NEWS
15/09/2018 07:00 BST | Updated 15/09/2018 08:35 BST

The Lehman Brothers Crash And The Chaos That Followed – Everything You Need To Know

A look-back on how events unfolded a decade ago.

Today marks exactly a decade since the collapse of Wall Street investment bank Lehman Brothers.

The institution’s downfall triggered chaos among the world’s financial markets, resulting in the Great Recession and the biggest economic downturn since the Great Depression in the 1930s.

Measures taken to recover from the crisis, including a series of austerity policies introduced by the UK government – are still impacting lives of ordinary people today.

Ten years on, concerns remain about behaviour among the banks, stoking fears that we could be on the brink of another financial crisis.

Here, we take a look at how events unfolded leading to that fateful day on September 15, 2008, and the chaos it left in its wake.

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A woman leaves Lehman Brothers' Canary Wharf office carrying belongings on September 15, 2008

Who Were Lehman Brothers?

The US bank that crumbled with more than $600bn worth of assets began life as a cotton trading business in mid-19th century Alabama.

Brothers Henry, Emanuel and Mayer Lehman eventually established the company in New York City, engaging in commodity trading.

Over the decades the firm expanded into real estate, asset management and financial services.

What Happened To Lead To The Bank’s Demise?

Lehman Brothers, then the fourth-largest investment bank in the US, filed for bankruptcy on September 15, 2008, in what became the biggest corporate bankruptcy filing in the country’s history.

The bank’s 158-year-old legacy was wiped out, forcing out 25,000 of its employees – along with boxes of their office belongings.

The move triggered the largest drop in the Dow Jones stock market index in the US since the September 11 terror attacks.

As the first major investment bank to fall, financial markets around the world were left in turmoil, with the US government scrambling to rescue the financial system as the credit crunch hit the UK and Europe’s banking sector.

A $700bn bill was passed in the US House of Representatives in October 2008 to buy up Wall Street bank debts.

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Fred Goodwin, Chairman of RBS Group 2001 - 2009

Meanwhile, the UK government nationalised three ailing UK banks – Royal Bank of Scotland, Lloyds TSB and HBOS in a £37bn bailout, with taxpayers owning 60% of RBS and 40% of a merged Lloyds TSB and HBOS.

The end of the year saw the Eurozone and the US officially declare a recession.
The Bank of England also slashed interest rates to the lowest level in its history and the UK fell into recession in January 2009.

The Warning Signs

Alistair Darling, Chancellor between 2007 and 2010, eerily warned in August 2008 that a looming crisis would be the worst in 60 years and would be “more profound and long-lasting” than estimated.

The sub-prime mortgage bubble in the US had intensified in the years prior, as clients with little credit history who took out high-risk loans began to default on their payments in record numbers.

As interest rates rose, the housing market slowed and homeowners also struggled to keep up.

Ben Bernanke, chair of the US Federal reserve, warned at the time that the crisis could cost up to $100bn.

Six months before Lehman’s demise, fellow Wall Street bank Bear Stearns was bought by JP Morgan for $240m – significantly less than the $18bn it was worth the year before.

Freddie Mac and Fannie May – two of the biggest lenders in the US – were assisted by financial authorities amid fears that they would collapse, further destabilising the US housing market. Days later, they were bailed out by the US government.

Northern Rock, then one of the UK’s biggest mortgage lenders, was bailed out by the Bank of England exactly one year before Lehman went down.

The move led to clients queueing at their local branches to withdraw a total of £1bn, amid concerns that their savings would go down the drain if the bank went bust.

It was nationalised in 2008 and later bought up by Virgin Money in 2012.

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Richard Fuld, former Lehman Brothers CEO who presided over the bank's collapse

Who Was To Blame For The Crisis?

Bankers and finance bosses took the heat, as some continued to pocket large bonuses while ordinary people felt the squeeze of the credit crunch.

Alan Greenspan, chairman of the US Federal reserve, presided over the ballooning housing bubble in the US fuelled by the risky sub-prime loans which were a key trigger for the chaos.

Richard Fuld, known as the ‘gorilla’ of Wall Street, was at the helm of Lehman Brothers when it crumbled and widely seen as one of the major contributing players behind the financial crisis.

Some even blamed the deregulation policies of US President Ronald Reagan and UK Prime Minister Margaret Thatcher in the 1980s, which removed constraints on banking behaviour.

Gordon Brown’s tenure as Chancellor between 1997 and 2007 saw him ironically claim the end of the “boom and bust” economic cycle, before he became PM and oversaw the catastrophic financial crash.

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Who Was Hit The Hardest?

“The group that’s clearly done the worst are younger people in their 20s and 30s,” Paul Johnson, director of the Institute for Fiscal Studies (IFS), told HuffPost UK.

While older generations may have been able to afford a home at a young age, those now in their 20s and 30s are finding it harder to save for a deposit amid lower levels of wealth.

Johnson said: “In part, the flip side of more regulation of the banks means that banks are not lending so freely. So if you don’t have a deposit or you don’t have cash, it’s much harder to get onto the housing ladder. 

“In the end, it’s not just their incomes that are lower, it’s the wealth of people in their 20s and 30s which is much lower than the wealth of people in their 20s and 30s 20 years ago.”

In the long-term, this is likely to result in less social and economic mobility, as those who can access an inheritance or help from parents may fare better than those who do not.

Johnson added: “It’s always been the case that how well you do in life is partly determined by parental background, education, labour market and so on. 

“But in addition, the scale of inheritance is going to be even more important than it has been, certainly in the last 50 to 70 years, because that generation has got so little wealth unless they can get help from their parents.”

A rise in self-employment and those taking up jobs in the gig economy has seen the number of people in work grow, although earnings have suffered.

So Where Are We Now?

The UK economy has shrunk significantly, IFS data released this week shows.

While the economy is usually expected to recover soon after a recession, the 2008 crash left a wound that is still healing – meaning we have lost a good bit of economic potential.

“When you look at what’s been happening to incomes and the fact that interest rates are still quite low, it still looks like we are suffering from those consequences,” Johnson said.

Public debt now stands at £1 trillion higher than pre-crisis levels, while median earnings are now 5 to 7% lower among 20 and 30-year-olds than they were 10 years ago. Among 60-year-olds, earnings are 1% lower.

But employment is on the up, as are household incomes, which have risen from £24,300 to £25,700 over the last decade, IFS figures show.

Government borrowing has also returned to what it was before the crisis. 

David Sandison
A decade on from the global crash, the 10YearsOn campaign descended on bank branches across the City declaring them financial crime scenes to highlight how the public have paid the heaviest price

Sleepwalking Into The Next Crisis?

Experts and campaigners alike are now warning of an impending crisis, although the nature of the next one is largely unknown.

But the cause is likely to be linked to Brexit and a wave of protectionist measures implemented globally, Johnson said.

Former prime minister Gordon Brown, who oversaw the start of the 2008 crisis, this week cautioned that we are “sleepwalking into the next crisis”.

He told the BBC that despite initial efforts to act on the crisis in 2009 and 2010, complacency set in.

His concerns were echoed by David Hillman, director of charity Stamp Out Poverty.

He told HuffPost UK: “Ten years on, we look back and we go, firstly, the bankers got bailed out and we got sold out. Why we came together was to look forward and go “well, unless fundamental changes are made, then this is gonna happen again and people are not going to want to pay for it again.

“Ultimately, we want to see a financial system that is actually brought back as a utility to society so that it can be used for the good of the people on the planet, as opposed to purely just trying to get profit for shareholders.

“Government needs to stand up to the financial sector and bring it back to the service of the economy.”

The cyclical nature of the economy means that concerns about an imminent crisis are valid – the UK economy has experienced an economic downturn every decade or so, each with a different trigger.

Johnson said: “We had the big oil price shock in the early 1970s, the collapse of a lot of the manufacturing industry in the early 1980s, in the 1990s we had a combination of bad monetary and fiscal policy, and in 2008 it was driven by the financial sector.”

He added: “If you’re thinking of the risks in the UK in the next two years, what is the biggest risk in terms of the economy going into a recession? Clearly it is a hard, no deal, disorderly kind of Brexit. The possibility of an escalating trade war. Those are the known scary things.

“There are about to be a whole lot of unknown scary things as well.”

  • The 10YearsOn campaign and Change Finance, a coalition of campaign groups committed to reforming the financial system, held a rally to mark the 2008 anniversary at London’s Royal Exchange on Saturday morning.