Lehman crash: 10 years after
Adecade has passed since the collapse of Lehman Brothers Holdings, Inc. on Sept. 15, 2008. On that day, the revered Wall Street institution filed for the largest and most complex bankruptcy in American history.
“The implosion of Lehman Brothers — and the mayhem it unleashed — was the most terrifying moment for business and the US economy since the Great Depression,” said Matt Egan of CNN Money. This triggered a series of stock market crashes and it was the first domino to fall in the subprime mortgage crisis that led to the global financial crisis — otherwise known as the Great Recession of 2008.
Prior to its shocking collapse, Lehman was the fourth biggest investment bank in America, behind Goldman Sachs, Morgan Stanley, and Merrill Lynch. It was founded in 1850 and became a member of the New York Stock Exchange in 1887.
Considered too big to fail, it became so important to the economy such that everyone thought the government would provide assistance to prevent Lehman from going bankrupt and ceasing to trade.
But outgoing President George W. Bush allowed it to fail after last-ditch efforts to sell or save it fell through. As an immediate result, the Dow Jones plummeted by more than 500 points while some $700 billion vanished from retirement plans and other investment funds.
According to the Federal Reserve Bank of San Francisco, the global financial crisis ultimately torched trillions of dollars in wealth equivalent to $70,000 for each and every American. Martha White of NBC News believes it “left no doubt that what had been considered a small fire in the subprime mortgage sector had been building undetected under the surface, and Lehman was the backdraft that turned it into an inferno.”
Phil Angelides, chairman of the Federal Crisis Inquiry Commission appointed by the US Congress in a bipartisan effort to investigate the causes of the Great Recession, said “it was the moment when the financial crisis fully burst upon us, when panic seized the market.” Over the following months, the impact on capital markets was disastrous with almost $10 trillion wiped off the market value of global equities.
True enough, the ensuing panic plunged the US economy into a severe downturn. The situation was exacerbated by the near-collapse of insurance giant AIG, which was granted a huge bailout by the Bush administration, and Merrill Lynch, which was rescued by Bank of America.
In January 2009, Barack Obama became President of the United States and inherited a free-falling economy marked by declines that were bigger than those at the outset of the Great Depression in 1929-1930.
London-based Financial Times commented: “The Obama administration implemented a number of important fiscal measures, notably the American...
Recovery and Reinvestment Act of 2009, and restored the financial sector faster than expected.”
An unintended consequence of Lehman’s crash that sent shockwaves across the world was the birth of financial technology or fintech firms and a new kind of bank resulting from the decline of consumers’ trust for traditional banking.
Julian Skan, senior managing director of Accenture Strategy, disclosed: “Since the financial crisis, regulation and digital disruption has changed the banking landscape. We are now looking at a very different ecosystem from 10 years ago: more competition, more business models, and more disruption to revenues.”
These start-ups could not have come about had it not been for the fall of Lehman, many of whose top employees decided to start their own businesses. Some of them turned out to be successful entrepreneurs rising from the ashes after getting disillusioned with the mainstream financial system.
Ryan Browne of CNBC noted that consumers have come to expect a different kind of experience from their banks in this age of the smartphone. “The rapid growth of platforms like Amazon, Netflix, and Uber brought with them a model of cramming several products and services into one basket,” he said, adding that “established players — conscious of their fintech rivals — have been rushing into the mobile arena, testing slick apps in a bid to lure millennial customers.
Nicolas Storonsky, a former equity derivatives trader at Lehman who is now CEO of digital banking upstart Revolut, observed that tech giants like Google would most likely set the trend in acquiring start-ups, saying: “We expect big tech companies to be more agile than traditional banks to start investing in promising technology platforms, with an increasing number of key partnerships, mergers and acquisitions.”
Will this trend find its way into emerging markets such as the Philippines? Let’s prepare to embrace it as we learn from the lessons of the once venerable Lehman Brothers.