Ex-Wall Street giant Lehman Brothers' bankruptcy in 2008 sparked the beginning of a period of massive global economic turbulence, forcing world leaders to re-examine the global financial system and tighten up financial regulations.
AFP - A year after the collapse of Lehman Brothers, the investment firm's demise has come to mark the beginning of a crisis that reshaped the financial sector and deeply scarred the global economy.
President Barack Obama is set to mark the stunning disintegration of the once-venerable Wall Street firm on September 15 with a major economic speech in New York, the heart of a weakened, even chastened, financial industry.
The Lehman collapse was followed by months of economic panic and seesawing markets, heralding an era when companies began turning to the government for aid.
The shocking bankruptcy unfolded over the weekend of September 13-14, 2008, beginning with a 13.5 percent drop in Lehman shares as markets closed on Friday, culminating in a 90 percent drop as panic gripped traders.
"There seems to be no end to the shoes that keep dropping around the financial services companies -- obviously we are dealing with an octopus -- and we just aren't sure who is next or whether the government will deem them worthy of public support," said Kevin Giddis at Morgan Keegan as that weekend approached.
Yet there was still hope of finding a savior for Lehman in marathon weekend talks before a frantic week that rocked the global financial system and led to what has been dubbed the "Great Recession."
The events around September 15, 2008 remain hotly debated a year later, but the failure of the 158-year-old firm shook confidence in the system, creating a panic from which the global economy has yet to recover.
As the weekend approached, reports said Bank of America was in line as a buyer, but debate was fierce on whether the US government should "backstop" any deal with credit guarantees -- a decision widely criticized in the takeover of Bear Stearns earlier in 2008.
The Financial Times reported that in addition to Bank of America, private equity firm JC Flowers & Co and China Investment Co., the Chinese sovereign wealth fund, were considering a possible joint bid for Lehman. British-based Barclays was also interested, the FT said.
A series of closed-door weekend meetings with Federal Reserve and Treasury leaders produced no buyer for Lehman. Bank of America then decided to pursue a deal for Merrill Lynch, another Wall Street giant reeling from the collapse of the US housing market bubble.
On Sunday, the last-ditch effort to find a buyer for Lehman appeared near collapse as Barclays pulled out of talks on concerns it would have to guarantee the US firm's trading commitments.
The talks finally collapsed around 1:15 am Monday and the bankruptcy filing came in New York hours later, catching by surprise market participants who had expected a last-minute rescue.
Later Monday morning, angry and saddened employees streamed into Lehman Brothers for what they feared would be their last day at work at the once seemingly impregnable bank.
Today, debate still rages on whether Lehman could have been saved and the global crisis contained.
"No one was willing to buy Lehman because its problems were too widespread," says Cary Leahey at Decision Economics.
He noted that many people forget that the Fed "did not have the regulatory authority to unwind Lehman Brothers the way they could a commercial bank."
What is undisputed is the impact that the collapse had, prompting a week of stomach-churning turbulence that pushed insurance titan AIG to the brink of collapse and caused a run on the trillion-dollar system of money market deposits, forcing the Fed and Treasury to put out multiple fires at once.
"Bernanke will go to his grave claiming he did everything in his power but couldn't save Lehman," said Joel Naroff of Naroff Economic Advisors.
Diane Swonk, chief economist at Mesirow Financial, said a rescue of Lehman was effectively doomed by the fallout from the March deal to save Bear Stearns, described by some as a bailout even though its shareholders got nearly nothing.
"There was no political will after Bear Stearns to bail out another investment bank," she said.
The collapse heralded a period of intense financial disruption, with small banks across the United States collapsing, and larger ones consolidating or turning to the government for help.
It also forced a reexamination of the global financial system, with governments around the world pushing for new, tougher regulations to discourage financial recklessness, including caps on banker bonuses.
Hammering out a deal on these regulations is set to be among the top priorities for heads of state and finance ministers who will convene at a meeting of the G20 in Pittsburgh, Pennsylvania on September 24-25.
Date created : 2009-09-13