The world appears to have forgotten a key lesson of the global financial crisis: some problems were spotted earlier, but sidelined.<\/p>\n
JPMorgan chief executive <\/p>\n
Jamie Dimon\u2019s<\/a> remark that \u201cwhen you see one cockroach, there are probably more\u201d is a blunt reminder of the global financial crisis in 2008. At the time, a flood of bad mortgages had revealed a tenuous labyrinth of complex, highly vulnerable financial products that saw some US investment banks collapse and equity markets struggle for six years to recover losses.<\/p>\n Evidence is mounting that we are approaching danger again, with revelations of bad debt exposure for <\/p>\n regional<\/a> and investment banks as a consequence of two bankruptcies. Auto parts maker First Brand Group filed for bankruptcy protection last month with US$11.6 billion in liabilities, while car dealership Tricolor did likewise with more than US$1 billion in liabilities.<\/p>\n It is true that US markets bounced back a day after some banks\u2019 stocks suffered their steepest single-day losses in more than six months on 16 October. Wall Street\u2019s fear index, the CBOE Volatility Index, shook off the anxiety after sharply jumping the day before.<\/p>\n However, many questions remain about the magnitude of exposure to holdings of other bad debt and the potential global fallout. Accompanying those is the backdrop of record <\/p>\n sovereign debt<\/a> worldwide, erratic trade policy confrontations and geopolitical tensions.<\/p>\n For the moment, chief executives are still leaning in, with more than half in an EY-Parthenon survey in September saying they are \u201cinvesting to accelerate portfolio transformation\u201d. But as the 2008 global financial crisis showed, situations change swiftly, especially in a highly interdependent global economy.<\/p>\n Meanwhile, chief executives are saying privately they have growing concerns about state capitalism and the <\/p>\n erosion of independence<\/a> at the US Federal Reserve, among other issues. These uncertainties could stop the music again, as former Citigroup chairman and chief executive Charles Prince put it when the global financial crisis was beginning to unfold.<\/p>\n Dimon\u2019s warning reflects his role in helping Washington navigate emergency relief to contain the financial wildfires and <\/p>\n stabilise capital markets<\/a>, including JPMorgan\u2019s rescue of failing rivals Bear Stearns and Washington Mutual, in 2008. His outlook reflects finance\u2019s innate vulnerability: the history of Wall Street traces the mercurial rise and fall of institutions when value is destroyed after public trust implodes.<\/p>\n What Dimon saw during the global financial crisis is how events snowballed when increasing numbers of risky subprime mortgages defaulted as the US housing bubble burst. Years of low interest rates and easy credit created an unsustainable cycle. Housing values rose so fast that banks initially figured they would still have sufficient equity after foreclosure sales.<\/p>\n The music stopped. Housing sales collapsed in the face of rising interest rates. Marginal borrowers, holding adjustable-rate mortgages, saw payments soar. Home values plummeted, leaving such borrowers owing more than their houses were worth.<\/p>\n That set off a chain reaction. Mortgage-backed securities packaged bundles of individual mortgages to pass off risks to investors, who borrowed heavily to own these securities. MBS products magnified and accelerated the collapse. That, in turn, brought the demise of credit-default swaps, instruments designed as insurance policies against MBS defaults. These derivatives were poorly understood and there wasn\u2019t enough capital set aside to pay out MBS losses.<\/p>\n Today\u2019s macroeconomic backdrop is dramatically different, but in some ways even more problematic. \u201cFinancial stability risks remain elevated amid risks presented by stretched asset valuations, growing pressure in sovereign bond markets and the increasing role of non-bank financial institutions,\u201d the International Monetary Fund\u2019s Global Financial Stability Report observed earlier this month.<\/p>\n Interdependence among financial markets has intensified, heightening contagion risks, which facilitated a global recession during the global financial crisis. These markets \u201chave become more connected, which has made it easier for financial conditions to spread across borders, including to major advanced economies\u201d, the Bank for International Settlements concluded in a June report.<\/p>\n Global banks, asset managers, insurers and pension funds often hold overlapping exposures. This is more worrisome because the multilateral frameworks used to co-ordinate policies among the world\u2019s largest economies, especially during a crisis, have been swept aside by bilateral and regional diplomacy.<\/p>\n Interdependencies accelerate ripple effects, which range from a liquidity squeeze in credit markets to <\/p>\n capital flight<\/a>, when investors demand higher returns for increased risks. The collapse of <\/p>\n Silicon Valley Bank<\/a> in 2023 shows the velocity at which stress spreads.<\/p>\n Silicon Valley Bank collapse stuns tech firms around the world, global operations dismantled<\/p>\n Another structural change has enormous consequences, but the global financial crisis sheds little light on it. This is the transition of financial intermediation to non-bank institutions, such as hedge funds, private equity firms, leasing enterprises, digital concerns and pension funds.<\/p>\n This rise is demonstrated by the emergence of the <\/p>\n