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Lehman bankruptcy: WTF actually happened back then?


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It was the biggest bankruptcy case in US history: the bankruptcy of the investment bank Lehman Brothers on September 15, 2008. And it was the culmination of a financial crisis that had been brewing for many years. This crisis triggered a deep recession in many industrialized countries and was ultimately also responsible for the euro crisis. The consequences can still be felt today - not only economically but also politically. The promised reforms of the financial market so that something like this does not happen again have only been partially implemented to this day. But US politicians are already giving in to the demands of banks and financiers to loosen rules - like the Dodd-Frank Act - again.

There were many reasons for the financial debacle ten years ago: greedy bankers, lax supervisors, indifferent politicians, unsuspecting citizens. A look back at a week that changed the world.

Wall Street's money machine implodes

Contrary to what is often claimed, it was not just the overheated US housing market that caused the crisis. The prices for home ownership rose sharply in the noughties. But it was bankers looking for new sources of income that set a disastrous chain reaction in motion. As early as 2001, they began to grant mortgages to US citizens who would not have received any according to traditional creditworthiness standards. The bankers didn't care about risk. Instead of taking the loan themselves into their books, as in the past, they bundled the mortgages and sold certificates on them to investors - the later infamous Subprime Mortgage Backed Securities. It was no longer the bank, but the investors who held the risk of default.

Because more and more banks got involved, billions flowed into the real estate market. The prices for houses and apartments rose rapidly. Homeowners simply replaced their loan with a new one if they could no longer pay the old one. So the quality of the credit decreased and it became more and more difficult to get a new mortgage. More and more homeowners were falling into arrears with their installments or giving up payments altogether. Millions of Americans eventually lost their homes. With investors, including many German institutions, losses increased. In addition, the banks had raised a large part of the funds for their mortgage money machine through short-term loans. That had fatal consequences for the financial system. In view of the increasing loan defaults, investors were reluctant to continue lending capital to the banks. With that, the crisis after the real estate market also reached the financial system.

It started in spring 2008 ...

The investment bank Bear Stearns is in dangerous trouble because of high losses on mortgage loans. The US Federal Reserve therefore arranged a takeover by the major bank JP Morgan in March. However, the state is taking on $ 29 billion of the losses Bear Stearns has on its books. In early September, the US Treasury Department has to support the world's largest mortgage lenders Fannie Mae and Freddie Mac with $ 200 billion. Until then, Fannie and Freddie were private institutions that acted on behalf of the public by taking over mortgages from banks and securitizing them.

... in September followed the week that changed the world

Thursday September 11th

Lehman Brothers reports losses of four billion dollars in just one quarter. One is in the process of actively looking for a buyer, according to a brief report to the US Securities and Exchange Commission. It's a steep drop. The bank is one of the oldest investment houses on Wall Street. "The mortgage business has been incredibly profitable for Lehman for years," says Lawrence McDonald, who worked at the investment bank between 2004 and 2008. Then it became a burden: "For every dollar we brought in on our team, they lost seven or eight dollars a few floors up," says McDonald. The share price had plummeted 96 percent within a year. "In the summer, people started talking about Lehman being the next, and even our customers kept asking us more and more questions," says Jared Dillon, who was responsible for Exchange Traded Funds (ETFs) at the bank at the time . "We never believed it ourselves. After all, our management told us otherwise."

Friday September 12th

The situation is coming to a head: The morning news reports that the Treasury is ruling out government support for the bank. It later emerges that Treasury Secretary Henry Paulson and Ben Bernanke, the head of the US Federal Reserve, agreed on a solution through the private sector over their weekly breakfast.

The finance minister of all people is now tasked with finding a buyer for Lehman. Before moving to Washington, Paulson was head of Goldman Sachs - one of Lehman's biggest competitors. But the Treasury is having trouble finding a prospect. Paulson calls the top bankers in the industry into the New York Fed (Federal Reserve) building. The Fed is in charge of overseeing Wall Street. In addition to 63-year-old Paulson, Timothy Geithner, the 48-year-old head of the New York Fed, is also present.

Some bankers have brought their chief financial officers with them as a precaution. Paulson reads a statement telling bankers that the government will not bail Lehman. If Lehman survives, then only with the help of the bank chiefs present. There is not much time left for a solution. If it is not clear what will become of Lehman by the stock market launch on Monday morning, chaos on the financial markets is to be feared. Two institutions are named as the most promising candidates for a takeover: the major bank Bank of America and the British investment bank Barclays. Both are not present. The meeting ends around 9:30 p.m. "The stock was trading for three dollars that day," says ex-banker Dillon. "Everyone knew that it was now likely that we would not survive. Even so, many still hoped that the Fed and the authorities would come up with a rescue plan over the weekend."