The Motley Fool Previous Page

When Will It End?

Morgan Housel
February 24, 2009

You've probably heard by now: Stocks closed yesterday at their lowest level since 1997.

Anyone remember 1997? Google (Nasdaq: GOOG  ) wasn't even a company. General Motors (NYSE: GM  ) was one of the most profitable companies in the world. Bob Dole had just run for president. Stocks were still quoted in fractions rather than decimals. Hanson was crazy big.

More relevantly, 1997 was around the same time then-Fed Chairman Alan Greenspan gave his famous "irrational exuberance" speech, warning that "…we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy."

But he did. And we did. Almost everyone underestimated how complex the intertwining relationships between Wall Street and Main Street were, and more importantly, the relationships between the global economies. China needed demand from American consumers; American markets needed capital from Chinese savers; consumers relied on that capital to fund a free-for-all real estate market; banks rerouted the proceeds into a secondary credit market that couldn’t care less about loan quality. It was a disaster waiting to happen, and as soon as one end of the self-fulfilling cycle shut off, the entire house of cards came crumbling down in a historic way.

Just how historic? Using peak-to-trough declines, here's how our current situation looks against other market crashes:



S&P 500 decline


Great Depression



Oil embargo



Dot-com crash



Unrivaled financial insanity



Yep -- we're now officially in the biggest market crash since the Great Depression. In fact, we found out courtesy of the World Economic Forum that more than 40% of total global wealth has been destroyed since the crisis began. You have plenty of company, dear sufferers.

Who to blame?
The big driver of this crash right now is obviously banks. Confidence in them -- as well as in the government's ability to save them -- is shot to pieces. The recent rumor that Citigroup (NYSE: C  ) would be swapping government preferred shares for common stock, for example, is a step in the right direction, but woefully inadequate.

Citi has around $23 billion of tangible common equity, which equates to a 1.2% "TCE ratio." To get that ratio up to the historical norm of around 6%, it would need something along the lines of $100 billion of fresh capital -- and that's assuming asset writedowns are over (which they aren't). Bank of America (NYSE: BAC  ) would need in the neighborhood of $75 billion to reach the same capital levels. While a gazillion dollars has already been thrown at banks to stop their hemorrhaging, it's still not nearly enough, and that outlook is flushing the economy down the toilet and scaring the pants off the market.

Be that as it may, it's not hard to make an argument that markets are currently being controlled by witless hysteria, opening the doors to investment values we haven't seen this generation. As Oscar Wilde once said, "We are all in the gutter, but some of us are looking at the stars." I'm looking for silver linings here, people.

To illustrate what I mean, I ran a quick screen to find stocks trading at less than three times 2008 earnings. Dozens popped up, including these three:


Market Cap

2008 Net Income

ArcelorMittal (NYSE: MT