From the near collapse of Bear Stearns in March to the bankruptcy of Lehman Brothers in September, the past year saw the unthinkable take place in the financial services industry.
The entire landscape for financial services was altered, as some industry giants were either bought up or disappeared altogether, while others were forced to adopt new structures. Not surprisingly, share prices in much of the sector reflected the upheaval.
The year began with many financial firms attempting to minimize losses tied to rising mortgage defaults and the deteriorating housing market. Investment bank Bear Stearns Cos., which was heavily invested in bonds backed by troubled mortgages, was among the first to crack.
In March, clients pulled money out of the investment bank fearing it wouldn't be able to meet its financial obligations. Its stock _ which had traded as high as $153.50 in June 2007 according to Ned Davis Research _ tumbled. The government helped broker a deal to sell Bear Stearns to JPMorgan Chase & Co. for $10 per share, after an initial price of $2 per share. The plan marked the beginning of the U.S. government's effort and billions of dollars spent to rescue the troubled industry.
Problems broadened in the credit and lending markets through the summer and exploded in September. The pain extended to financial services companies including insurers and mortgage, student and credit card lenders.
"One would've had to be an incredibly dour person to imagine that type of destruction," said Anton Schutz, portfolio manager of the Burnham Financial Industries Fund and Burnham Financial Services Fund. "Firms focused on lending to homeowners failed and firms with tremendous securities portfolios linked to those loans failed."
The Dow Jones U.S. General Financial Services Index slid 63 percent in 2008 as shares of companies like student lender Sallie Mae and asset manager Janus Capital Group Inc. lost between half or nearly all of their value. In the same period, the Dow Jones Total Market index fell 39 percent and the Standard & Poor's 500 index dropped 39 percent.
Companies heavily invested in mortgage lending fared the worst throughout the year. IndyMac Bancorp Inc., a California-based bank that focused primarily on mortgage lending, failed in July.
In September, mortgage financiers Fannie Mae and Freddie Mac, which own or guarantee nearly half of all U.S. mortgages, were taken over by the government. Each company's shares fell about 98 percent in 2008.
"At the beginning of the year, the focus was on subprime and really all residential real estate credit," said Frederick Cannon, an analyst at Keefe, Bruyette & Woods Inc. "At the end of the year, (the industry) was looking at credit risk across all debt."
Lehman was devastated, in part, by its business in complex insurance-like instruments called credit default swaps. Problems with swaps also led the government to bailout insurance giant American International Group Inc. with a package of loans now totaling about $150 billion. Citigroup Inc. also received billions of dollars in aid from the government amid concern about its capital position. Citi shares fell 77 percent during the year.
Within days of Lehman's bankruptcy filing in September, Merrill Lynch & Co. sold itself to Bank of America Corp. as investors worried about the ability of investment banks to remain independent amid the tumult.
After the Lehman collapse and Merrill Lynch sale, investment banking stalwarts Goldman Sachs Group Inc. and Morgan Stanley _ viewed as safer bets during the initial downturn _ became bank holding companies in an effort to access a wide array of federal lending programs, including a $700 billion Treasury Department plan to directly invest in banks. Other financial firms like American Express Co. and CIT Group Inc. became bank holding companies in recent months.
Both Goldman and Morgan Stanley reported quarterly losses of more than $2 billion for the quarter ended Nov. 30 _ Goldman's first quarterly loss since it went public in 1999. Goldman shares plummeted 62 percent in 2008, while Morgan Stanley shares declined 71 percent.
In 2008, financial companies mostly speculated about losses. In 2009, they will feel more pain as they record actual losses, Cannon said.
"It might be a painful medicine, but it helps us get through the cycle," Cannon said.
Even sectors of the financial services industry without credit risk exposure or those that remained conservative in recent years and have not faced mounting loan losses were unable to avoid getting tangled up in the 2008 downturn. Shares of companies like stock exchange operator CME Group Inc. fell 71 percent and shares of credit card processor MasterCard Inc. sagged 35 percent and are down more than 50 percent from their 2008 peak.