It has been over 7 years since the astonishing collapse
of one of the world’s largest banks shook the global financial system. Having
only been 15 years old at the time, I did not fully understand the enormity of
the problem. One thing that sticks in my mind, how could a bank the size of
Lehman Brothers be allowed to fall?
Having watched the ‘The Last Days of the Lehman Brothers’
documentary, it helped me to understand the underlying issues which led to the
bank to collapse and consequently file for bankruptcy. The investment bank had
deliberately overstated the value of its assets, such as the collateralised
debt obligations (CBO’s). When you combine this with the US subprime mortgage
housing crisis, Lehman brothers faced a $25 billion hole, seemingly in the eyes
of the bank, out of nowhere.
$25 billion is not exactly a sum which could quite easily
go unnoticed, is it? Surely one of 25,000 employees should have picked up on
this well before it became too late. Once the bank noticed they were in
trouble, they had to write down their commercial real estate assets from $40
billion, to $33 billion and the banks rating was also downgraded. Not looking pretty
is it? Yet the company had carried on doing what they were doing as though
there were no issues, until it was too late.
Global insurance giant, AIG, were another company that
got into difficulty. They had decided to maximise profits to trade in credit
default swaps, until the mortgages that were tied to those swaps began to regularly
default. The firm were running out of cash to cover their losses and asked the
Government for an emergency loan to cover these losses, believed to be worth
$40bilion. The difference between this situation and the one Lehman brothers
found themselves in, as reported by the BBC at the time, was that allowing AIG to
fall would directly affect millions of consumers and companies around the word
and therefore they were deemed too big to be allowed to collapse.
Having already rescued other private companies, it was
becoming less and less acceptable for the Government to continue bail out
firms. The US Treasury refused to give UK bank, Barclays, a guarantee for
Lehman’s trading obligations which consequently led to the deal falling
through. In doing this, the US Treasury made a statement, saying that they were
unwilling to use public money to rescue banks that had got themselves in this
mess.
Some people may think this is a sceptical view; however I
believe the Government took the view that no organisation was too big to fail
and if avoidable mistakes had been made, then they needed to be prepared to
face the consequences. In comparison to AIG, Lehman Brothers were in a
different position. In order to even enter discussions with Barclays, they realised
that they needed to take on $25 billion of bad debts. As well as the current
issue of being illiquid, the bank didn’t have the assets to be able to pay off
their long term debts.
Looking back on the financial crisis, it is clear in my
eyes that the vastly unregulated firms got too far ahead of themselves, seeming
thinking that they would be fine no matter what happened. Merrill Lynch were
another Bank who fell into difficulty, and were ultimately rescued rather controversially
by the Bank of America in $50 billion deal. These banks had all over stated
what they had and as a result successfully made millions through over inflated
share prices. However, the success was short lived as it was only a matter of
time until this caught up with them and as a result almost wiped out the entire
industry.
At the end of the day, the issue stemmed from whoever believed
it was a good idea to approve these mortgages, without realising that these
people would be unable to pay the banks back. Someone within the industry must have
looked into this lending and surely thought we could be in trouble here. Was it
just a case of it being too little too late by the time Lehman Brothers realised?
Can a bank like this not know how many bad debts they possess, and honestly not
realise how many mortgages were going to default as well not realising how deadly
these CDO’s would turn out to be? I for one am certainly not convinced, someone
somewhere must have known something.
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