Legendary funding financial institution Lehman Brothers was on hearth — and nobody was coming to place it out.
Financial institution of America refused to rescue the 158-year-old Wall Road agency with out assist from Uncle Sam. The British authorities would not let Barclays ( purchase Lehman Brothers and its poisonous steadiness sheet. And Washington determined in opposition to one other politically unpopular bailout. )
So Lehman Brothers was allowed to fail. At 1:45 a.m. on Monday, September 15, 2008, Lehman Brothers filed for Chapter 11 chapter safety.
What ensued was the biggest and most advanced chapter in American historical past. However that does not do justice to the harm Lehman’s demise triggered the monetary system. The implosion of Lehman Brothers — and the mayhem it unleashed — was probably the most terrifying second for enterprise and the US economic system for the reason that Nice Despair.
“It was the second when the monetary disaster absolutely burst upon us, when panic seized the markets,” Phil Angelides, who led the official bipartisan inquiry into the 2008 meltdown, advised CNNMoney.
Lehman’s failure shook Wall Road to its core. The Dow plummeted 504 factors, the equal of 1,300 factors at the moment. Some $700 billion vanished from retirement plans and different funding funds. The panic that adopted plunged the American economic system right into a extreme downturn, now often known as the Nice Recession.
Immediately, Lehman Brothers and its CEO Dick Fuld are the poster kids for the reckless risk-taking that wrecked the economic system.
Lehman’s remaining days had been marked by frantic last-minute negotiations over its destiny.
Proper up till the tip, everybody thought somebody would rescue Lehman Brothers: Certainly the agency would not be allowed to fail. Bear Stearns, a smaller funding financial institution, had been saved simply six months earlier by Washington and JPMorgan Chase (. )
On Wednesday, September 10, South Korea’s Korean Improvement Financial institution dropped out of the operating to be Lehman Brothers’ white knight. The information — mixed with Lehman’s announcement of a file $three.9 billion quarterly loss — despatched the financial institution’s shares cratering 45%.
With South Korea out, Treasury Secretary Hank Paulson known as Financial institution of America CEO Ken Lewis to ask him to discover a inventive means to purchase Lehman Brothers. Put in your “creativeness hat,” Paulson urged Lewis.
However by Friday, September 12, Financial institution of America stated it was bowing out until the federal government was prepared to assist. Lehman was merely caught with too many “illiquid” mortgage belongings, and it could not promote them shortly sufficient to satisfy different obligations. Financial institution of America ( determined as a substitute to purchase the subsequent funding financial institution in line to fail: Merrill Lynch. )
“You simply did not know what was going to occur if you acquired into work on Monday,” stated Brady Kim, who labored as an analyst on Lehman’s buying and selling desk. “Had been you going to be working for Barclays? Some Korean conglomerate?”
The one possibility few noticed coming was chapter. “They are not simply going to let the financial institution go underneath,” Kim stated.
‘Not a penny’
That Friday night, Paulson ordered the heads of the massive Wall Road companies to satisfy on the New York Fed’s headquarters. They had been advised to give you a private-sector answer to save lots of Lehman.
American officers had little urge for food for one more bailout. That they had simply seized management of teetering mortgage giants Fannie Mae and Freddie Mac the weekend earlier than. Fed officers stated Paulson made it clear there can be no authorities assist this time, “not a penny.”
Saturday introduced an obvious breakthrough for Lehman: Barclays agreed to purchase Lehman — so long as Wall Road would take some belongings off its fingers. However the Barclays deal went up in smoke on Sunday when UK regulators balked at blessing the dangerous deal.
“Think about if I stated sure to a British financial institution shopping for a really giant American financial institution which … collapsed the next week,” Alistair Darling, the UK’s chancellor of the exchequer, later advised the Monetary Disaster Inquiry Fee.
‘It was pandemonium up there’
With no patrons left, regulators pressured Lehman Brothers to file for chapter on Sunday evening, earlier than buying and selling opened within the morning.
Lehman’s attorneys and executives left the New York Fed to tell the board that no rescue was coming.
“We went again to the headquarters, and it was pandemonium up there,” Harvey Miller, the chapter counselor for Lehman Brothers, later advised investigators.
The Fed rejected a last-minute Lehman plea for extra help from the central financial institution, resulting in the early-morning chapter.
The collapse shocked workers.
“I by no means thought the corporate would exit of enterprise. It was horrible,” stated James Chico, who labored as an analyst within the again workplace at Lehman for greater than 20 years.
Tom Rogers was on his honeymoon in St. Lucia when the financial institution, his employer for seven years, went bust.
“I got here again, and it was simply mass chaos,” stated Rogers, who began as an intern at Lehman and moved as much as senior analyst within the agency’s reinsurance enterprise.
The turmoil confirmed simply how fragile and interconnected your entire system was. The state of affairs was exacerbated by the near-collapse of AIG (, the insurance coverage behemoth. Regulators feared AIG’s demise would convey down the entire system — so AIG was given a $182 billion bailout. )
Concern and panic shortly unfold by the monetary system, inflicting credit score markets to freeze. Even giant and iconic industrial corporations akin to Normal Motors ( had been unable to obtain short-term funding. )
“The monetary disaster reached cataclysmic proportions with the collapse of Lehman Brothers,” the disaster inquiry fee concluded.
Fuld, who had infamously advised shareholders in April 2008 that “the worst is behind us,” emerged as one of many villains of the disaster. He steered Lehman proper into the face of an epic storm.
Between 2000 and 2007, Lehman’s belongings had greater than tripled to $691 billion. And its borrowing ratio, often known as leverage, jumped to 40 occasions its shareholders’ fairness within the firm. The agency had comparatively little capital to guard in opposition to hassle.
Madelyn Antoncic, Lehman’s chief threat officer from 2004 to 2007, tried and did not warn Fuld in opposition to taking over extra mortgage threat.
“On the senior stage, they had been making an attempt to push so laborious that the wheels began to return off,” Antoncic advised the fee.
For his half, Fuld advised lawmakers in 2008 that the ache of Lehman’s failure “will stick with me for the remainder of my life.”
The previous Lehman Brothers boss, who made and misplaced a $1 billion fortune on Wall Road, has made few public appearances for the reason that disaster. He did converse at a 2015 occasion the place he admitted he would do some issues in another way.
“I missed the violence of the market and the way it unfold from one asset class to the subsequent,” Fuld stated.
The place had been the regulators?
Fuld would not deserve all of the blame. The agency’s demise underscored the wild risk-taking that regulators and CEOs had allowed to turn into rampant throughout Wall Road.
Think about, for instance, the 2000 deregulation of unique monetary devices often known as derivatives. Regulators had little window into how these trades linked banks to 1 one other. When one financial institution failed, different monetary establishments fell in a type of domino impact.
Even a month earlier than Lehman’s chapter, officers on the Fed had been nonetheless in search of info on the financial institution’s 900,000 spinoff contracts. They usually had been clueless in regards to the threat posed by AIG’s monumental e-book of derivatives.
“The individuals charged with overseeing our monetary system had been flying blind because the disaster developed,” Angelides stated.
Solely in 2010, with the passage of the sweeping Dodd-Frank monetary reform regulation, had been derivatives required to be purchased and offered on exchanges.
Regulators additionally did not get Lehman Brothers to gradual its headfirst dive into mortgages. The agency stored shopping for actual property belongings nicely into the primary quarter of 2008.
The Treasury Division’s Workplace of Thrift Supervision did not situation a report warning of Lehman’s “outsized wager” on industrial actual property till two months earlier than its collapse. The OTS was abolished by Dodd-Frank.
Likewise, the SEC declined to name Lehman Brothers out for exceeding threat limits — although the company was conscious.
“The SEC…knew of the agency’s disregard of threat administration,” the fee stated.
Lehman Brothers additionally acquired away with utilizing accounting gimmicks to masks how a lot cash it borrowed. Bart McDade, Lehman’s president and chief working officer, wrote in an e mail on the time that the accounting maneuvers are “one other drug we R on.”
Ought to Lehman have been saved?
Economists will debate for many years whether or not Washington ought to have rescued Lehman to stop the chaos that adopted. Former Federal Reserve chairman Ben Bernanke maintains that regulators had no authority to lend to a failing Lehman.
“We primarily had no alternative and needed to let it fail,” Bernanke advised the fee.
However others say Bernanke and Paulson ought to have realized that permitting Lehman to fail would deepen the disaster.
“Our regulatory system is manufactured from people — and people make errors,” stated James Angle, a enterprise professor at Georgetown College. “The Fed clearly may have completed a greater job of containing the harm.”
The inconsistent response by Washington — deciding to not rescue Lehman after saving Bear and earlier than serving to AIG — “added to uncertainty and panic,” the monetary disaster inquiry concluded.
May it occur once more?
Immediately’s monetary system is safer due to the reforms put in place after 2008. Banks have bulked up on huge quantities of capital. Regulators are extra vigilant.
However some fear in regards to the threat of one other downturn, even when it would not begin with banks.
“I am involved about now,” stated famed Yale professor Robert Schiller, pointing to “extremely priced” shares and rising residence values.
“We’re already in for what might be a repeat of 2008,” Shiller stated. “It can look completely different this time, however there might be a decline in residence costs and recession coming in.”
Let’s hope the teachings from the final disaster have not been forgotten.
A Decade Later: It has been 10 years for the reason that monetary disaster rocked America’s economic system. In a particular yearlong collection, CNNMoney will look at the causes of the disaster, how the nation remains to be feeling its results, and the teachings we’ve — and haven’t — discovered.
–CNNMoney’s Julia Horowitz contributed to this report.
CNNMoney (New York) First printed September 14, 2018: 7:20 AM ET