TEN YEARS AFTER THE FALL
The financial world quaked as Lehman Brothers failed. Here are 7 Chicago stories from that uncertain time.
Chicago and the nation were already grappling with a recession on the morning of Sept. 15, 2008, when Lehman Brothers, an investment bank with more than $600 billion in assets, went under in what remains the largest bankruptcy filing in U.S. history. • Financial markets roiled. The Dow Jones Industrial Average fell 504 points or 4.4 percent, in one day. • In Chicago, like elsewhere, the financial crisis was felt not just in the trading pits but across workplaces and neighborhoods — in the kitchens of McMansions and starter homes alike. • Bank lending dried up, making it harder for businesses to operate, grow and invest. Commercial and residential real estate development ground to a halt, sometimes midproject. Nest eggs shrank. Some banks and financial service firms were bailed out by the federal government or acquired by stronger competitors. Others failed. Illinois’ monthly unemployment rate topped 10 percent for 15 months, beginning in May 2009.
“Financial services were shrinking in front of our faces.”
“You couldn’t borrow a nickel in late 2008 and early 2009.”
Years of inflated home values and lax consumer lending standards — which allowed many buyers to purchase homes with scant credit and existing homeowners to take equity out — left homeowners overleveraged. Foreclosures in Chicago and its suburbs mounted, and furniture, toys and other personal belongings littered parkways outside homes as people were evicted. Some homeowners attended court-ordered auctions, sitting silently as they watched the paperwork pass hands as banks repossessed their homes. • In 2012, more than 125,000 homes in the area that stretches from Kenosha, Wis., through the Chicago area and into northwest Indiana received a foreclosure notice. By the end of that year, in Cook County alone about 78,000 mortgage foreclosure cases were pending in the court system. Local•organizations and the court system struggled to meet the overwhelming demand for all kinds of services amid tight budgets. The collapse of Lehman Brothers was a watershed moment for the Great Recession, which technically began in late 2007 and ended in June 2009. To this day, parts of the Chicago area are are still trying to recover. The economic crisis changed the people who went through it.
The markets executive
Terry Duffy
Terry Duffy, chairman and CEO of CME Group, didn’t see the Lehman Brothers bankruptcy coming, even though he’d met with senior employees at the investment bank’s New York headquarters the previous week.
The morning of Sept. 15, 2008, Duffy was in Florida for the start of CME Group’s first annual conference. The Chicago-based futures and options exchange had lined up former Federal Reserve Chairman Paul Volcker and former British Prime Minister Tony Blair to speak with top clients. Then attendees got the news.
“It was surreal,” said Duffy, 60, then CME’s executive chairman.
CME had dealt with smallerscale bankruptcies and had a playbook for the immediate response.
“Financial services were shrinking in front of our faces. … It starts to take people out of the game,” Duffy said.
He felt the company had to ride out that period while waiting for new regulations. “I tried to educate members of Congress and anyone who would listen about the benefits of financial services,” he said. “‘Let’s not throw the baby out with the bathwater.’”
One thing he thinks the U.S. got right was the speed of its response. “I’m a big believer that once people understand the rules, things will be just fine,” Duffy said. “Uncertainty as you’re going through the process always takes away from trade.”
Duffy’s biggest takeaway from the financial crisis? The U.S. economy is resilient.
The time also reinforced a lesson he learned early in his career.
When Duffy was 22, his parents mortgaged their home to help him get started in the trading business. A mistake led to a major loss, and he dug the hole deeper trying to fix it.
“Introducing some risk is good. Otherwise you never grow. But it has to be in a measured way that’s within your means,” he said. “You have to understand the potential losses.”
The developer
Garrett Kelleher
If there ever was a moment to attempt to build the tallest skyscraper in the Western Hemisphere along Lake Michigan, it turns out 2008 wasn’t that time.
Irish developer Garrett Kelleher sensed he was on the verge of pulling off the most audacious real estate development in Chicago history, the 2,000-foot-tall Chicago Spire condominium tower. Then the financial crisis hit.
“The Chicago Spire is the most complex project that has ever been contemplated in Chicago,” Kelleher said. “If I had been where I was in 2008 a year earlier, the Spire would be built by now. I’m convinced of that.”
Helped by an international marketing effort whose launch was attended by actors Liam Neeson and Natasha Richardson, Kelleher’s Shelbourne Development Group pre-sold more than 30 percent of the Spire’s planned 1,194 units in just a few months.
The biggest of those pre-sales, Beanie Babies tycoon Ty Warner’s deal for a penthouse listed for $40 million, actually came just after Lehman Brothers fell. Despite strong pre-sales, Kelleher hadn’t finalized an expected $1.5 billion or more in long-term financing for the Santiago Calatrava-designed project.
When global lending markets froze, all Kelleher had to show for his efforts was a 76-foot-deep, circular foundation hole along Lake Shore Drive and an impending decade long battle in courtrooms. Kelleher’s lender, Anglo Irish Bank, pulled out of plans to lead a group of construction lenders on the Spire project in the third quarter of 2008, as the bank neared a collapse that sent the Irish economy into a tailspin.
A broader economic meltdown ended any hope that Kelleher could line up alternate lenders. “You couldn’t borrow a nickel in late 2008 and early 2009,” said Kelleher, 57.
“A fact that is often missed in commentary (is) the substructure for the seven-level car park and building were completed — not just the cofferdam or ‘hole’ as it is often referred to,” he said.
Kelleher remains based in Dublin, still works as a developer and owns the St. Patrick’s Athletic professional soccer team. Developer Related Midwest took over the Spire site in 2014 and in May of this year unveiled plans to build two skyscrapers, rising 850 feet and 1,100 feet, on the 2.2-acre site.