The World The Crisis Made: 10 Years After Lehman Brothers
“We’re a lot less vulnerable, but still more vulnerable than we should be,” was the message from the former Deputy Governor of the Bank of England, Paul Tucker, addressing last week’s Financial News Breakfast Briefing in London, on the 10-year anniversary of the collapse of Lehman Brothers.
He was joined on the panel by the former Head of UK Investment Banking at Lehman Brothers, Michael Tory, and Ben Power, who has put the story of the investment bank on stage at the UK’s National Theatre.
As Lehman’s Michael Tory noted, the bank’s history and family values made up the DNA of the firm, and ultimately contributed to its downfall. Started by three immigrant brothers from Bavaria, Lehman began by providing capital to Alabama’s cotton industry (inevitably enmeshed with the slave trade), growing into a major investment bank headquartered in New York. The bank endured the Civil War, two World Wars, major crashes in Russia and Asia, and had come out stronger each time. The notion that they would, yet again, ‘push through as a family’ seemed like a given, even just days before their collapse. Whether this was confidence, or incredible hubris, is a theme explored in Power’s play.
Tory then outlined the now-mythic story of the bank’s collapse. Forty-eight hours prior to the bank’s collapse, an anonymous spokesman announced Lehman needed six months to adjust to new market conditions, given the then-recent failure of Bear Stearns. On Sunday evening, the bank’s executives met, and made a call to President George Bush to warn him of the impeding danger, but were unable to reach him. The entire company met at 8:30 am on the Monday morning, where its failure was announced, and employees were sent home with their possessions in the now-iconic boxes, some of which ended up on eBay. Tory noted how there was a rush on the vending machines, with employees trying to spend the hundreds of dollars on their cafeteria cards before they were kicked out of the building.
The discussion moved onto how markets and societies are still recovering from the effects of the crash, and the continuing simmering anger of the public. Tory noted that the public are becoming more aware of the “socialisation of losses, and the privatisation of gains,” or that the public absorbs the failures of the financial system, yet only the bankers reap the rewards. Such a paradigm, whether perceived or real, inevitably leads to political instability and populism, of which we continue to witness the effects.
That sub-prime mortgages in the US market brought down the global economy exposed both the interconnectedness and fragility of the international financial system. The Bank of England’s Paul Tucker argued that further regulation is still required to protect it. Rather than providing government bailouts to banks who put our financial systems in peril, legislation should be designed to cushion the impact of failures and bring those responsible to account. According to Tucker, the public typically supports the latter approach and an audience poll, conducted both at the beginning and end of the discussion, confirmed his assertions.
Overall, the panel was in unison on the fact that, while steps have been taken, we still have some way to go to building a stable, fair system that works for everyone.