Lehman Brothers: When the monetary disaster spun uncontrolled
Right now, Lehman Brothers and its CEO Dick Fuld are the poster kids for the reckless risk-taking that wrecked the economic system.
Lehman’s ultimate days had been marked by frantic last-minute negotiations over its destiny.
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 document $3.9 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 artistic method to purchase Lehman Brothers. Put in your “creativeness hat,” Paulson urged Lewis.
“You simply didn’t 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. “Have been you going to be working for Barclays? Some Korean conglomerate?”
The one possibility few noticed coming was chapter. “They’re not simply going to let the financial institution go below,” Kim stated.
‘Not a penny’
That Friday night, Paulson ordered the heads of the massive Wall Avenue corporations to fulfill on the New York Fed’s headquarters. They had been advised to provide you with 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 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.
“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 night time, earlier than buying and selling opened within the morning.
Lehman’s legal professionals 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 added help from the central financial institution, resulting in the early-morning chapter.
The collapse shocked staff.
“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 twenty 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.
Worry and panic shortly unfold by means of the monetary system, inflicting credit score markets to freeze. Even giant and iconic industrial firms reminiscent of Basic 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 instances its shareholders’ fairness within the firm. The agency had comparatively little capital to guard in opposition to bother.
Madelyn Antoncic, Lehman’s chief danger officer from 2004 to 2007, tried and did not warn Fuld in opposition to taking up extra mortgage danger.
“On the senior degree, they had been attempting to push so onerous that the wheels began to come back 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.”
“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?
Full doesn’t deserve all of the blame. The agency’s demise underscored the wild risk-taking that regulators and CEOs had allowed to turn out to be rampant throughout Wall Avenue.
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 sort of domino impact.
Even a month earlier than Lehman’s chapter, officers on the Fed had been nonetheless searching for data on the financial institution’s 900,000 by-product contracts. And so they had been clueless in regards to the danger posed by AIG’s monumental ebook 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 bought on exchanges.
Regulators additionally did not get Lehman Brothers to sluggish its headfirst dive into mortgages. The agency stored shopping for actual property belongings effectively into the primary quarter of 2008.
The Treasury Division’s Workplace of Thrift Supervision didn’t concern a report warning of Lehman’s “outsized guess” 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 danger limits — despite the fact that the company was conscious.
“The SEC…knew of the agency’s disregard of danger 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 electronic 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 forestall the chaos that adopted. Former Federal Reserve chairman Ben Bernanke maintains that regulators had no authority to lend to a failing Lehman.
“We basically 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 fabricated from people — and people make errors,” stated James Angel, a enterprise professor at Georgetown College. “The Fed clearly might have carried out 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?
Right now’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.
“I’m involved about now,” stated famed Yale professor Robert Schiller, pointing to “extremely priced” shares and rising residence values.
“We’re already in for what may very well be a repeat of 2008,” Shiller stated. “It would look totally different this time, however there may very well be a decline in residence costs and recession coming in.”
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 study the causes of the disaster, how the nation remains to be feeling its results, and the teachings we’ve — and haven’t — discovered.
CNN’s Julia Horowitz contributed to this report.