Two Years After The Lehman Brothers Collapsed
Two Years After The Lehman Brothers Collapsed
The U.S. still hasn’t paid the Lehman Brothers’ bankruptcy
The United States still have not paid the bankruptcy of the Lehman Brothers bank, which occurred two years ago and which led to mass unemployment, the explosion of U.S. debt and to serious problems within the financial system.
The disappearance of this weighing name from Wall Street, which occurred on September 15th 2008, will remain in U.S. history books; the Wall Street Journal, the U.S. newspaper with the largest circulation, even speaks about a “world after Lehman”.
Apparently, the U.S. is doing better than two years ago, President Barack Obama repeating it with any given opportunity and stressing that the economy returned to growth and to job creation.
However, two years have passed since the bankruptcy of Lehman Brothers which created a growing gap between elite in the U.S. and other classes there.
“I’m not sure people realize how bad things are,” warned Andrew Ross Sorkin, financial journalist of the daily New York Times, estimating that other large groups such as Goldman Sachs are close to bankruptcy.
According to a survey released by Allstate Insurance Company, 56% of Americans believe their country’s economy is going “in the wrong direction”, just like in April, when the United States was still considered to be in recession.
“Until then, the deterioration of mortgage loans and the real estate markets caused what seemed a serious recession, but this was not unprecedented. As soon as Lehman went bankrupt, the economy went diving,” recalled Robert Samuelson, columnist of Newsweek, quoted by AFP.
“The characteristic of a crisis is that people are taken by surprise and overwhelmed, and because of this it is possible that Lehman’s mistakes could not have been avoidable, Samuelson.
Whatever the reason, the crisis had lasting repercussions over the last two years: the unemployment rate exceeded 6.2% then and now stabilized at 9.6% (unemployment rate submitted by the US Bureau of Labor Statistics for August 2010), while public debt has reached from 9.634 billion dollars to 13.442 billion dollars.
Public opinion routinely asks that those responsible should face the court, but at Lehman Brothers nothing like this ever happened, there was just an investigation in regards to the manipulation of displaying handling of accounts without any problems.
Even Richard “Dick” Fuld, the former chief executive at Lehman Brothers Investment Bank, considers that the biggest culprit for the most important collapse in the U.S. corporate history is the State itself.
Should the U.S. have interned?
How would the world look now, two years after Lehman Brothers, if the Fed would have chosen to intervene and invest taxpayers’ money to prevent the fourth largest investment bank on Wall Street to go bankrupt? This is a situation a news publication in Romania illustrates best.
It might have been worse for that action would only have delayed the moment one of the major institutions on Wall Street would have collapsed due to existing void confidence in the financial industry.
It might have been better, judging from looking at the effects of the largest bankruptcy in U.S. history: hundreds of billions of dollars spent by the government in Washington to support banks, a recession and high unemployment rates.
And this, just looking at the situation in the U.S. But the Lehman bankruptcy had global effects. The collapse of Lehman plunged the world into the deepest financial crisis since the one in the ’30s and into the worst recession after the Second World War.
Richard Fuld, former chairman at Lehman, said the bankruptcy in 2008 was mainly caused by false rumors of a solvency crisis, uncontrollable forces of the market and the refusal of U.S. authorities to help his company. On the other hand, in order to defend his actions one day after the bankruptcy, Ben Bernanke, the Fed chief, said before a Congress Committee: “The law did not allow us to intervene”.
“The bank only suffered a short-term liquidity crisis and not a shortage of capital,” said Fuld, who in the past seven years as head of the bank earned 310 million dollars. “The bank’s finances were too shaky to justify using taxpayer’s money to rescue it,” said Ben Bernanke, the Chairman of the United States Federal Reserve – Fed. He said he knew a few days before Lehman’s bankruptcy that the institution’s collapse would be “catastrophic”, but insisted that the law, at that time, did not allow him to use taxpayers’ money without being sure that the money will be covered for.
However, the day after the downfall of Lehman Brothers, the Fed played a leading role in the nationalization of the AIG insurance giant, granting the company 85 billion dollars for 80% of its shares. The bill eventually rose to 180 billion dollars. The difference between AIG and Lehman was, according to authorities’ statements that the insurer had the power to return the money received from the state.
Only now AIG shareholders negotiate the government’s exit from within the company’s shareholding. To better illustrate the drama of those times, it should be noted that Goldman Sachs and Morgan Stanley, some of the most standardized investment banks on Wall Street have been converted into commercial banks in order to have access to emergency loans supplied by the U.S. Central Bank. Lehman did not have the same luck. “When I asked the same thing I was denied”, said former executives at the investment bank.
The Lehman bankruptcy brought a panic in the banking industry so strong that no one knew the exact exposure of other banks in regards to the U.S. institution.
The result was the freezing of inter-bank lending conditions, which led not only bankers, but ordinary people to wonder what the next bank collapsing bank will be. The result was that the state changed all the laws that led to the Lehman bankruptcy and a grant of money for Wall Street banks through the TARP fund. The Fund was provided with 700 billion dollars and some banks were forced to accept the money from the state even if they did not need it.
Maria Bartiromo, one of the most important business news presenters in the United States, was covering Wall Street at the moments of maximum stress and presents her version of those dramatic moments in a book entitled “The Weekend that changed Wall Street.” According to CNBC, in The Weekend That Changed Wall Street, Bartiromo writes a behind-the-scenes play-by-play of the crash to show hour by suspenseful hour how the entire global financial system unraveled.
“When covering the crisis in the autumn of 2008 I thought: this is a unique moment in history. I was interviewing people in the morning, at noon and at night,” remembers Bartiromo. So, what is her opinion about the Lehman collapse? “Should Lehman have been saved? I don’t know, but speaking with people inside the Treasury I felt like they needed an example to show the Congress that the banking industry was in collapse and that state money is needed to intervene,” Bartiromo told an U.S. publication. Eventually the Congress passed the Tarp program that helped Wall Street to stabilize.
The question will always remain: Should the State have intervened and save Lehman Brothers? The answers will always be divided.
Why didn’t Washington take any action
1. There was no buyer interested in the institution
Bank of America was interested in Lehman up to the point when they realized it would be more convenient to buy Merrill Lynch. Barclays was also interested in buying the bank but changed its mind when the British authorities began to disapprove, according to the American journalist David Indiviglio.
2. Records were a mess
Because a buyer could have been found, the bank’s fate laid in the hands of the Fed, which could have come up with an emergency loan. They dropped the idea because it was considered that Lehman did not have guarantees that would enable it to access taxpayer’s money.
3. There was no political will for a loan
Using public money was, at that time, not a desirable option, because people have already lost their patience with regard to supporting the banking sector. Politicians did not agree to the idea of the Fed or the Treasury to lose billions of dollars to save Lehman.
4. The Bank’s failure did not affect the average American
When it came to AIG, a company with strong ties throughout the economy, none of the above reasons was convenient, considers the American journalist. A day after Lehman’s bankruptcy, the State used 85 billion dollars to support AIG. But the situation there resembled that of Lehman Brothers. There was no buyer for the company and the records were in a deplorable state. So, what was the difference? If the Lehman bankruptcy would have indirectly affected taxpayers, the same could not have been said about the bankruptcy of AIG.
The financial world now
In the two years after the Lehman Brothers bankruptcy, investors have changed their behavior preferring safer investments like bonds and gold, but also emerging markets, in exchange to shares in companies in developed countries, writes The Wall Street Journal.
The orientation to treasury bills issued by the United States and to ”junk” rated bonds, which are considered risky, rose strongly, despite warnings that “bubble phenomenon” could appear on the bond markets.
Many stock markets, particularly in the United States, failed to recover losses suffered after the Lehman Brothers bankruptcy. Dow Jones Industrial Average still has to recover over 900 points to once again reach the level before the collapse at Lehman.
The U.S. stock markets, located in the epicenter of the financial crisis still remain one third under the levels recorded two years ago. Moreover, since August 2008, investors around the world withdrew 203 billion dollars from the stock markets of developed countries, according to EPFR Global. This amount represents 8.5% of the total 2.400 billion U.S. dollars.
The current recovery of U.S. stock market contrasts with the robust health crisis that followed the crisis of the past. Two years after the 1987 crash, the Dow Jones index was 400 points above the level recorded on the Friday before the renowned Black Monday. This means it had an advance of 20%.
Recently, there are indications that investors would be willing to give up bonds for shares. The Dow Jones gained 4.5% this month to a level of 10,462.77 points, after economic results that exceeded expectations were published and after some of the fears regarding a recession in W (double-dip recession) were dissipated.
By contrast, the ten-year Treasury securities were down, sending yields up from 2.477% to 2.795%.
