As we count down to the 10-year anniversary of the Lehman Brothers collapse, could the world be facing another market meltdown?
Growing concern about economies such as Argentina, Turkey, South Africa and Iran pushed the MSCI Emerging Markets Index into "bear" territory yesterday.
Stock markets on that index are now down by an average of 20 per cent since the start of the year, following sharp falls last week.
The currencies of Argentina, Turkey and Iran have all hit record lows and concerns are growing about a contagion effect spreading to other countries. South Africa's's economy has gone into recession.
New Zealand's NZX50 share index has been caught in the volatility as investor confidence swings between bullishness, based on US fundamentals, and fears about emerging markets.
During last month the local market surged 6 per cent to reach a record 9362 points before falling nearly 3 per cent in just over a week, to close yesterday at 9095.
In theory, the ongoing strength of the US economy makes a serious financial crisis unlikely right now.
But ironically, America's return to economic health is creating new risks as higher US interest rates and a stronger greenback put the squeeze on debt laden economies.
A decade after Lehman's collapse — widely recognised as the peak of the global financial crisis — we are still effectively in recovery, with central banking settings well below historic averages.
However, the US Federal Reserve has begun the process of returning to normal settings. It has raised interest rates seven times from the record post-GFC lows.
The Fed is widely expected to hike again on September 26, in a move that will further raise borrowing costs around the world.
"Unfortunately, the unintended consequence of this low interest rate environment is that we are fuelling the same type of credit bubble that we did previously," says Pie Funds chief executive Mike Taylor.
"Banking is essentially a trust based system so as long as we retain trust in the system then we don't have another crisis. But nothing goes up forever."
Global debt has now passed its 2008 level — US$250 trillion at last count.
As a percentage of GDP, debt was now well up on pre-crisis levels, Taylor said.
The Lehman anniversary, combined with nervousness about the length of the US bull market — now in its ninth year — has sharpened the focus on potential risks.
The escalation of the trade war between China and the US also weighs on sentiment, with tech stocks this week bearing the brunt of news that President Donald Trump plans to proceed with a further US$200 billion in tariffs on Chinese imports.
International Monetary Fund managing director Christine Lagarde this week warned that the financial system was "safer but not safe enough", and that the regulatory pendulum had begun to swing back toward looser oversight.
"Perhaps most worryingly of all, policy makers are facing substantial pressure from industry to roll back post-crisis regulations," she wrote in a blog post.
On September 15, 2008 the collapse of Lehman Brothers bank — the biggest bankruptcy ever — sent shock waves around the world.
It was the biggest financial crisis the world had seen since 1929.
"In the industry at the time it was Armageddon ... It was severe, it was fast and it was very, very painful," recalls Taylor, who had just launched his equities business at the time.
"It was a baptism by fire," he says. "There were times when you thought, is it never going to recover, what is the total damage for the industry going to be?"
To get a sense of how dramatic it seemed at the time, it is worth looking at the history of Lehman Brothers.
Founded in 1850 by German immigrant brothers Henry and Mayer Lehman, it represented a classic "American dream" success story.
It grew with the country, joining the New York Stock Exchange in 1887, and survived and thrived even through the big market crashes of 1929 and 1987.
By 2008 it was the fourth largest US investment bank, with assets of US$640b.
However, in the late 1990s Lehman became one of the first big investment banks to move into the complex area of mortgage backed securities — the investment class that would eventually cause the global financial crisis.
In 2003 and 2004 Lehman acquired five mortgage lenders, including sub-prime lender BNC Mortgage and Aurora Loan Services, website Investopedia notes in its history.
In 2007, Lehman underwrote more mortgage-backed securities than any other firm, accumulating a US$85b portfolio.
The US property boom was in full swing and Lehman stock soared to a record high in 2007, giving it a market capitalisation of US$60b.
"By the time we reached the peak in 2007, they were 31 times leveraged," said Taylor. "What that meant was if their assets fell by about 3 per cent, they were bankrupt."
But as cracks started to appear in the housing market — and particularly the sub-prime mortgage market — Lehman management failed to acknowledge the broader risk, describing it at the time as "well contained".
In the next few months the crisis snowballed. Lehman's highly leveraged position left it exposed and a series of writedowns wasn't enough to stop the meltdown.
In the second week of September 2008 it waved the white flag and attempted to engineer a bailout.
"There was an 11th-hour meeting called at the Federal Reserve; they tried to get other banks to bail them out," Taylor says.
When that happened the financial world was struck with "fear and contagion".
"They thought, well if the Government's not going to bail us out, who's next?"
Bank of America, Merrill Lynch and British bank Barclays all declined to get involved.
Then the big call was made by US officials.
"The Government said, hands off, we're not going to do it and Lehman was left to collapse."
Markets around the world plunged.
During the whole global financial crisis — or "great recession" — shares fell by at least 50 per cent for most markets, Taylor says. "Some emerging markets fell 65-70 per cent from their peak and in a very short space of time — only 18 months."
The full meltdown was ultimately prevented by the crisis measures taken by central banks — money printing and ultra-low interest rates.
- The Market Watch video show is produced in association with Pie Funds