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Lehman Brothers bankruptcy (Sept 2008)
Sept 15, 2008· Crisis or event
Fact, law or dataA rule, statute, definition or measured number.
On September 15, 2008, the 158-year-old investment bank Lehman Brothers filed the largest US bankruptcy ever, with about $639 billion in assets.
See it on the Money & Finance map →How it works
Lehman had borrowed about 31 dollars per dollar of equity, much of it overnight, to hold mortgage securities and commercial real estate. As losses grew in 2008, lenders demanded more collateral. Over the weekend of September 12–14, Treasury and the Fed sought a buyer; Barclays could not get UK regulators' approval in time, and Bank of America bought Merrill Lynch instead. Officials declined to backstop a deal. Lehman filed early Monday, and the Dow fell 504 points.
Why it matters
Its failure turned a mortgage crisis into a global panic: a money fund broke, interbank lending froze, and governments moved from case-by-case rescues to blanket guarantees.
Facts, rules and data
Bankruptcy examiner Anton Valukas's 2010 report, which exposed the 'Repo 105' accounting that hid debt, FCIC testimony, and memoirs by Paulson, Bernanke and Geithner.
Debates and risks
Whether the Fed and Treasury lacked legal power to save Lehman or chose not to is still disputed; creditors eventually recovered far more than first feared.
Connections (2)
▸Lehman Brothers bankruptcy (Sept 2008) ended the era of big standalone Investment banks: underwriting, deals and tradingFact, law or data
The connection
After Lehman failed and Merrill Lynch was sold, investors doubted any firm funded by overnight loans could survive. Within a week, Goldman Sachs and Morgan Stanley became bank holding companies, gaining Fed lending in exchange for Fed supervision and tighter rules. Wall Street's big independent investment banks were gone.
When and why
New York, September 15–21, 2008; Bear Stearns had already been sold to JPMorgan in March.
How we know
The Fed's approval orders of September 21, 2008, converting Goldman Sachs and Morgan Stanley into bank holding companies.
Debates and risks
Smaller independents such as Jefferies, Lazard and Evercore survive; whether the conversions really reduced risk is debated.
▸Lehman Brothers bankruptcy (Sept 2008) was the climax of The 2008 global financial crisisFact, law or data
The connection
Lehman's bankruptcy was the moment a slow-moving crisis became a panic. A large money fund holding Lehman debt 'broke the buck', investors fled money funds, commercial paper froze and banks stopped lending to each other. Within weeks governments worldwide guaranteed their banks and Congress passed TARP.
When and why
New York, Monday, September 15, 2008; the Reserve Primary Fund broke the buck the next day.
How we know
Interbank lending spreads and money fund outflows jumped right after the filing, as the FCIC documented.
Debates and risks
Whether Lehman's failure caused the panic or was simply its most visible event, with AIG and others about to fail anyway, is debated.