Washington that everything was going to be alright. And it wasn’t really until September 2008 that everyone started freaking out.

September 2008 saw the failure of Lehman Brothers, an event that scared the living daylights out of Wall Street. After seeing Bear Stearns bailed out by the Fed, everyone assumed Lehman would get bailed out too, but they didn’t.

Seeing the failure of one of the biggest names on Wall Street made everyone wonder who could be next. Bailouts couldn’t be taken for granted, and so Wall Street began to panic. Within weeks many on Wall Street and in Washington feared that the financial system was on the verge of collapse.

Hindsight being what it is, most of us realize after the fact that Bear Stearns’ difficulties should have been the clue that not all was well on Wall Street. But it was Lehman Brothers’ failure that really focused attention on what was going on.

With everything that’s going on in the economy today, what will be the next Lehman moment, the incident that drives people to panic?

Looking back years from now, last year’s bank failures may end up being the Bear Stearns of our time, the incident that should have tipped everyone off that the end of the bubble was near. But what will be the Lehman moment?

Here are four possibilities.

1. More Bank Failures

Banks aren’t necessarily out of the woods just yet. New York Community Bancorp (NYCB), one of the rescuers during last year’s banking crisis, is facing its own difficulties, and just required a capital injection of $1.05 billion. Its survival is anything but guaranteed, however.

Overall, the regional banking sector is experiencing significant weakness, and it’s not inconceivable that we could see more bank failures this year. Part of that is because regional banks are dealing with a potential collapse of the commercial real estate market.

2. Commercial Real Estate Implosion

Over 1,900 smaller banks are holding levels of commercial real estate loans that exceed 300% of their equity. That means that a significant writedown in commercial real estate loans could wipe these banks out.

The commercial real estate market has taken a big hit from higher interest rates, with delinquencies on commercial mortgage-backed securities expected to top 8% this year.

Overall, about 20% of all commercial real estate loans are expected to mature this year, making it far more expensive for companies when it comes time to enter into new loan agreements. Roughly 25 percent of office properties, 27 percent of industrial properties, and 38 percent of hotels and motels will see their loans mature this year.

With the prospect for Federal Reserve rate cuts growing slimmer each month as inflation remains stubborn, it’s very likely that the commercial real estate market could see significant impacts this year, impacts which could negatively affect markets by themselves or which could combine with banking weakness to lead to a systemic crisis.

3. International Crisis

With rumblings of growing conflict in the Middle East, an international crisis can’t be ruled out either. Whether it’s the result of all-out war, of further disruption to commercial shipping, or to a spike in oil prices due to international disputes, a geopolitical crisis is a major wild card.

Such a crisis would also be incredibly difficult to predict, difficult to navigate, and difficult to foresee an end to. But the effects of a major war on world markets could be severe.

4. Collapse of the AI Bubble

In addition to everything else that’s going on in the world right now, there’s a growing bubble in AI stocks that seems eerily similar to the excesses of the dotcom bubble. And with AI being the buzzword of the day and driving stock markets to new highs, there’s a great fear in some corners that we could soon see a repeat of the dotcom bust.

Many of the people behind the AI surge likely don’t remember how badly the dotcom bust impacted Americans who lost much of the savings they had built up through the boom years of the 1980s and ‘90s. Those were trying times for many people, and the euphoria surrounding internet stocks back then seems to have been replicated in the euphoria for AI stocks.

Will there be a single stock that collapses and starts the burst of the entire bubble? Or will the entire sector come down in a big heap? And what might start that collapse?

There are so many things going on in the world today, so many potential black swan events that could send markets tumbling, that it’s hard to imagine which one might be ground zero for the next crisis. But with so much going on, it’s certainly hard to imagine that all these potential crises can be averted.

Are You Protected?

If you’re worried about the future and fearful that the US economy is facing another potential Lehman moment, you’re likely wondering how you can protect yourself against what’s coming. After all, if we have another dotcom-type burst, or another 2008-style financial crisis, there’s the potential for significant losses.

Many Americans have already started to protect their assets with gold, whether it’s through direct cash purchases of gold or through gold IRAs to protect their tax-advantaged retirement savings. Gold has served as a safe haven asset for centuries, and its track record through times of crisis has been pretty good.

Gold gained 25% during the same time period markets fell over 50% during the financial crisis (October 2007 to March 2009), and then went on to continue setting all-time highs through 2011. Recently gold has set new all-time highs, as continued safe haven buying is spurring gold demand and pushing the gold price ever higher.

If you’re thinking about making gold a part of your preparation to protect yourself during the next recession, now is the time to learn more about your various gold options. Goldco offers quality gold coins and bars direct from mints around the world, and we offer you the opportunity to purchase gold both through a gold IRA and through direct cash purchases.

With over $2 billion in precious metals placements and over 5,000 5-star reviews from our satisfied customers, Goldco has worked hard to become one of the best gold companies in the country. Call Goldco today to talk to one of our representatives and learn more about how gold can help you safeguard your savings.

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