Ten years after the fall of Lehman Brother

Today marks the 10th anniversary when Lehman Brothers fell into bankruptcy on 15 September 2008. Despite the on-going tariff war between the US and China, there is a general sea of calmness in the major stock exchanges all over the world.  Back then, scene was very different. For several weeks before 15 September and several months after that, the front few pages of our daily newspapers were full of bad news.

Lehman Brother’s downfall also pulled along with it several big banks and financial institutions. AIG, Citigroup, JPMorgan Chase, Bank of America, Fannie Mae & Freddie Mac were all at risks, and were awaiting government bailout. With the crisis hitting the big financial institutions in the world’s largest economy at that time, it is almost certain that small and open economies, like Singapore, was going to feel the onslaught as well. The STI fell from the high at close of 3,875.77 made on 11 October 2007 to 2,486.55 on 15 September 2008, retreating 35.8%. It did not stop there. As bad news, continued to flush all over the news media, the STI fell further. DBS, a good proxy of the Singapore economy, and a heavy weight on the STI certainly cannot escape from this avalanche. Its share price fell from more than $20 to less than $10 by the end December 2008, retreating more than 50%. Everywhere is fear, and we did not know which blue-chip stock, in particular which financial stock, was going to go under. Fund managers were all selling as redemptions picked up speed.

Perhaps, the stubborn side of me helped. I decided to swim against this tide, buy a few shares, close my eyes, close my ears, go for a long haul, do not sell irrespective of whatever happened, and see how it would turn out after 10 years. In the worst-case situation, I would lose some savings. If I have been wanting to own DBS, this would have been a good opportunity. In a financial crisis of such a scale, huge wealth is transferred one person’s pocket to another’s pocket. Debtors will be punished, creditors will be rewarded. Spenders will become poor, and savers will feel rich. Cash is king. However, cash is still only cash if it remains in the bank. So, this should be the time to put our cash into good use. Splurge and buy up assets that had never been put on such discounts, was the key.

A few weeks after purchasing the stock, came the next bombshell. DBS decided to raise rights, 1 for 2 shares, with a whopping 45% discount at $5.42 based on the last day trading price at $9.85. It literally forced existing shareholders to take up the rights. So, no choice, I dipped further into my pocket to pick up the rights. (I remember, I tried to buy extra rights, but I believe I only managed to get a few shares to round off the lots due to over subscription of the rights.)

In the midst of such a crisis and with a much bigger market float after the rights issue, the share price continued to fall. In fact, the share price went even below $7. It certainly, took some grits and guts to continue to hold the shares. Even at $7, it was still a long way to fall if it was really going to be very bad. My intuition impressed upon me that if DBS were to fail at that time, we would all be in real serious trouble. Our property price would plunge, our car value would be decimated and our Singapore dollars would be very unstable in the forex market. So, whether we are on shares, on property or on cash, it was not going to matter. And, with the US dollars also plunging at that time, the only shelter is probably gold. After all, it was only 10 years ago then that DBS gobbled up POSB. In the minds of those people on the street, POSB was still the people’s bank. It is unlikely that it would be allowed to fail. The epicenter of this financial crisis was in the US. We are only feeling the effects of this financial tsunami. The question was how low could DBS touch, and not whether it would fail. It turned up well, and the fear was quite short-lived. The stock came up back again after March 2009, when STI temporarily went below 1,500.

Was it plain sailing after that? Not quite. I should ask, were there anything along the way to de-rail holding the stock? Certainly yes. When I purchased the stocks, my objective was to go long, and very long and to disregard the share price. So, the only ‘financial benefit’ was the dividend from the stock. At that time, this ‘giam-siap’ (stingy) bank, gave only $0.60 per share as dividend.  When a reliable source, told me that the bond coupon rate of Swiber was at 7%, I felt stupid again. If we invest in the bond at the cost of $250k, the yearly coupon would have been $17,500. A back-of-envelope calculations of the equivalent amount, would have been about 15,000 DBS shares at the prevailing price of between $16.50 and $17.00.  For 15,000 DBS shares, the dividend would only be $9,000. And this stark difference would carry on yearly, for probably 4-5 years, until the bond matured. If one were to chase for the last dollar, it would make sense to sell DBS shares and buy Swiber. So, would it make sense to sell off the shares and buy bond instead? Nobody knows what was going to happen. But, I do believe when the bond yields were high at that time, many people actually switched out of equities and buy bonds as well as other high yield instruments. It was lucky. I chose to remain in equities. The reason was that there was literally no secondary market. If we really wanted to sell, nobody was going to buy from our hands, unless we depress our price significantly. Precisely, at that time, due to liquidity, the corporate bond of Genting was trading at a discount, while the perpetual bonds were trading at a premium. So, if we want to get into it, the only choice was to hold corporate bonds to maturity. It turned out that the decision was right. Swiber defaulted and remain suspended today.  And, DBS was no longer a ‘giap-siap’ bank as it used to be. It doubled its dividend.  And, right now the yield based on the average purchased price would have enjoyed an even higher yield compared to Swiber or the any REITs. In fact, this stock would have become an equity-bond situation mentioned in the book “Warren Buffet and the Interpretation of Financial Statements”, by Mary Buffet and David Clark, 2008. It left me scratching my head what was the term ‘equity-bond’ really mean at that time when I was reading that book. Now, I understand. In a few words, it means to buy an equity, let the share price move up to its intrinsic value. As the dividend starts to move up back-on-the-heels of the equity price, we would have, in effect, enjoyed the yields of bonds.

Then again, were there any more scares along the way? Certainly yes. When China suddenly devalued the RMB in 2016, it was envisaged that China was not doing well on the economic front. That again pushed down the STI. In particular, the bank stocks were hit. All the three banks stocks were trading about 10% below book value. DBS, once again, fell below $14 for the first time in the few years. It had been languishing around $16-$17 per share almost throughout the year 2016. Only in 2017 did DBS share price climb up slowly and steadily, following of several quarters of good financial results. With the announcement of its new dividend benchmark, it has arbitrarily created a floor for the share price. If the bank continues maintain its dividend payout of $1.20 per share, it should help maintain the share price north of $24 per share, giving a yield of about close to 5% per share.

It has come a long way, and will there be more volatility going forward. Certainly yes, the tariff issues between the US and China is still yet to be resolved. Also, for so many years, the interest rates all over the world have been held extremely low. Debts were now at their historical highs once again. If FED were to increase interest rates aggressively, I would not be surprise that another crisis could erupt, maybe, this time, the epicenter is nearer to us. Then again, DBS share price can get hit again.

Disclaimer – The above arguments are the personal opinions of the writer. They do not serve as recommendations to buy or sell the mentioned securities or the indices or ETFs or unit trusts related to it.

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Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.