Global Financial Crisis 2008

The Global Financial Crisis unfolded over roughly 18 months as US subprime mortgage losses propagated through securitised credit markets and into bank balance sheets. The S&P 500 peaked in October 2007 and bottomed in March 2009 at approximately 57% below its high — the worst US equity drawdown since the Great Depression. Bear Stearns was rescued in March 2008; Lehman Brothers failed in September 2008; AIG was nationalised days later; money-market funds "broke the buck"; and the commercial-paper market briefly stopped functioning. Central banks responded with coordinated rate cuts to near zero and the first round of quantitative easing. The US economy contracted sharply and unemployment peaked at 10%.

• Long-dated US Treasuries delivered strong positive returns as yields collapsed.
• Gold rose meaningfully across the crisis and continued rising into 2011.
• The US dollar and the Japanese yen strengthened during the acute panic phase.
• Cash held in insured deposits or T-bills preserved capital entirely.
• Investors who systematically rebalanced into equities during 2008-2009 — or kept contributing through a SIP — captured a generationally low entry price.

• Bank stocks — many large US and European banks lost 70-90% of their value; Lehman, Washington Mutual and Wachovia were wiped out or absorbed in distressed deals.
• Mortgage-backed securities and CDOs, including many tranches that had been rated investment-grade.
• Hedge-fund strategies that relied on continuous repo financing or short-volatility exposures.
• Diversification across "alternative" assets (private equity, real estate, structured credit) that ultimately moved together when bank funding seized.
• Leveraged real-estate equity, which faced both falling prices and tightening credit.

• Correlations across "risk assets" converge to one in a liquidity crisis. Asset classes that diversified each other in normal markets all fell together when bank funding froze.
• Counterparty risk is real. Bank, broker and fund choice can matter more than security selection in an acute panic.
• The recovery, when it came, was rapid. The S&P 500 doubled from its March 2009 low within roughly four years, rewarding investors who maintained equity exposure through the drawdown.
• Government and central-bank backstops fundamentally changed the loss path. The bottom did not coincide with peak bad news; it coincided with the credible promise of policy support.