“We have involved ourselves in a colossal muddle having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time–perhaps for a long time.”
John Maynard Keynes, The Great Slump of 1930
On September 15, 2008, Hank Paulson, U.S. Treasury Secretary, announced the fall of Lehman Brothers. It was a day the world will never forget. The U.S. economy contracted by four percent, financial institutions took over $1 trillion in losses, and the U.S. government and other countries bailed out their banking sector with rescue packages worth either hundreds of billions or trillion of dollars, depending on how you count them. On September 15, 2008, $700 billions were wiped out of the stock market. The stock market plunged more than 500 points. The fragile house of cards of Lehman Brothers finally came tumbling down on this tragic day after a brilliant history of more than 160 years.
In hindsight, we are now fully aware that Wall Street banks used their financial clout to bet in brand-new financial markets, bundling together complex derivatives with bogus mortgages in a toxic brew that ultimately poisoned the global economy. The dust has not settled yet and additional card houses are crumbling down as a result of this global financial collapse. The latest victim is Portugal which tragically followed Iceland, Greece, and Ireland. Spain is expected to be the next casualty.
In the private sector, the following entities were brutally shaken by the turbulence at Wall Street when the financial bubble imploded, (e.g., Bear Stearns, Lehman Brothers, Indy Mac, Freddy Mac, Fannie Mae, Merrill Lynch, AIG, Washington Mutual, Wachovia, and others.) Eight financial institutions failed—six of them in September of 2008 alone.
And the damage was not limited to the U.S. More than 20 European banks across ten countries were rescued from July 2007 through February 2009. This, the most wrenching financial grand debacle since the Great Depression, caused a terrible recession in the United States and severe harm across the world.
Ten years earlier, in 1998, the global markets for custom derivatives had grown to over $70 trillion in face value (and over $2.5 trillion in market value) from almost nothing a decade before. In a decade the derivatives market which operated in the shadows grew at the walloping rate of 826 percent. Everybody was drinking the Kool-Aid by the gallon, (e.g., subprime borrowers themselves, securitizers, institutional investors, mortgage brokers and originators, mortgage lenders, Wall Street investment banks, members of both main political parties, Federal Regulators, and major U.S. rating agencies.)
After more than two years, the poltergeist of Lehman Brothers still hovers over the financial markets to remind us of what rapacious greed and predatory lending can do. It’s unfortunate that Lehman Brothers is associated with the financial calamity of Wall Street. In fact, it was one of the most respected financial icons of the United States founded in the 19th century. Lehman Brothers played an important part in the financial and commercial history of the United States for more than 160 years.
In 1844, 22-year old Henry Lehman, the son of a Jewish cattle merchant emigrated to the United States from Rimpar, Bavaria in Germany. After arriving in New York, he moisten his index finger and lifted it up into the air to feel the flow of the wind. The wind was blowing South and that is where he headed—to the Deep South. The roads led him to a Jewish enclave in Montgomery, Alabama where he opened a dry-goods store—“H. Lehman.”
In 1847, following the arrival of his brother Emanuel Lehman, the firm became “H. Lehman and Bro.” With the arrival of their youngest brother, Mayer Lehman in 1850, the firm changed the name again and “Lehman Brothers” was founded.
The Lehman brothers were hard-working people who believed in traditional moral values. After being a peddler, selling groceries, dry goods, and utensils to the local cotton farmers, Henry Lehman and his two brothers placed their bets on the commodities business. Soon after its founding, Lehman Brothers evolved from a general merchandising business to a commodities broker that bought and sold cotton for the planters living in and around Montgomery, Alabama. “King Cotton” dominated the economy of the southern United States in the 1850s. As the business grew, a brief partnership was formed with cotton merchant John Wesley Durr to build a cotton storage warehouse, enabling Lehman Brothers to engage in larger sales and trades.
Their large warehouses of cotton served as reserves for depositors who considered them a safe bank. Lehman’s influence on commerce, finance, and banking weaves throughout the fabric of U.S. business and political history. At its sudden death in 2008, Lehman Brothers was the fourth largest bulge bracket investment bank in the world. But its traditions were those of a banking warrior—the brilliant finance house that had backed, encouraged and made possible the retail giants of Gimbel Brothers, E.W. Woolworth and Macy’s and the airlines American, National, TWA and Pan Am.
They raised the capital for Campbell Soup Company, the Jewel Tea Company, and B.F. Goodrich. They also backed the birth of television at RCA, plus the Hollywood studios RKO, Paramount, and 20th Century Fox. They found the money for the Trans-Canada oil pipeline. They were also the producers of “A Streetcar Named Desire”.
Some of the core activities of Lehman Brothers were: bucket shops, investments trusts, short selling, credit default swaps and subprime mortgages. All this vast financial empire was created by selling household goods and cotton; practical physical things people could see and touch. How different the business changed in the latter years of the company when ambitious executives like Richard Fuld, Joseph Gregory, Erin Callan and Lew Glucksman led the company to its demise. Fuld became a symbol of failure, the face of arrogant, blundered, massively overleveraged Wall Street.
On its later years, Lehman Brothers had departed from long-term investment in America’s future and settled on aggressive short-term profit-making by off-loading toxic mortgages on anyone it could sell them to. What a sad ending for this preeminent Wall Street house.
“People are 99 percent animal, one percent human; and it’s the human part that causes all the trouble. You’d think it would be the other way around.” (The Last Days of Lehman Brothers—the movie).
Ben Bernanke, present Chairman of the Federal Reserve Board, the central bank of the United States; during his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis, and Tim Geithner, current United States Secretary of the Treasury are still at the helm of the economy of the United States. They are the same ones who orchestrated the financial maneuvers of the financial catastrophe of 2008. Do they have what it takes to do their job or are they puffing up the next global financial bubble? It’s the sixty thousand dollar question I ask myself. Good Day.
Suggested reading: The Murder of Lehman Brothers: An Insider’s Look at the Global Meltdown written by Joseph Tibman