About this Video

• Video Title: Lehman Brothers: How this Bank started the Economic Crisis of 2008 | Inside the Storm | FD Finance
• Channel: FD Finance
• Speakers: Dr. Sumit Agarwal, Salil Sakhrani, Chris Roebuck, Dick Fuld, Anthony Fry, Agnes Co, SJ Omar, Mr. Tan
• Duration: 44:50

Introduction

This video details the rise and fall of Lehman Brothers, explaining its role in the 2008 financial crisis. It explores the excessive risk-taking and lack of regulation within the investment banking industry, focusing on the securitization of mortgages and the subsequent global impact, particularly in Asia.

Key Takeaways

• The meteoric rise of investment banks in the early 2000s: Investment banks experienced unprecedented growth and profitability, leading to extravagant lifestyles and a lack of accountability among bankers.
• Securitization of mortgages: The process of bundling mortgages into complex financial products (CDOs) amplified the risk associated with the housing market.
• Aggressive lending practices: Banks extended loans to subprime borrowers, creating a bubble that was destined to burst.
• Lehman Brothers' role: Lehman Brothers, despite its long history and reputation, engaged in excessive risk-taking, ultimately leading to its bankruptcy.
• Global impact of Lehman's collapse: Lehman's failure triggered a global financial crisis, significantly impacting retail investors in Asia who had invested in structured products linked to Lehman.
• Regulatory failures: Lack of adequate regulation allowed the risky practices of investment banks to flourish.
• Long-term consequences: The crisis highlighted the interconnectedness of the global financial system and led to tighter regulations.

Securitization was the tool that turned mortgage payments into even more wealth for financial empires like Lehman Brothers. By bundling mortgages and other loans into collateralized debt obligations (CDOs), Lehman and other investment banks created new financial products that they could sell and trade, tripling their business over six years. The massive volume of these securities generated enormous profits for the firm.

Giving mortgages without verifying borrowers' earnings meant that many people received mortgages they couldn't afford. This fueled a surge in demand, further inflating the housing bubble and ultimately increasing the risk of defaults when the market inevitably corrected. Investment bankers, focused on immediate profits, ignored the long-term consequences of this unsustainable practice.

Dick Fuld's career at Lehman Brothers spanned decades, starting on the trading floor in 1969 and culminating in his role as chairman and CEO from 1993. His leadership style was described as passionate and intensely focused on the firm. Almost 95% of his wealth was tied to Lehman stock, demonstrating a high degree of personal investment in its success. However, this strong leadership also involved a certain intolerance of dissent and a forceful approach that ultimately proved detrimental. His strong belief in the firm and its ability to navigate market challenges led him to make decisions which proved incredibly risky.

Bear Stearns, America's fifth-largest investment bank, was hit hard by the subprime crisis and was forced into a bailout by the US Federal Reserve and JP Morgan Chase for over $30 billion. This event was shocking and astonishing in its speed and scale. The bailout of Bear Stearns, though it prevented its immediate collapse, sent a shockwave through the market, signaling the severity of the crisis and the vulnerability of even large investment banks, and causing Lehman Brothers' stock to tank by 48%. This in turn precipitated further market decline and heightened concerns about the stability of other investment banks.

Lehman Brothers' announcement of its first quarterly loss in 14 years—a staggering $2.8 billion—shocked the market. This enormous loss raised serious concerns about the bank's financial health and its ability to withstand the ongoing crisis. It fueled speculation that Lehman Brothers might not survive, causing a significant downturn in the stock market and increasing anxieties across the investment banking industry.

Dick Fuld responded to the crisis by attempting to keep Lehman Brothers alive at any cost. He raised more capital from investors and made other changes. However, his approach was described as ignoring warning signs and continuing to gamble, a decision driven by his fierce loyalty to Lehman and his personal financial stake in its success. This ultimately proved to be a catastrophic failure.

The US government chose not to bail out Lehman Brothers, unlike Bear Stearns, partly due to concerns about moral hazard. Regulators worried that bailing out Lehman would set a precedent, encouraging other failing institutions to believe they would also receive government support. There was also a belief among some that letting Lehman fail would send a strong message to the market about the consequences of excessive risk-taking. The decision to not bail out Lehman was a significant factor in accelerating the severity of the financial crisis.

The collapse of Lehman Brothers on September 15th, 2008, devastated investors in Hong Kong and Singapore who had purchased structured products like high notes and mini-bonds linked to Lehman. These products lost almost all their value, resulting in the loss of millions of dollars for thousands of ordinary people who had invested their life savings. Many of these investors did not fully understand the risks involved in these complex financial instruments.

In Singapore, the losses caused by Lehman Brothers' collapse led to widespread public anger and anxiety. In October 2008, almost a thousand people demonstrated in Hong Lim Park, Singapore's only designated space for public protests—the largest demonstration ever held there at that time. This reflected the public's outrage and distress over the significant losses suffered by many, including elderly individuals who had lost their life savings. Many of those affected did not understand the complexities of the investments they were making.

The financial crisis starkly highlighted the disconnect between Wall Street executives and ordinary investors. While executives, like Dick Fuld, retained millions despite the collapse of Lehman Brothers, ordinary investors in places like Singapore and Hong Kong suffered devastating losses of their life savings. This revealed a significant gap in understanding and risk tolerance. Executives often viewed investments as numbers and calculated risks, while retail investors were often unaware of the complexities and risks involved, leading to a massive disparity in outcomes. The crisis exposed the indifference of some executives to the real-world consequences of their actions, furthering the perception of a significant chasm between Wall Street's elite and everyday citizens.