Editor’s Be aware: This story initially printed on September 14, 2018.
New York
CNN Enterprise
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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 Avenue agency with out assist from Uncle Sam. The British authorities wouldn’t let Barclays (BCS) 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 most important and most advanced chapter in American historical past. However that doesn’t do justice to the injury Lehman’s demise triggered the monetary system. The implosion of Lehman Brothers — and the mayhem it unleashed — was essentially the most terrifying second for enterprise and the US economic system for the reason that Nice Melancholy.
“It was the moment when the financial crisis fully burst upon us, when panic seized the markets,” Phil Angelides, who led the official bipartisan inquiry into the 2008 meltdown, instructed CNN.
Lehman’s failure shook Wall Avenue 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 called the Nice Recession.
Right this moment, Lehman Brothers and its CEO Dick Fuld are the poster kids for the reckless risk-taking that wrecked the economic system.
Lehman’s closing days had been marked by frantic last-minute negotiations over its destiny.
Proper up till the top, everybody thought somebody would rescue Lehman Brothers: Certainly the agency wouldn’t be allowed to fail. Bear Stearns, a smaller funding financial institution, had been saved simply six months earlier by Washington and JPMorgan Chase.
With South Korea out, Treasury Secretary Hank Paulson known as Financial institution of America CEO Ken Lewis to ask him to discover a inventive manner to purchase Lehman Brothers. Put in your “imagination hat,” Paulson urged Lewis.
However by Friday, September 12, Financial institution of America stated it was bowing out except the federal government was prepared to assist. Lehman was merely caught with too many “illiquid” mortgage belongings, and it couldn’t promote them rapidly sufficient to fulfill different obligations. Financial institution of America determined as an alternative to purchase the subsequent funding financial institution in line to fail: Merrill Lynch.
“You just didn’t know what was going to happen when you got into work on Monday,” stated Brady Kim, who labored as an analyst on Lehman’s buying and selling desk. “Were you going to be working for Barclays? Some Korean conglomerate?”
The one choice few noticed coming was chapter. “They’re not just going to let the bank go under,” Kim stated.
That Friday night, Paulson ordered the heads of the large Wall Avenue corporations to fulfill on the New York Fed’s headquarters. They had been instructed to provide you with a private-sector resolution to save lots of Lehman.
American officers had little urge for food for an additional 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 Avenue 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.
I by no means thought the corporate would exit of enterprise.”
James Chico, former Lehman Brothers analyst
“Imagine if I said yes to a British bank buying a very large American bank which … collapsed the following week,” Alistair Darling, the UK’s chancellor of the exchequer, later instructed 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 back to the headquarters, and it was pandemonium up there,” Harvey Miller, the chapter counselor for Lehman Brothers, later instructed 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 staff.
“I never thought the company would go out of business. It was terrible,” 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 came back, and it was just 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 scenario 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.
Worry and panic rapidly unfold by means of the monetary system, inflicting credit score markets to freeze. Even giant and iconic industrial firms resembling Common Motors had been unable to obtain short-term funding.
“The financial crisis reached cataclysmic proportions with the collapse of Lehman Brothers,” the disaster inquiry fee concluded.
Fuld, who had infamously instructed 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 called 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 danger officer from 2004 to 2007, tried and did not warn Fuld in opposition to taking over extra mortgage danger.
“At the senior level, they were trying to push so hard that the wheels started to come off,” Antoncic instructed the fee.
For his half, Fuld instructed lawmakers in 2008 that the ache of Lehman’s failure “will stay with me for the rest of my life.”
The previous Lehman Brothers boss, who made and misplaced a $1 billion fortune on Wall Avenue, has made few public appearances for the reason that disaster. He did communicate at a 2015 occasion the place he admitted he would do some issues in a different way.
“I missed the violence of the market and how it spread from one asset class to the next,” Fuld stated.
Fuld doesn’t deserve all of the blame. The agency’s demise underscored the wild risk-taking that regulators and CEOs had allowed to change into rampant throughout Wall Avenue.
Think about, for instance, the 2000 deregulation of unique monetary devices often called derivatives. Regulators had little window into how these trades linked banks to at least one 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 by-product contracts. And so they had been clueless concerning the danger posed by AIG’s huge e book of derivatives.
“The people charged with overseeing our financial system were flying blind as the crisis developed,” Angelides stated.
Solely in 2010, with the passage of the sweeping Dodd-Frank monetary reform legislation, 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 didn’t challenge a report warning of Lehman’s “outsized bet” on business 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 danger limits — despite the fact that the company was conscious.
“Our regulatory system is made of humans — and humans make mistakes.”
James Angel, Georgetown College enterprise professor
“The SEC…knew of the firm’s disregard of risk management,” the fee stated.
Economists will debate for many years whether or not Washington ought to have rescued Lehman to forestall the chaos that adopted. Former Federal Reserve chairman Ben Bernanke maintains that regulators had no authority to lend to a failing Lehman.
“We essentially had no choice and had to let it fail,” Bernanke instructed 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 made of humans — and humans make mistakes,” stated James Angel, a enterprise professor at Georgetown College. “The Fed clearly could have done a better job of containing the damage.”
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.
Right this moment’s monetary system is safer because of the reforms put in place after 2008. Banks have bulked up on huge quantities of capital. Regulators are extra vigilant.
However some fear concerning the danger of one other downturn, even when it doesn’t begin with banks.
“I’m concerned about now,” stated famed Yale professor Robert Schiller, pointing to “highly priced” shares and rising house values.
“We’re already in for what could be a repeat of 2008,” Shiller stated. “It will look different this time, but there could be a decline in home prices and recession coming in.”
Let’s hope the teachings from the final disaster haven’t been forgotten.
A Decade Later: It’s been 10 years for the reason that monetary disaster rocked America’s economic system. In a particular yearlong sequence, CNN will look at the causes of the disaster, how the nation continues to be feeling its results, and the teachings now we have — and haven’t — realized.
