One Year After Lehman Brothers Bankruptcy

On September 15th, 2008, the 158 year old investment bank, Lehman Brothers, filed for bankruptcy in Federal court. It was the biggest bankruptcy in American history and nearly brought down the world’s financial system.

CNN has complied comments from those financial executives who remember the panic well. A few of their comments follow.

Mohamed El-Erian : Chief Executive and Co-Chief Investment Officer of PIMCO:

“On the Wednesday and Thursday before Lehman filed for Chapter 11, I asked my wife to please go to the ATM and take as much cash as she could. When she asked why, I said it was because I didn’t know whether there was a chance that banks might not open. I remember my wife sort of pausing and saying, “Are you serious?” And I said, “Yes, I am.” We had long felt that the world was increasingly in disequilibrium, and by March of 2008 we decided that things were critical and that the unthinkable was thinkable.”

Meredith Whitney: Well known and highly regarded investment analysist: Shouldn’t have let Lehman fail:

“I don’t think they should’ve let Lehman fail. The rules didn’t seem uniformly applied. And it’s very hard to get individuals comfortable with investing if different rules are being applied to different people.”

Neel Kashkari: Former Assistant Secretary of the Treasury and supervisor of TARP: A real-life, terrifying experiment

“We were now forced to live a real-life, terrifying, financial-markets experiment: Would the failure of a major investment bank really lead to the catastrophe that we feared? When blue-chip industrial companies called us later that week, having trouble funding themselves, we learned that our worst fears were coming true.”

You can read the entire account at CNN under the title “ When Wall Street Nearly Collapsed”.

The big remaining questions are: 1.)How do things stand one year after the Lehman bankruptcy? 2.) Does the 50% stock market rally mean that we have restructured our financial system and reduced the risk of systemic failure?

By own view is that 1.) We have concentrated systemic risk, not reduced it, and 2.) no we have not, we have increased it.

The trillions of dollars that Treasury and the Fed have poured into the financial system have certainly supported a higher stock market as some of those dollars have flowed into stocks. However, the flaws in the system have not been repaired, only papered over.

And I do mean paper as the government has created huge amounts of new “money” out of a few computer keyboard strokes. This fiat paper money has been created by the issuance of huge amounts of new debt. As much of the problems within the financial system and the real economy are a by product of excessive debt it stands to reason that they can not be solved by creating even more debt. Then there is the risk that the creation of so many new dollars will send the dollar into a tail spin on the foreign exchange market. This could lead to a much higher inflation rate for the US.

Lehman was not the only investment bank to disappear, only the one the government let collapse into bankruptcy. Merrill Lynch was “saved” by a shotgun wedding with Bank of America. Then there was Bear. On March 24,2008 JPMorgan agreed to up the bid to $10 a share in stock and to purchase 95 million new shares of Bear Stearns, giving JPMorgan an immediate 39 percent stake in the collapsed brokerage firm. The deal, which closed May 30,2008 brought to an end an 85-year-old institution. You can read the full story at The New York Times.

Well established investment banking firms were reduced to rubble in the 2008 financial meltdown. Goldman Sachs, JP Morgan, and other financial firms, like AIG, were saved by government bailout funds. As a result, unfortunately, risk is now concentrated in fewer hands and it seems like at least some of the “too big to fail” firms are up to their old dirty use of excessive leverage tricks that helped to bring on the disaster.

The big money center and larger regional banks are still sitting upon a mountain of toxic waste mortgage assets that are likely worth only a fraction of the value that they are carried at on the banks books. In short, few if any of the structural weaknesses that contributed to the financial meltdown have been repaired. The risk of another emergency of some sort is still high. Very likely, since so much additional debt has been placed into play the next crisis will be even larger and more of a disaster than the last.

It is a time not for investors to rejoice but to be extremely cautious. One year after the Lehman Brothers bankruptcy many analysis and government officials think that the “worse is over”. However, remember these are the same guys and gals who didn’t see the financial meltdown coming until it was too late. As underlying problems have not been fixed the long crisis is probably just getting started. For example, the problems developing with the commercial real estate market are not reassuring.