The Fall of Lehman Brothers: One Year On
Tuesday, 15 September 2009 04:25
One year ago, America saw its biggest bankruptcy in history as Lehman Brothers collapsed, triggering a banking crisis that swept the world.
Although other banks, such as Bear Stearns, had already fallen victim to the financial storm, until September 15th it had seemed unthinkable that a 150-year-old institution could be allowed to fail completely.
The ensuing panic and loss of confidence led to some of the darkest days on global stock markets. In the month that followed, there was a real fear of a worldwide collapse of the banking system.
Who was to blame?
In September 2008, US banks were preparing to report on their profits and losses for the third quarter. Everyone had been bracing themselves for some bad news, as the crisis which had first become widely known in August the preceeding year had already claimed several high-profile victims.
In the UK, Northern Rock had been nationalised early on in the year, while in the US, Wall Street giant Bear Stearns had been quickly sold off in March to JP Morgan Chase.
And a few days earlier, the government had taken the momentous decision to nationalise Freddie Mac and Fannie Mae, the institutions born out of the Great Depression, which fund most home loans in the US.
Rumours about the stability of Lehman had been around for some months, as the bank was known to have high levels of debt and exposure to the toxic assets that were at the heart of the crisis.
By Wednesday, September 10th, Lehman announced a loss of $3.9 billion. Clients left in droves, and the bank was having trouble raising credit. Officially, the bank was only looking for a buyer for part of the business at this point.
In fact, the bank was on the verge of collapse and was in talks with Barclays and Bank of America for a buy out.
By Friday, Timothy Geithner, the president of the Federal Reserve Bank of New York, had called a meeting to asses the bank's options.
The share price in Lehman had been falling sharply all week, as investors realised the bank was dangerously close to failing - but the US government had intervened before, on behalf of Freddie Mac, Fannie Mae and Bear Stearns.
And Barclays was reportedly very keen to buy the whole of Lehman, with Bank of America also showing an interest.
But by Sunday morning the talks had broken down.
Barclays reportedly wanted some guarantees from the US government against the enormous amount of bad debt held by Lehman. But the Federal Reserve had said all along there would no taxpayer bailout - and there wasn't. Alistair Darling as chancellor in London made similar noises.
A former vice-president of Lehman has also claimed an employee of the bank, and cousin to George W Bush, had put through a call to the president in a last-ditch rescue attempt. But the president would not take the call.
Barclays decided to walk away, and Lehman filed for bankruptcy. By Monday morning, the bank that seemed too big to fail had failed and the world watched as employees filed out with their belongings from the bank's headquarters in New York and London.
Not all employees lost their jobs, however - Barclays and Japanese brokerage Nomura bought parts of the business once it was liquidated.
In a final twist to the tale, after walking away from Lehman on Saturday, Bank of America returned - to buy rival investment bank Merrill Lynch. The deal was announced on Monday, as Lehman's bankruptcy was hitting the headlines.
The backlash
"The collapse had a major effect, not only on the UK economy but the global economy," says Howard Archer, economist for Global Insight.
"Global trade really fell off a cliff and we are only just seeing a recovery now."
Lending dried up overnight as banks looked around to see who would be next, Dr Archer says.
"Conditions were already tight but they tightened even further. The Lehman Brothers collapse really heightened the financial sector's problems."
Although the banking system avoided the worst case scenario - complete collapse - the repurcussions will last for years to come, Dr Archer believes.
"The financial sector is not going to drive the economy as it once did," he says, predicting other service sectors will have to fill the gap.
But the cost of bailing out the banking industry has taken its toll on the public purse. This deficit, combined with an ongoing reluctance by banks to lend, will mean the next few years of economic growth will be much slower than we have been used to.
Christopher White, UK equities fund manager and banking sector specialist at Threadneedle, says: "Last September, we were in the midst of probably the severest crisis the UK banking sector has ever seen.
"The casualties have included many banks and building societies including Northern Rock, Bradford and Bingley, Alliance and Leicester, HBOS and the Dunfermline Building Society amongst others."
But one year on, things are looking up, he adds.
"The good news for the banking sector is that concerns over capital have disappeared... for now. helped by large rights issues and the introduction of the government's asset protection scheme (in the case of Lloyds and Royal Bank of Scotland), which is designed to insure the banks against losses on their riskiest assets.
"Profitability is still difficult due to the low level of interest rates, low mortgage volumes and impairment, but asset pricing is improving to more normal levels after a period of excessively cheap credit."
Effect on consumers
Consumers were affected in the UK in an indirect way through tightened lending as banks saw risk everywhere and nervously awaited the next disaster.
But many were also directly affected as investors realised with horror that the 'safe' products sold to them by advisers were anything but.
Peter Howard, who heads the action group Spirited and can be contacted on spiritedawaybylehmans@hotmail.com, said four firms sold products - including ISAs - supposedly guaranteeing returns and initial capital.
But the investments were ultimately held by Lehman Brothers in Holland, even though there was no mention of the bank in the literature.
"We knew the banks in America were having problems. If they had mentioned Lehmans, people wouldn't have bought them," Mr Howard says.
The average age of people losing out was 65 and some are in their 70s, according to Mr Howard - and they all thought they were buying safe products.
"They thought they were buying British-based investments - and it turns out they were at Lehman Brothers in Holland," Mr Howard says.
A year on, and Mr Howard has confirmed that some people who were badly advised did get their money back - but there are still many who are fighting for their cash.
But at least the financial services industry appears to have improved its marketing, Mr Howard adds.
"The new structured products being sold are a lot clearer," he says.
"So the industry has taken it on and they have changed the way they market it [structured products].
"They now tell you who the final provider is."
The FSA is investigating and in its last update the City watchdog said it believed there is enough evidence to take action against some of the firms involved.
Although a final review of the issue is not due until October, the FSA is urging victims to take their case to the Financial Ombudsman Service (FOS) who can look into individual complaints.
Dan Waters, retail policy director at the FSA, says: "In light of the progress we have made, we believe our regulatory action can now progress alongside the Ombudsman adjudicating on individual complaints without prejudicing either, so individual cases referred to the Ombudsman can now proceed."
At the time of the collapse of Lehmans it was often claimed the fall had changed the world. The future of finances from Wall Street to the UK high streets has been changed for a generation at least.
Sarah Routledge
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