On this day in economic and business history …
Lehman Brothers filed for bankruptcy protection early in the morning on Sept. 15, 2008, after failing to find any company willing to acquire its immense liabilities. The investment bank’s $613 billion in debts and $639 billion in reported assets set a record for the largest bankruptcy in American history, and as the filing arrived so soon after the federal bailouts of Fannie Mae and Freddie Mac, it marked a turning point in investor attitudes toward the unfolding financial crisis.
This unprecedented bankruptcy, combined with reports that Bank of America Corp (NYSE:BAC) had bought Merrill Lynch at the fire-sale price of $50 billion the previous day, sent financial markets into a panic. The Dow Jones Industrial Average (INDEXDJX:^DJI) closed down 4.4%, fully into bear-market territory. The Federal Reserve and other central banks around the world leapt into the fray to make deep wells of liquidity available to floundering financial institutions. Shares of struggling insurer American International Group Inc (NYSE:AIG), which would soon receive bailouts eventually totaling $68 billion to avoid compounding the Lehman problem, collapsed by more than 50% during the day as investors came to terms with the grim reality of the situation.
Lehman had put itself in a truly precarious position. Leverage ratios in excess of 30-to-1 meant that a 4% decline in the firm’s assets would wipe out its equity entirely. That was all but inevitable when the overheated housing market finally cooled. By the summer of 2008, it became obvious that Lehman was in trouble — five days before its bankruptcy, the investment bank announced a $3.9 billion quarterly loss.
Regulators had watched Lehman for months as the crisis unfolded, but some combination of bailout fatigue, insufficient resources, ignorance, and hubris prevented action when it would have been able to arrest the company’s slide. After promising $200 billion to Fannie and Freddie, and after funneling many billions more into other financial rescues and stimulus efforts, the Fed told Wall Street that it would have to solve its own problems. Shortly before bankruptcy, desperate Lehman executives reached out to Barclays for a last-minute buyout, but when the British bank stepped back, there was nowhere else to go.
From that point on, the market entered the worst days of the crisis. The Dow Jones Industrial Average (INDEXDJX:^DJI)’s Sept. 15 closing value of 10,917.51 points was already 23% lower than its 2007 peak, but the financial chaos caused by Lehman’s bankruptcy sent the sell-off into overdrive. In the six months that followed, to the lowest point of the crash, the Dow Jones Industrial Average (INDEXDJX:^DJI) fell 40% lower than its Sept. 15 level and 54% below its pre-crisis peak.
Three years after Lehman’s collapse, the Levy Economics Institute at Bard College released a study with staggering implications — the federal government’s total crisis-related obligations added up to $29.6 trillion. Direct bailout disbursements are comparatively modest — ProPublica estimates the total lent out by the Troubled Asset Relief Program to be $608 billion. Could either of these staggering sums have been kept at a lower level if the Fed had stepped in to save Lehman from itself? We’ll never know. That’s a subject for alternative-history writers now.
Neither of the two surviving financial institutions at the heart of the Sept. 15, 2008, panic had fully recovered five years later. Bank of America Corp (NYSE:BAC), which received $45 billion in bailout funds, remains nearly 50% below its closing value at the end of Sept. 15. American International Group Inc (NYSE:AIG), which appeared far more distressed at the time, has been clawing its way back at an impressive pace, but it still remains about 20% below its Sept. 15 closing price.
