Exactly 16 years have passed since September 15, 2008, when the American LehmanBrothersthe world’s fourth largest bank, said bankruptcygiving way to the largest banking failure in history (or, as some economists put it at the time, simply “a huge catastrophe”). The causes of the financial collapse of this major bank – explained in a superb way by Adam McKay’s Oscar-winning film “The Big Bet” (2015) – there were many, but the cause that played the greatest role was undoubtedly the subprime mortgage crisisthat is, loans granted in the real estate market to people who would never have been able to obtain the money under normal conditions, because they had fewer guarantees of paying their debts and were at risk of defaulting, as actually happened.
This fact is particularly relevant because cost tens of trillions of dollars And begot 30 million new unemployedbut not only that: it hit the stock markets all over the world, triggering a global recession and a new phase in the international economy that influences the world even today.
What Happened to Lehman Brothers and Why It Failed
Lehman Brothers, an investment bank active since 1906, had been providing financial consultancy since 1860. The credit institution was so huge that at the time of the events of 2008, no one imagined what end it would meet, but rather it was thought that it was “too big to fail” (too big to fail). To understand why everything went to pieces we need to take a little leap back, between the late 1990s and the early 2000s.
In 2001, following the attack on the Twin Towers, the United States had entered a period of crisis, and Federal Reserve Systemthe US central bank, opted for an unprecedented monetary policy, repeatedly cutting rates. The market thus had more liquidity, and banks began to take money at low rates from the FDE to grant loans to families and businesses. It was a good time for the real estate market, which was clearly growing in the early 2000s. Furthermore, already at the end of the 1990s, many US credit institutions had begun to obtain resources by subordinating their performance and capital to the solvency of the customers to whom they had granted loans. mortgages (often mortgages), which were considered to be always safe financial products.
However, not everyone could afford to get a mortgage normally, because they could not provide banks with guarantees of solvency. And that’s how the subprime mortgageswhich had higher than average interest rates and were granted to those who banks generally considered unreliable because potentially defaulters. The interest rates on these types of mortgages were very low, but they would grow exponentially within a few years of their opening (a detail that was not well explained to the contractors, who then found themselves in an unsustainable situation). Banks were granting more and more mortgages of this type at the time, and so house prices were rising continuously, because the public demand was very large.
But this ever-growing bubble was destined to burst. In 2006, house prices stopped risingespecially thanks to the tightening of rates decided by the FED. Higher rates meant that mortgages were more expensive, so the demand from the public decreased. More and more defaults began to appear, because many of the families and businesses were no longer able to pay their mortgage payments over time subprimewhich as we have often said had variable rate interest and that over time had risen to an unsustainable level. The portfolio value of many banks fell enormously, and little by little the risk they had assumed and hoped would never occur materialized.
When Lehman Brothers’ Accounts Crashed
The bank posted losses of nearly $3 billion in April-June 2008, and its stock price had fallen 73 percent since the start of the year. By early that summer, it was clear to LB employees that the bank would be insolvent. It attempted to be acquired by a Korean bank, but was unsuccessful. On September 9, stocks plummet even more, losing almost 45%. The situation had become desperate, because in the meantime the bank had announced that it had lost another 3.9 billion dollars and continued to pester investors with requests to sell.
On September 13, the FED took matters into its own hands and opted for an emergency liquidation of the assets. The idea, however, was temporarily shelved because the English bank Barclays had announced that it might acquire Lehman Brothers. The British Prime Minister Gordon Brown But he rejected the offer, saying it would be like “importing a cancer into the British banking system”, and that didn’t happen.
And so the inevitable happened: at 1.00 am on September 15, 2008, the press office of Lehman Brothers communicated to the world its bankruptcy, and that would have availed itself of Chapter 11 which in the US guarantees protection in the event of bankruptcy. The bank had left behind a sort of abyss linked to mortgage products (especially those linked to subprime mortgages) Total debt of $613 billion and approximately 26,000 of its employees, who ended up unemployed.
The effects on the stock market and the consequences of the crash
The days on the stock market were as intense as ever: the shares of Lehman Brothers dropped by 80% and brought the Dow Jones index to worst decline since September 11, 2001. The bank’s CEO, Richard Fuldsoon ended up under investigation for corruption and false accounting for having paid some members of Congress (also investigated for corruption) almost 300 thousand dollars. But it was not only a question of corruption and gambling in granting loans to unreliable people: first of all it was an ineffective regulation of the financial system that allowed all this.
Lehman Brothers had a huge exposure to the international financial system, and its collapse inevitably triggered a serious crisis of confidence in the markets and a long recession period which had an echo in almost the entire world, so much so that some countries have not yet fully recovered. To contain the situation and save the banks, European governments and central banks implemented a series of targeted financial aidthinking of strategies to save deposits and public accounts. This terrible catastrophe certainly served to establish more stringent banking rules: in fact, banks were imposed greater capital strength, with more stringent criteria on capital and liquidity. The aim was to prevent such an event from happening again, and so far – there is no doubt about it – it has worked (and hopefully will in the future too!).
