Lehman: 1 year later

If the Great Recession has a start date, it might just be Monday, Sept. 15, 2008.

That's the day Wall Street woke up from a quiet weekend to discover that Lehman Brothers, a venerable pillar of corporate America for more than 150 years, had fallen.

The impact was obvious. The Dow shed 504 points, or 4.42 per cent, as Wall Street reacted to the news. At the time, it was the Dow's worst day since 9/11, but there were many more to come.

It was a shock, to be sure, but not a complete surprise. Days earlier, amid whispers of a liquidity crisis, Lehman Brothers had posted a $3.8-billion US quarterly loss.

CEO Richard Fuld Jr. outlined a restructuring plan that included putting numerous Lehman assets on the block to raise cash. But by the end of the week, banks in Asia, Europe and North America had all balked at buying up Lehman, and investors had already begun to flee the company's shares in droves.

Over the weekend of Sept 13 and 14, Lehman executives worked round-the-clock in a furious attempt to raise funds to stay afloat. As day broke on Monday, it proved to be all for naught. Lehman's hundreds of billions of dollars worth of debt outnumbered its assets, and lenders weren't willing to keep the taps open any longer.

The company filed for bankruptcy protection and the impact of the largest bankruptcy in U.S. history cascaded through the economy.

The impact was obvious. If Lehman could topple, "it [became] clear we were one step away from a financial meltdown," economist Nouriel Roubini said at the time. Roubini first gained prominence by predicting the credit and housing bubbles that started the process as far back as 2005.

'I'm afraid this is sort of halftime … but there's a very rough second half ahead.' —Investment banker Jim Rickards

Lehman didn't get the contagion started. The previous week, the U.S. government stepped in to stop Fannie Mae and Freddie Mac, companies that held more than half of all U.S. mortgages, from sliding into insolvency amid a crumbling housing market.

The Fannie and Freddie bailouts left investors' confidence teetering on the edge, but Lehman's collapse sent it toppling over the precipice.

Canada fared better

Canada, famously, was the only industrialized nation not to bail out its banking sector. Several took the opportunity to prop up their capitalization levels. But with the exception of a hit to profits and a drastically reduced stock price, Canadian banks saw nowhere near the level of pain that Wall Street endured.

"Certain banks have had some significant writedowns … but the balance sheets of the Canadian financial sector remains very healthy," Prime Minister Stephen Harper said two weeks after Lehman's collapse.

"The troubles in the financial sector of the United States should not spill over into Canada," he vowed.

On Wall Street, Bear Stearns had already been absorbed into JPMorgan before Lehman got the ball rolling. Bank of America bought Merrill Lynch. Wells Fargo swallowed Wachovia after that. Smaller players were picked clean of assets that still had value, with the rest simply allowed to expire.

At the end of the month, insurer AIG, which had been heavily involved in complex credit default swaps, buckled under the weight of its own debts. Again, the federal government stepped in with an $85-billion US "emergency loan" to bail out the insurer.

The government cited the danger of AIG causing other financial firms at home and abroad to fail to justify the decision.

"If Lehman Brothers' failure could help trigger AIG's going down, who knows who AIG's failure could trigger next," Chapman University School of Law Prof. Timothy Canova told CBC News at the time.

The AIG collapse turned the focus to a new bogeyman: bonuses. As Congress debated the passage of a bill to bail out AIG with $180-billion worth of public funds, news of exorbitant bonuses for the very employees responsible for the losses broke.

The outrage was immediate, and swift. There was even talk of death threats. ("You don't have a gun; that's good," were the words Lehman's former CEO, Fuld, uttered when a Reuters reporter tracked him to his house in Idaho recently.)

Focus on exorbitant bonuses

"Maybe it's time to fire some people," Representative Barney Frank, chair of the House financial services committee, said in March when AIG chair Edward Liddy was called on the carpet to explain why about 400 employees in the financial products unit were paid $165 billion in bonuses after the firm received federal funds. "We can't keep them from getting bonuses, but we can keep them from having their jobs," said Frank, a Democrat.

The bonus outrage spread. New York Attorney General Andrew Cuomo probed Merrill Lynch & Co. for $3.6 billion in bonuses paid just before the firm was swallowed by Bank of America.

As recently as Sept. 9, 2009, Goldman Sachs Group CEO Lloyd Blankfein called the furor over massive bank bonuses "understandable and appropriate."

"There is little justification for … outsized compensation when a financial institution lost money for the year," he told a bank conference in Germany. But that hasn't stopped his own firm from setting aside $11.3 billion for employee bonuses this year.

Indeed, bonuses are back in style, notes Jim Rickards, a co-founder of defunct hedge fund Long-Term Capital Management. "Wall Street is back to its old tricks … People are talking about big money," he tells CBC News.

Despite new regulations designed at keeping a lid on compensation, energy trader Andrew Hall, who's with a subsidiary of Citigroup, is rumoured to be seeking $100 million in compensation because the unit he leads earned $650 million this year.

In the aftermath of Lehman, with a new U.S. president elected on a campaign of change, there were promises that things would be different. But one year later, it's not clear that they are.

Little has changed

Broadly, two main factors were blamed for the Wall Street collapse brought about by Lehman's demise. Banks were taking riskier bets, and the financial products they packaged together became more and more obtuse, to the point that there was a complete lack of transparency about what was being sold.

On both counts, it's not clear anything has changed.

"Absolutely, we have not fixed a thing," Joseph Stiglitz, the 2001 winner of the Nobel Prize in Economics, tells CBC News. The banks that were deemed "too big to fail" have become bigger by buying up distressed rivals and the rules that govern them remain largely the same.

Bank profits have improved in recent quarters, but that's misleading, Stiglitz says, because the earnings are coming not from traditional lending, but from trading revenues. "And trading means speculation," he said. "We [still] haven't done anything about over the counter, non-transparent derivatives."

He lauds countries like Canada for having tighter banking regulations to mitigate the type of unbridled speculation that took down Lehman. But he holds out little hope that Congress will do anything systemic to rein in Wall Street's remaining titans any time soon.

"Congress is too much in the hands of the financial sector. There are five lobbyists per congressman, financed by the financial industry," he notes. With financial disincentives like that, real reform seems unlikely, he says.

Fuld and the lieutenants atop Lehman worked non-stop for two days trying to save a venerable investment bank that had survived the Great Depression and had been around since before the Civil War from itself.

One year later, Wall Street seems no better prepared to deal with whoever the next Lehman might be. 

"I'm afraid this is sort of halftime," Rickards said. "But there's a very rough second half ahead."