When the financial crisis spun out of control

Reliving the financial meltdown, ten years later

Legendary investment bank Lehman Brothers was on fire — as well as no one was coming to put which out.

Bank of America refused to rescue the 158-year-old Wall Street firm without support coming from Uncle Sam. The British government wouldn’t let Barclays (BCS) buy Lehman Brothers as well as its toxic balance sheet. as well as Washington decided against another 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 bankruptcy protection.

What ensued was the largest as well as most complex bankruptcy in American history. however which doesn’t do justice to the damage Lehman’s demise caused the financial system. The implosion of Lehman Brothers — as well as the mayhem which unleashed — was the most terrifying moment for business as well as the US economy since the Great Depression.

“which 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, told CNNMoney.

Lehman’s failure shook Wall Street to its core. The Dow plummeted 504 points, the equivalent of 1,300 points today. Some $700 billion vanished coming from retirement plans as well as some other investment funds. The panic which followed plunged the American economy into a severe downturn, currently known as the Great Recession.

Today, Lehman Brothers as well as its CEO Dick Fuld are the poster children for the reckless risk-taking which wrecked the economy.

Lehman Brothers 2008 crisis

Frantic talks

Lehman’s final days were marked by frantic last-minute negotiations over its fate.

Right up until the end, everyone thought someone might rescue Lehman Brothers: Surely the firm wouldn’t be allowed to fail. Bear Stearns, a smaller investment bank, had been saved just six months earlier by Washington as well as JPMorgan Chase (JPM).

On Wednesday, September 10, South Korea’s Korean Development Bank dropped out of the running to be Lehman Brothers’ white knight. The news — combined with Lehman’s announcement of a record $3.9 billion quarterly loss — sent the bank’s shares cratering 45%.

With South Korea out, Treasury Secretary Hank Paulson called Bank of America CEO Ken Lewis to ask him to find a creative way to buy Lehman Brothers. Put on your “imagination hat,” Paulson urged Lewis.

however by Friday, September 12, Bank of America said which was bowing out unless the government was willing to help. Lehman was simply stuck with too many “illiquid” mortgage assets, as well as which couldn’t sell them quickly enough to meet some other obligations. Bank of America (BAC) decided instead to buy the next investment bank in line to fail: Merrill Lynch.

“You just didn’t know what was going to happen when you got into work on Monday,” said Brady Kim, who worked as an analyst on Lehman’s trading desk. “Were you going to be working for Barclays? Some Korean conglomerate?”

The one option few saw coming was bankruptcy. “They’re not just going to let the bank go under,” Kim said.

chart Lehman Brothers 2008 crisis

‘Not a penny’

which Friday evening, Paulson ordered the heads of the big Wall Street firms to meet at the brand new York Fed’s headquarters. They were told to come up which has a private-sector solution to save Lehman.

American officials had little appetite for another bailout. They had just seized control of teetering mortgage giants Fannie Mae as well as Freddie Mac the weekend before. Fed officials said Paulson made which clear there might be no government help This specific time, “not a penny.”

Saturday brought an apparent breakthrough for Lehman: Barclays agreed to buy Lehman — as long as Wall Street might take some assets off its hands. however the Barclays deal went up in smoke on Sunday when UK regulators balked at blessing the risky deal.

“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 told the Financial Crisis Inquiry Commission.

‘which was pandemonium up there’

With no buyers left, regulators pressured Lehman Brothers to file for bankruptcy on Sunday night, before trading opened from the morning.

Lehman’s lawyers as well as executives left the brand new York Fed to inform the board which no rescue was coming.

“We went back to the headquarters, as well as which was pandemonium up there,” Harvey Miller, the bankruptcy counselor for Lehman Brothers, later told investigators.

The Fed rejected a last-minute Lehman plea for additional assistance coming from the central bank, leading to the early-morning bankruptcy.

The collapse shocked employees.

“I never thought the company might go out of business. which was terrible,” said James Chico, who worked as an analyst from the back office at Lehman for more than two decades.

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

“I came back, as well as which was just mass chaos,” said Rogers, who commenced as an intern at Lehman as well as moved up to senior analyst from the firm’s reinsurance business.

‘Cataclysmic proportions’

The turmoil showed just how fragile as well as interconnected the entire system was. The situation was exacerbated by the near-collapse of AIG (AIG), the insurance behemoth. Regulators feared AIG’s demise might bring down the whole system — so AIG was given a $182 billion bailout.

Fear as well as panic quickly spread through the financial system, causing credit markets to freeze. Even large as well as iconic industrial companies such as General Motors (GM) were unable to receive short-term funding.

“The financial crisis reached cataclysmic proportions with the collapse of Lehman Brothers,” the crisis inquiry commission concluded.

Fuld, who had infamously told shareholders in April 2008 which “the worst will be behind us,” emerged among the villains of the crisis. He steered Lehman right into the face of an epic storm.

Between 2000 as well as 2007, Lehman’s assets had more than tripled to $691 billion. as well as its borrowing ratio, known as leverage, jumped to 40 times its shareholders’ equity from the company. The firm had relatively little capital to protect against trouble.

Madelyn Antoncic, Lehman’s chief risk officer coming from 2004 to 2007, tried as well as failed to warn Fuld against taking on more mortgage risk.

“At the senior level, they were trying to push so hard which the wheels commenced to come off,” Antoncic told the commission.

For his part, Fuld told lawmakers in 2008 which the pain of Lehman’s failure “will stay with me for the rest of my life.”

The former Lehman Brothers boss, who made as well as lost a $1 billion fortune on Wall Street, has made few public appearances since the crisis. He did speak at a 2015 event where he admitted he might do some things differently.

“I missed the violence of the market as well as how which spread coming from one asset class to the next,” Fuld said.

lehman dick fuld 2008 crisis

Where were the regulators?

Fuld doesn’t deserve all the blame. The firm’s demise underscored the wild risk-taking which regulators as well as CEOs had allowed to become rampant across Wall Street.

Consider, for example, the 2000 deregulation of exotic financial instruments known as derivatives. Regulators had little window into how these trades linked banks to one another. When one bank failed, some other financial institutions fell in a kind of domino effect.

Even a month before Lehman’s bankruptcy, officials at the Fed were still seeking information on the bank’s 900,000 derivative contracts. as well as they were clueless about the risk posed by AIG’s enormous book of derivatives.

“The people charged with overseeing our financial system were flying blind as the crisis developed,” Angelides said.

Only in 2010, with the passage of the sweeping Dodd-Frank financial reform law, were derivatives required to be bought as well as sold on exchanges.

Regulators also failed to get Lehman Brothers to slow its headfirst dive into mortgages. The firm kept buying real estate assets well into the first quarter of 2008.

The Treasury Department’s Office of Thrift Supervision didn’t issue a report warning of Lehman’s “outsized bet” on commercial real estate until two months before its collapse. The OTS was abolished by Dodd-Frank.

Likewise, the SEC declined to call Lehman Brothers out for exceeding risk limits — even though the agency was aware.

“The SEC…knew of the firm’s disregard of risk management,” the commission said.

Lehman Brothers also got away with using accounting gimmicks to mask how much money which borrowed. Bart McDade, Lehman’s president as well as chief operating officer, wrote in an email at the time which the accounting maneuvers are “another drug we R on.”

Should Lehman have been saved?

Economists will debate for decades whether Washington should have rescued Lehman to prevent the chaos which followed. Former Federal Reserve chairman Ben Bernanke maintains which regulators had no authority to lend to a failing Lehman.

“We essentially had no choice as well as had to let which fail,” Bernanke told the commission.

however others say Bernanke as well as Paulson should have realized which allowing Lehman to fail might deepen the crisis.

“Our regulatory system will be made of humans — as well as humans make mistakes,” said James Angel, a business professor at Georgetown University. “The Fed clearly could have done a better job of containing the damage.”

The inconsistent response by Washington — deciding not to rescue Lehman after saving Bear as well as before helping AIG — “added to uncertainty as well as panic,” the financial crisis inquiry concluded.

Could which happen again?

Today’s financial system will be safer thanks to the reforms put in place after 2008. Banks have bulked up on vast amounts of capital. Regulators are more vigilant.

however some worry about the risk of another downturn, even if which doesn’t start with banks.

“I’m concerned about currently,” said famed Yale professor Robert Schiller, pointing to “highly priced” stocks as well as rising home values.

“We’re already in for what could be a repeat of 2008,” Shiller said. “which will look different This specific time, however there could be a decline in home prices as well as recession coming in.”

Let’s desire the lessons coming from the last crisis haven’t been forgotten.

A Decade Later: which’s been 10 years since the financial crisis rocked America’s economy. In a special yearlong series, CNNMoney will examine the causes of the crisis, how the country will be still feeling its effects, as well as the lessons we have — as well as have not — learned.

–CNNMoney’s Julia Horowitz contributed to This specific report.

CNNMoney (brand new York) First published September 14, 2018: 7:20 AM ET

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