Financial Crisis Anniversary: The Media's Verdicts

Financial Crisis Anniversary: The Media’s Verdicts

Communication professionals working in finance could draw important lessons from the recent coverage of the financial crisis’ 10th anniversary – it encapsulates the PR problems that have been plaguing the industry for the last decade. Employing our media analytics tools, we examined how the coverage reflected the developments in economics, financial services, personal finances, regulation and politics. We also found that the most widely discussed potential causes for a next crisis are the rising global debt, the peripeteia of emerging markets, China’s financial system, the too-big-to-fail banks phenomenon and the cybersecurity hazards accompanying the sector’s accelerating digitalisation.

 

September 15th marked the 10th anniversary of the collapse of Lehman Brothers, formerly the fourth-largest investment bank in the United States. Building on the troubled subprime mortgage market, the bank’s demise became the tipping point for a full-blown global financial crisis, the worst since the Great Depression of the 1930s.

As with everyone in the industry, the 2008 crisis posed unprecedented challenges to communication professionals – in the past 10 years, the lion’s share of their work has been revolving around the reconstruction of the shattered image of financial institutions. In a bid to restore trust and confidence, the world of finance is in an ongoing process of redefining itself, accelerated by the emergence of new competition coming along from the ranks of tech.

Surely, PR experts could draw valuable lessons in crisis management from the 2008 crash. But they could also learn a lot about how to strengthen their brands by following the recent coverage trends of the 10th anniversary.

 

What goes around comes around

 

Almost every major media outlet dedicated a special place to the anniversary, publishing series of articles and videos on different aspects of the crisis, its causes and its aftermath. Since the ghost of the economic calamity still looms large over the world, this kind of content proved to be a popular read and engaged many social media users of varying ages and occupations to share their views.

Thanks to our media analytics tools, we managed to identify the main topics in the coverage:

 

 

The most popular topic was the crisis’ effects on global markets and the economy after quakes which we still feel today. An often cited figure suggests that the median net worth of US families dived by 39% in the three years through 2010, with around 9 million jobs lost. Apart from reminding the readers about such facts, journalists questioned whether the financial industry is over the hump now and whether the world’s economy would be able to survive another turmoil of such a scale.

When it comes to financial services, the crisis reinforced the public’s hostility towards Wall Street. For many people, the word “banker” became a synonym of a fraud. Research by management consulting company Gallup concluded that confidence in banks had dropped from 53% in 2004 to 21% in 2012, while 64% of the respondents in a Harris survey said that bankers didn’t deserve their huge paychecks.

In terms of regulation, the focus of coverage was on the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law in July 2010 to protect consumers and reduce financial risks. In May 2018, after just eight years, President Donald Trump introduced some fundamental changes to it, loosening mortgage regulations and requirements for banks with less than $250 billion in assets.

The subject of personal finances was intertwined with the subject of financial services in most of the articles. A new research by the UK Institute for Fiscal Studies (IFS) showed that the financial crisis has made wages 3% lower what they were in 2008 – then the average wage in Britain was £24,100, while it was £23,300 last year. People between 30 and 39 are paid £2,100 less annually than people of the same age group ten years ago, which represents a drop of 7.2%. For the 20-somethings, the drop is 5%.

Paul Johnson, director of the IFS, said: “The average earnings of those in their 20s and 30s fell especially sharply in the immediate aftermath of the recession, perhaps as employers were able to cut starting wages more than wages of those already in work.” The recent growth hasn’t been sufficient to remedy the losses.

When it came to politics, the majority of outlets didn’t focus on a historical narrative about the direct consequences but tried to pin down how we still experience the crisis today. Some suggested that it broke a social contract between plutocrats and the public, and undermined trust in experts and expert opinions, which in turn was responsible for the rise of populism and Donald Trump’s election victory.

Amir Sufi of University of Chicago’s Booth School of Business, Atif Mian of Princeton University and Francesco Trebbi of the University of British Columbia co-authored an analysis of 60 countries which concluded that “financial crises tend to radicalise electorates. After a banking, currency, or debt crisis, our data indicate, the share of centrists or moderates in a country went down, while the share of left- or right-wing radicals went up in most cases.

 

Looking into the crystal ball

 

It’s interesting to note that most of the in-depth analyses didn’t just dwell on what happened 10 years ago, but also speculated on whether there will be another financial crisis and what might cause it. And while most articles agreed that, indeed, there’s going to be a next financial catastrophe, the possible reasons for it differed, with five of them standing out as most popular:

 

 

Global debt is certainly worrying: it recently reached a record level of 225% of world GDP, ($164 trillion), which is 12 points worse than in 2009, while the debt-to-GDP ratio has exceeded 318%. When paying their bills, countries with large fiscal deficits are compelled to pay even more interest, and it’s hard for them to handle even the smallest economic decline.

Investors should be careful with the levels of corporate debt, according to Joseph LaVorgna, chief Americas economist at investment bank Natixis, who said: “Firms have used artificially low rates to borrow in the capital markets and only buy back stock in the equity market. The inherent instability of debt over equity financing suggests that the next downturn could hit investment spending unusually hard.

The problem is with the potential means to pay the corporate debt off. Steve Blitz, a chief U.S. economist at TS Lombard, commented: „The real biggest problem lies, if I’m looking at the U.S., I look at debt-to-cash ratios, and I take out the top ten companies. Debt to cash is very very high, but debt equity is very very low. What that tells me is corporations are borrowing against their net worth, as opposed to borrowing against cash flow and income, which in effect is the same thing households were doing in 2004, 2005 and 2006.

Many developing (and often fragile) markets were troubled by financial woes this year: investors, anxious about rising interest rates and trade disputes, have been selling assets, reducing the investments in these markets to $2.2 billion in August 2018 from US$13.7 billion in July.

The divestment has compromised the currencies of Turkey, Indonesia,  Argentina, Iran and Venezuela, while players prefer to go back to US treasury bonds and other dollar-denominated assets. International trade suffers as a result, and there could be a domino effect with losses in developing markets undermining the global financial system.

In an interview with the BBC marking the crisis’10th anniversary, Bank of England Governor Mark Carney warned that China’s financial system represents one of the biggest risks to the world’s financial stability. “China is a great source of growth in the global economy, an economic miracle — lots of positives. At the same time, their financial sector has developed very rapidly, and it has many of the same assumptions that were made in the run-up to the last financial crisis,” he said, adding that the country might enter a new financial crisis on the scale of the one in 2008.

The main problem centres around the sale of non-guaranteed wealth-management products. Takahide Kiuchi, an economist at Nomura, explained: “The situation revolving around these [wealth-management products] is similar to the residential mortgage-backed securities problem in the US that eventually triggered the collapse of Lehman Brothers and the global financial crisis.”

The “too big to fail” financial institutions, who possess extreme market power and hence are exposed to many risks, have always subject to heated debates. These institutions are so large and so interconnected with the whole system that their collapse would be catastrophic to the global financial order – this is actually what happened with Lehman Brothers.

The big players keep on growing: the top five US banks operate 47% of banking assets, up 3% from 2007. Just six banks handle half of the assets of the whole industry, while 10 firms such as JP Morgan, Goldman Sachs and Citigroup hold more than half of the assets of the top 100 commercial banks.

The interconnectivity factor creates another major risk – a cyber attack on the financial system could easily trigger a global turmoil. This concern frequently tops the Depository Trust’s Systemic Risk Barometer.

 

Big fish

 

The biggest American banks dominated the anniversary coverage:

 

 

JP Morgan is the leader due to its dire prediction that the next crisis will strike in 2020 – such a specific forecast was bound to get the media’s attention. The bank based its calculation on the potential duration of the next recession, the scale of the economic expansion, the asset-price valuations and the level of deregulation.

The bank’s head quant, Marko Kolanovic, compiled a 168-page anniversary report, in which he foresaw that stocks would suffer from the rise of computerised trading and passive investing. The problem is that many quant hedge funds are programmed to sell when a market weakness occurs. This could result in a meltdown in stock prices and cause the next financial crisis.

Kolanovic clarified: “Basically, right now, you have large groups of investors who are purely mechanical. They sell on certain signals and not necessarily on fundamental developments, such as increases in the VIX [the Chicago Board Options Exchange Volatility Index], or a change in the bond-equity correlation, or simple price action. Meaning if the market goes down 2%, then they need to sell.

The rest of the banks on our list have been mentioned mainly because of their behaviour during and after the crisis. Goldman Sachs and Wells Fargo, for instance, have been recovering quite well, having made more in cumulative profits in the past 10 years than in the previous decade. Other banks, such as Bank of America Merrill Lynch, Citigroup and Morgan Stanley, have fallen behind.

There were reports on how some banks were punished for their role in the 2008 crash – during the last decade, financial corporations have paid more than $150 billion in fines. The banks which were hit the hardest included Merrill Lynch, JP Morgan, Citigroup, RBS, Deutsche Bank, Wells Fargo, Goldman Sachs, Credit Suisse and Morgan Stanley. In addition, there were articles analysing why some bankers and CEOs didn’t go to jail and whether the justice system is effective in these instances.

Some journalists focused on the way banks are trying to regain trust. Most notably, the reports concentrated on the increasing personalisation of financial services driven by digital innovations. Many writers warned about fintech’s market disruption, publishing headlines such as: „After the crisis, a new generation puts its trust in tech over traditional banks“ and “Replace ‘tech’ with ‘banks,’ and we’ve seen a big comeuppance before“. For more on this topic, read our post on the digital dawn of finance.

By analysing the way in which the media approached the anniversary, communication professionals in the financial sector would know where the main reputation challenges lie. This coverage provides a good summary of how the financial sector changed its image, and it could also tell where the industry stands today. Thus, it serves as an excellent indicator of the pressure points which need extra PR attention.

In such cases, it is of utmost importance to combine media analytics tools with experienced human analysisidentifying the most pertinent topics of the coverage and finding the meaning beyond the raw data is the fuel of every successful campaign.


 

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