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CPBJ Extra Blog

Failure of Lehman Brothers may have been a necessary evil

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Five years ago Sunday, Lehman Brothers filed for Chapter 11 bankruptcy protection, the first and loudest shot in the firestorm that would hasten the greatest economic disaster since the Great Depression some 80 years earlier.

The historic investment bank — with $600 billion in assets under management, making it one of the five biggest investment banks in the country at the time — was backed into a corner it couldn’t get out of and used the bankruptcy escape hatch.

Lehman’s fall from grace as the biggest bankruptcy filing in history may not only have been inevitable but also necessary. The subprime real estate market — which Lehman Brothers had a large stake in — was running rampant across the country. Its downfall is seen is a contributing factor to Lehman Brothers’ fall and the fall of the economy.

Looking back, the demise of Lehman Brothers and of Bear, Stearns and Co. months before, could be seen as a market correction, a karmic way of forcing banks and investment firms to look at what they were doing and realize the effects they can have not just on the economy, but on society.

In 2008, we were awash in good feelings about the economy. It seems impossible, but check out the first paragraph from Global Finance in its annual survey and report on investment banks from June 2007:

“Records fell across the board in 2006 for worldwide debt and equity issuance, as well as mergers and acquisitions, and there are no signs yet that the investment banking boom has reached its peak. Private equity firms are raising big new funds to invest in corporate buyouts, the financial services industry is continuing to consolidate, and high oil prices and an expanding global economy are spurring energy and power deals. And while interest rates are creeping up from record lows, there is plenty of global liquidity to keep the party going.”

It’s almost impossible to remember now, but as our economy was about to crumble and millions of people were about to lose their jobs and life savings, we were collectively beating our chests about how completely awesome we were and how we should be able to “keep the party going.”

In 2008, it all came crashing down, and five years later, there is still plenty of blame to go around. But as Christopher Whalen, a former Bear, Stearns and Co. employee, wrote on the financial website Breibart.com this week, the main culprit here was greed:

“The moral of the story of Lehman Brothers is that no amount of regulation can prevent acts of wanton stupidity, fraud, and greed in a free society. Expecting regulators to proactively prevent a financial crisis is at best wishful thinking. In the end, the failure and bankruptcy of Lehman Brothers was the best and only outcome for ending this latest nightmare on Wall Street.”

That lesson of “wanton stupidity” is still fresh in everyone’s minds right now. The trick is making sure it’s just as fresh on Sept. 15, 2058.

 

Michael Sadowski

Michael Sadowski

Mike Sadowski covers Lebanon County, banking and finance, law and the legal community, and technology. Have a tip or question for him? Email him at michaels@cpbj.com. Follow him on Twitter, @MikeCPBJ. Circle Michael Sadowski on .

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