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When the financial crisis ran out of control



  The revival of the financial melting, ten years later

Legendary investment bank Lehman Brothers was on fire – and nobody came to express it.

Bank of America refused to save 158-year-old Wall Street without support from Uncle Sam. The British government would not let Barclays ( BCS ) buy Lehman Brothers and its toxic balance sheet. And Washington decided for another political unpopular rescue operation.

So Lehman Brothers failed. At 1

:45 pm on Monday, September 15, 2008, Lehman Brothers filed for Chapter 11 Bankruptcy.

The consequence was the largest and most complex bankruptcy in American history. But it does not do justice Damage Lehman's demise caused the financial system. The implantation of Lehman Brothers – and the chaos that was released – was the most scary moment of business and the US economy since the great depression.

"It was the moment when the financial crisis exploded completely when panic took the markets," told Phil Angelides, who led the official bipartisan investigation to the 2008 breakdown, CNNMoney.

Lehman's failure shook Wall Street to its core. Dow dropped 504 points, equivalent to 1,300 points today. Some $ 700 billion disappeared from pension plans and other investment funds. The panic that followed damped the US economy to a sharp decline, now known as the great recession.

Today, Lehman Brothers and its CEO Dick Fuld are poster children for the ruthless risk taking that destroyed the economy.

  Lehman Brothers 2008 Crisis

Frantic Talks

Lehman's last days were marked with lasting bargaining of his destiny.

Right until the end everyone believed that someone would save Lehman Brothers: Certainly, the company would not fail. Bear Stearns, a smaller investment bank, had been saved just six months earlier by Washington and JPMorgan Chase ( JPM ) .

On Wednesday, September 10, South Korea's Korean Development Bank released the run to be Lehman Brothers white knight. The news – in combination with Lehman's announcement of a record 3.9 billion quarterly loss – sent the bank's shares in a crushing 45%.

With Syd Korea, Finance Minister Hank Paulson called Bank of America CEO Ken Lewis to ask him to find a creative way to buy Lehman Brothers. Put on your "fantasy hat", Paulson urged Lewis.

But on Friday, September 12, Bank of America said it was bending unless the government was willing to help. Lehman was simply stuck with too many "illiquid" mortgage loans and could not sell them fast enough to meet other obligations. Bank of America ( BAC ) decided instead to buy the next investment bank in order to fail: Merrill Lynch.

"You did not know what would happen when you came to work on Monday," said Brady Kim, who worked as an analyst at Lehman's trading desk. "Would you work for Barclays? Some Korean conglomerates?"

The only option that came to be was bankruptcy. "They should not just let the bank go," Kim said.

  The Lehman Brothers 2008 crisis chart

"Not a penny"

On Friday night, Paulson ordered the heads of the big Wall Street companies to meet at the New York Federal headquarters. They were told to arrive at a private sector to save Lehman.

US officials had some appetite for another rescue operation. They had just taken control of the teetering mortgage giants Fannie Mae and Freddie Mac the weekend before. Fed officials said Paulson made it clear that there would be no government help this time, "not a penny."

Saturday gave a clear breakthrough for Lehman: Barclays agreed to buy Lehman – as long as Wall Street would take some assets out of their hands. But the Barclays agreement went up in smoke on Sunday when Britain's regulatory authorities offered to bless the risky deal.

"Imagine if I said yes to a British bank that bought a very big American bank that … collapsed the following week," said Alistair Darling, UK ex-Chancellor, later by the Commission for Financial Crisis Management.

"It was a pandemonium up there"

With no buyers left, regulars Lehman Brothers squeezed into bankruptcy on Sunday evening before trade opened in the morning.

Lehman's lawyers and executives left New York Fed to inform the board that no rescue would come.

"We went back to the headquarters, and it was a pandemonium up there," said Harvey Miller, bankruptcy consultant for Lehman Brothers, later to investigators.

Fed denied a last minute Lehman reason for further assistance from the central bank, which led to the morning time.

The collapse shocked the employees.

"I never thought the company would go bankrupt. It was terrible," said James Chico, who worked as analyst at Lehman's back office for more than two decades.

Tom Rogers was on his honeymoon in St Lucia when the bank, his employer for seven years, went busted.

"I came back, and it was just massacos," said Rogers, who started as a trainee at Lehman and moved to senior analysts in the company's reinsurance business.

& # 39; Cataclysmic proportions & # 39;

Turbulence showed how fragile and coherent the entire system was. The situation was exacerbated by AIG ( AIG ) the insurance period. Regulators feared AIG's closure would put down the entire system – so AIG received a $ 182 billion rescue operation.

Fear and panic spread rapidly through the financial system, which led to the freezing of credit markets. Even large and iconic industrial companies like General Motors ( GM ) could not receive short-term funding.

"The financial crisis reached catastrophic proportions with Lehman Brothers collapse", concluded the crisis investigation project.

Full, who had infamously told the shareholders in April 2008 that "the worst is behind us" appeared as one of the bad guys of the crisis. He ruled Lehman right into an epic storm's face.

Between 2000 and 2007, Lehman's assets had more than tripled to $ 691 billion. And its loan ratio, known as leverage, jumped to 40 times equity in the company. The company had relatively small capital to protect against problems.

Madelyn Antoncic, Lehman's Chief Risk Officer from 2004 to 2007, tried and failed to warn Full against taking on more mortgage loans.

"At the highest level, they tried to push so hard that the wheels began to come," Antoncic told the Commission.

For his part, Full told lawmaker 2008 that the pain of Lehman's failure "will be with me for the rest of my life."

The former Lehman Brothers boss, who made and lost a $ 1 billion fortune on Wall Street, has made some public appearances since the crisis. He spoke at an event in 2015 where he admitted that he would do some things differently.

"I missed the market's violence and how it spread from one asset class to the next," said Fuld.

  Lehman Dick Full 2008 crisis
Richard Fuld, former chairman and chief executive of Lehman Brothers Holdings Inc., talks in a House Financial Services Committee meeting on Lehman Brothers bankruptcy in Washington, DC, USA, April 20, 2010 Lehman, who left the largest bankruptcy in US history, violated his own risk management rules with knowledge of the US Securities and Exchange Commission, said a bankruptcy investigator. Photographer: Andrew Harrer / Bloomberg via Getty Images

Where were the regulators?

Full does not deserve all debt. The company's downfall underlined the wild risk that regulators and CEOs had allowed to become uneven over Wall Street.

Think of 2000 deregulation of exotic financial instruments called derivatives. Regulators had a little window in how these shops linked banks to each other. When a bank failed, other financial institutions fell into a kind of domino effect.

Even one month before Lehman's bankruptcy, officials at Fed still seek information about the bank's 900,000 derivative contract. And they were unclear about the risk that AIG's huge derivative book represented.

"The people responsible for monitoring our financial system flew blind when the crisis developed," said Angelides.

Only in 2010, with the review of the sweeping Dodd-Frank Financial Reform Act, were derivatives required to be bought and sold in exchanges.

Regulators also failed to get Lehman Brothers to slow down their first mortgage mortgages. The company continued to purchase real estate in the first quarter of 2008.

The Treasury Department's Office of Thrift Supervision did not issue a report warning about Lehman's "outsized bet" on commercial real estate until two months before it collapsed. OTS was abolished by Dodd-Frank.

Similarly, the SEC declined to call Lehman Brothers out to exceed risk limits – even though the Agency was aware.

"SEC … knew about the company's risk management," the Commission said.

Lehman Brothers also came out using accounting gimmicks to mask how much money they borrowed. Bart McDade, Lehman's President and Chief Operations Officer, wrote in an email at the time that the bookkeeping operations are "another drug we are on."

Should Lehman have been afraid?

Economists will debate for decades if Washington should have saved Lehman in order to prevent the chaos that followed. Former Federal Reserve Chairman Ben Bernanke claims that the supervisory authorities had no authority to lend to a failure Lehman.

"We had essentially no choice and allowed it to fail," Bernanke told the Commission.

But others say Bernanke and Paulson should have realized that Lehman could fail to deepen the crisis.

"Our regulatory system is made by people – and people make mistakes," said James Angle, business professor at Georgetown University. "Fat could clearly have done a better job of containing the damage."

The inconsistent response from Washington – decided not to save Lehman after saving Bear and before helping AIG – "to insecurity and panic" ended the financial crisis.

Could it happen again?

Today's financial system is safer thanks to the reforms introduced after 2008. The banks have massaged large amounts of capital. Regulators are more vigilant.

But some worry about the risk of another decline, even if it does not start with banks.

"I'm worried about it now," said the famous professor Robert Schiller, who pointed to "high priced" shares and rising home values.

"We're already in for what might be a repeat of 2008," said Shiller. "It will look different this time, but it may be a decline in household prices and the recession."

Let's hope that the lessons from the recent crisis have not been forgotten.

A decade later: It has been 10 years since the financial crisis rocked the US economy. In a special year-long series, CNNMoney will investigate the causes of the crisis, how the country still knows its effects and the lessons we have – and have not learned.

– CNNMoney's Julia Horowitz contributed to this report.

CNNMoney (New York) First published September 14, 2018: 07:20 ET


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