To put it simply, 2008 has been a horrific year.
Investors have watched share market indices, including China's CSI 300, Sweden's Stockholm General and the United States S&P 500, crumble in value.
The financial services sector has shed over 200,000 jobs globally as banks aggressively trim costs to deal with over $1 trillion in mortgage-related losses.The Dow Jones Industrial Average slumped from a record 14,198 points on October 11, 2007, to 7449 points on November 21, 2008. And as those points vanished by the 100s each day, people lost jobs, and companies begged for a lifeline or just tragically collapsed.
The early signs were when US financial services groups Citigroup and Merrill Lynch reported nearly $28 billion in collective mortgage related write-downs.
The losses, reported in January, prompted sovereign wealth funds from Kuwait to Singapore to make multi-billion dollar investments in both firms.
The US Federal Reserve cut interest rates by 1.25 percentage points in two separate meetings to 3 per cent in the same month.
Global stocks rallied in February after the cuts. Fed chairman Ben Bernanke and US Treasury secretary Hank Paulson tried to reassure the country that the sub-prime crisis was contained and would not spill over into the broader economy.
They were wrong, and the worst was yet to come. But before the true nightmares of the year came to fruition, inflation was creating a major headache in the first half of 2008.
Demand for food and energy was soaring in emerging markets, including China and India. The cost of food staples, including corn, wheat, soybeans and rice, were rising so rapidly that there were riots in Egypt and the Philippines and even food hoarding in the US.
Oil spiked to a record US$147.27 on July 14; Goldman Sachs bullishly forecast it could rally to US$200.
Meanwhile, financial institutions, including Citigroup, Merrill Lynch, Fortis, UBS and Royal Bank of Scotland, continued to post billions of dollars in sub-prime losses in the second quarter. The financial services sector also became a living nightmare as job losses ratcheted up in their 1000s by the week.
In September, the financial crisis truly started to erupt. Fannie Mae and Freddie Mac, which own or guarantee around 40 per cent of $18.5 trillion in US mortgage-residential debt outstanding, were seized by Uncle Sam.
Both firms were put into a conservatorship on September 7 and the US Treasury agreed to pump $150 billion into each firm to keep them afloat.
While Fannie and Freddie were rescued, investment houses Lehman Brothers and Merrill Lynch moved into the crosshairs.
Before it collapsed, Merrill Lynch agreed on September 14 to sell itself to Bank of America for $92 billion.
Lehman Brothers though came to a dead end. After shunning a potential lifesaving deal by selling a stake to Korea Development Bank, the biggest underwriter of US bonds backed by mortgages filed for bankruptcy protection, citing $945 billion of bank debt.
Five days later, rivals Goldman Sachs and Morgan Stanley received approval to become bank holding companies, allowing them to garner cash deposits to weather the credit crunch.
It was an end of an era for Wall Street. But it wasn't by any means an end to the pain.
AIG was next in line. Investors lost confidence in the company as its stock price fell 95 per cent from US$70.13 to US$1.25 on September 16.
Belgium, the Netherlands and Luxembourg agreed to bail out Fortis through a US$16.4 billion cash injection. France and Belgium bailed out Dexia for 6.4 billion euros.
The multinational insurer was on the brink and the Fed threw it a $131 billion lifeline in return for a 79.9 per cent stake in the company.
Global stocks rallied again. Paulson conjured a $1 trillion financial rescue package in an attempt to end the meltdown. The plan headed to Congress.
Savings and loan giant Washington Mutual collapsed as the plan was on the way, the biggest banking failure in American history. Paulson's plan was defeated by 228 votes to 205 on September 29.
Investors reacted violently. The Dow Average plummeted a record 777 points to 10,365. Worldwide stocks tanked and the financial crisis spread to Europe as British lender Bradford and Bingley was nationalised. Iceland's economy was hit after its three biggest banks collapsed from a multi-year debt binge.
Something needed to be done and quickly. Paulson offered a reworked version of the $1 trillion package to US senators, which passed through Congress on October 1.
The Fed and Treasury had exhausted their heaviest weaponry, but it was clear that by this point that no matter how much intervention there was, the crisis would have to heal itself and the key ingredient was time.
The financial crisis continued. The Dow Average broke global investor confidence after it closed below 10,000 points.
On that day, Australia was briefly in the global media spotlight when the Reserve Bank of Australia slashed interest rates by 1 percentage point, the most aggressive move by a central banker so far in the year.
The next day the Fed, European Central Bank, Bank of Canada and Sweden's Riksbank simultaneously cut their benchmark rates by half a percentage point.
Nothing worked and then the United Kingdom banking system delved further into peril. The British Government stepped in, using $83 billion of taxpayer money to partly nationalise Royal Bank of Scotland, Halifax Bank of Scotland and Lloyds TSB on October 13.
UBS was thrown a $92 billion lifeline by the Swiss Government on the same day.
Job culling surged in late October and November. But then a signifying moment in human history occurred. Democratic presidential candidate Barack Obama defeated his Republican rival, John McCain, to become the first US president of African-American descent on November 5.
Stocks rallied in the hope Obama's plans to create jobs, enforce more market regulations, boost infrastructure spending and pass a stimulus package would help the economy.
Two weeks later, Citigroup announced an unprecedented 52,000 job cuts globally, with some positions in Australia being culled. Its stock price tumbled 50 per cent in several trading sessions following the announcement.
The firm, which embodies the phrase 'too big to fail, received a $472 billion loan guarantee and $31 billion in fresh capital from the US Government.
In Australia, news of overseas bank failures horrified Australians, and the Federal Government's rhetoric about the Big Four's strength just wasn't enough assurance.
Prime Minister Kevin Rudd called a crisis meeting on October 11 and 12 and announced the Government would guarantee all Australian deposits for the next three years and all wholesale term funding.
The financial planning and funds management community was thrown into chaos as the Government's move sparked an unintended consequence because investors fled from mortgage funds and into the safety of Australian deposits.
Asset managers, including Perpetual, Axa, Challenger and Australian Unity, and smaller managers have frozen over $20 billion worth of property, mortgage and income funds since the announcement.
Consumer confidence had also worsened because economic growth slowed and Australian firms shed jobs, or were rumoured to have started culling.
Babcock and Brown in November announced the largest amount of employee dismissals in Australia, planning to trim 850 staff by 2010 as it restructured its business to focus on infrastructure.
BlackRock in Australia cut 10 jobs. AMP dismissed 46 staff within its wealth business. Suncorp and HSBC had made minor back-office retrenchments. BT Financial Group retrenched 100 staff in July. MLC is reviewing all new positions and Macquarie Group is said to have let go of over 100 staff.
The All Ordinaries Index began the year at 6421 points, just shy of the record 6873 points it reached in October 2007.
The benchmark of 500 Australian equities sunk to 3201 points by November 21, wiping out nearly five years of gains and underperforming markets in the US and Europe, which are already in recession.
Base metal prices crashed in the second half of 2008 as demand collapsed, evidenced by production cuts from miners including BHP Billiton and Rio Tinto. BHP withdrew its bid for Rio on November 25, citing the economic crisis.
Economists including AMP Capital's Shane Oliver had reversed their position of optimism and moved to forecast that Australia would enter recession.
Australian investor confidence has also been hammered by local corporate collapses.
Opes Prime appointed a receiver and administrator in March after a funding shortfall. Lift Capital collapsed on April 10 after its margin lending model failed.
Allco Finance Group became the first Australian high-profile victim, entering voluntary administration on November 4 after its business collapsed under the weight of its own debt.
ABC Learning centers collapsed two days later, again on debt.
Despite the gloom sparked by company failures, the financial services sector had its bright spots in terms of consolidation, which may boost the long-term competitiveness of surviving firms.
Westpac Bank and St George Bank agreed to an $18 billion mega-merger on May 13.
The proposal passed regulatory approvals and a shareholder vote in November and the combined entity, led by Gail Kelly, began trading on December 1 with a market value of $44.6 billion.
Rival Commonwealth Bank of Australia's (CBA) market value was $44.08 billion.
Challenger Financial Services Group had sold its financial planning division to Axa for $150 million in June.
The sale included Genesys Wealth Advisers and Synergy Capital Management. In a separate transaction, Axa transferred its $1.3 billion Australian annuities portfolio to Challenger.
CBA agreed to buy BankWest from its troubled parent, Halifax Bank of Scotland, for $2.1 billion in October.
The purchase was considered a steal because CBA paid 20 per cent below book value for BankWest, compared to Westpac's takeover of St George Bank at 2.7 times book value.
The acquisition allowed CBA to double its presence in Western Australia and included wealth management firms St Andrew's Australia and Whittaker Macnaught.
IOOF Holdings (IOOF) and Australian Wealth Management (AWM) agreed to merge and create an entity that manages $88 billion in assets.
The merger will be achieved through a scheme of arrangement, with IOOF issuing one IOOF share for every 3.73 AWM shares.
The new entity is to be named IOOF, and shareholders will be asked to vote on the merger in March or April next year.
With 2008 now fast approaching the finish line, the industry will have a chance to reflect on a year that likely won't be forgotten by the current generation. It's not often financial news creeps its way into the mainstream news and becomes the top concern for so many people.
Indeed the year will end on a low note. But while there is an aura of doom and gloom for investors, there is also an abundance of opportunity as credit and stock market valuations have dropped to decade lows.
Financial planners proved their worth as the value of good quality advice was undeniably soothing to nervous clients amid a bear market.
The financial sector is poised to be reborn and will be stronger than before as this economic crisis abates.
The Year Ahead - 2009
Will Australia avoid a recession?
Although investing is a long-term game, the economic downturn has certainly provided challenges in the short term. As financial planners and their clients adjust to the new climate, the question on everyone's mind is how deep will we go and for how long?
Lat year was the year in which the 17-year bull run of the economy came to an end as Australia proved unable to guide its galloping herd away from the crippling effects of the global financial crisis.
For financial planners this has meant lower revenues as their funds under management shrunk and new inflows practically dried up.
It is, therefore, not hard to predict what will be on people's minds in the coming year, and the question that covers all concerns for 2009 is whether the economy will fall into a prolonged recession.
What recession?
Ask economists if a recession is likely and they will respond with a counter question: "What do you mean by recession?"
Unlike the United States, Australia does not have an official bureau to determine when a recession starts and as a result there are many different schools of thought on how to come to an appropriate description of it.
A widely-used rule of thumb says a recession comes after two consecutive quarters of real gross domestic product (GDP) contraction. According to this definition, most people agree Australia will probably avoid a recession in 2009.
But this definition evokes a sigh of desperation from economists. "Two quarters of negative growth is a pseudo definition," BT Financial chief economist Chris Caton says.
"It is not used anywhere in the world.
"For example, the US declared the economy is in a recession since December 2007 and they have not yet recorded two quarters of negative growth."
The problem with the two-quarter definition is that it does not identify all recessions of the past decades, while it labels other periods of lower growth as recessions where the general consensus speaks of an economic blip.
"When people say to me recession, they mean 1982 or 1990; they don't mean 2000 - not in Australia anyway," nabCapital chief economist Alan Oster says.
Nobody really knows where the two-quarter rule comes from - the media says it comes from economists, while economists blame the media - but it is undisputedly a flawed one.
GDP figures are complex and often revised. Besides, they mean different things for different countries; a growth figure of 3 per cent would be reasonabe for Australia, but disastrous in China.
Unemployment barometer
To most people a recession is not about a slump in economic growth, but about a rise in unemployment. ANZ chief economist Saul Eslake started to work on a definition based on this criteria, inspired by a question his boss sent him in the middle of the night about the technical description of a depression.
Eslake came up with a definition under which a recession occurs when unemployment rises by 1.5 per cent or more within a 12-month period.
The advantage of using this definition is that it pleases economists because it reflects the underlying notion that a recession refers to a significant shortfall in growth relative to the economy's potential.
"It also makes more sense to the man or woman in the street, who, not unreasonably, don't know what GDP is and don't know when it is rising or falling, but certainly know what a rise in unemployment looks like," Eslake says.
According to this definition, the Australian economy most likely will fall into a recession.
Forecasts
Eslake predicts unemployment will rise from the current 4.3 per cent to 5.75 per cent in the December quarter of 2009. He sees unemployment peaking in the December quarter of 2010 at 6.75 per cent, and doesn't expect an improvement before the second half of 2011.
Meanwhile, GDP growth will remain positive next year at 0.6 per cent.
"It's an exceptionally difficult environment. It's hard to think of a trading partner [of Australia] who won't have a recession in their definition. China won't have negative growth, but it will certainly have rising unemployment. And that may be true for India," Eslake says.
Oster predicts a rise in unemployment to 6 per cent by the end of 2009 and to 6.5 per cent in 2010, while Caton does not want to put a figure to the unemployment rate, but says it might go up as high as 8 per cent in the next few years.
Caton is convinced we are in for a prolonged slump.
"We've had a pattern of deep recessions lately. The last two recessions, the one in the early '80s and the one in 1990, were both quite deep," he says.
"Let's put it this way: we just had a very prolonged period of economic recovery [since the last recession]."
Whether we call it a recession, a downturn or an economic blip, the result will be the same. Many people will tighten their belts as they worry about keeping their jobs. This will put further pressure on inflows of financial planners.
As revenues fall, financial planners will either have to diversify or look for a parent company with deep pockets that can help them through the lean times. Not everyone will be able to adjust successfully to the new conditions and already voices can be heard that the industry is at the forefront of a new wave of consolidation.
