Second verse, same as the first?

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In 2007, I worked for a community bank with a long history of high performance. At the time, I was running the only national business line, the home improvement finance business. Competition was pretty fierce but our volumes were growing steadily. Most of the water cooler chatter in my circles was about loan sales to keep the portfolio balanced and the impact of conduits on commercial real estate pricing and loan structures.

Behind the scenes – though I wasn’t aware of it – there were negotiations to sell the bank. Then, in the middle of the year, we announced that we were being acquired by a larger local institution. The bank was sold at its peak value, which seems a minor miracle to me today. Regardless, many of us were unhappy about the sale initially. We were deep into projects and developing business lines that we believed in. However, our CEO and CFO had a much clearer view of what was happening in the financial markets than the rest of us. They felt that the valuation we received in the transaction was easily the best of our options. Within a couple months, it was clear that a recession was in the works and, shortly after the deal closed, that recession was developing into something quite ominous.

While I didn’t have the opportunity to discuss with our executives what they saw in the market, the accuracy of their premonition stuck with me. I can remember how frothy the market was at the time. The low market rates had investors chasing yields and taking risks that they didn’t really understand. Areas of lending that had been owned by banks historically were flooded with investor cash. Banks like us were pressured to compete, which meant taking risks that made us uncomfortable and could only be justified by turning a blind eye to the past. And then it all fell apart.

So, what’s the point? The point is that today feels a little like it did in early 2007. I’m generally not one of those doom-and-gloom guys who predicts 35 of every 2 recessions. The world continues to develop into a better place despite the challenges we face. We’re lucky to be alive in this place and at this point in history. But I wonder whether we learned the appropriate lessons from the Great Recession. Just like then, investor money is flooding into lending and risk management appears to be an afterthought. Today, everybody and their uncle has a unique underwriting model that has been validated statistically – but only during good times. Peer-to-peer lenders are doing IPOs, the solar industry has achieved celebrity status, the markets continue their impressive bull run, mortgage standards are loosening…what could go wrong?

My predictions are worth exactly what people pay for them (nothing), so I’ll stay away from making one. But the question remains: have we learned lessons from recent history? Or will this song require a third verse, same as the first?

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