Banks now much more cautious
Since Lehman’s collapse the biggest change has been that institutions realise the importance of their reputations
A decade ago this month, the century-old US investment bank Lehman Brothers declared bankruptcy. It was the largest corporate failure in US history at the time and it marked the official start of the Great Recession.
How have banks, local and foreign, changed over the decade for the better — or for the worse?
Banks, not only in the US but around the world, were at the very centre of the crisis, creating a powerful vortex when they retreated and pulled in not only each other but whole economies.
Behind the banks lay a booming property market, underpinned by the end of the Cold War, global economic expansion, especially in Asia, and the sense that a brave new world had begun.
Lehman Brothers had tried to leverage this expansion aggressively, not only directly but also indirectly with new financial instruments such as mortgage-backed securities and collateralised debt obligations.
One Lehman division provides an apposite example. In 2003, the Lehman home loans division made $18.2bn in real estate loans.
By 2004, this number topped $40bn. By 2006, its two real estate units were lending almost $50bn a month. In 2008, Lehman had assets of $680bn but only $22.5bn in capital, which meant that a 3%-5% decline in real estate values would wipe out all capital.